The sale of Zicom's security business has raised concerns over deceleration in growth rates going forward.
Zicom Electronic Security Systems, a leading player in the domestic security products and services market, has seen its stock plummet 18 per cent last week. The key reason for this downfall is the company's announcement of exiting from its core business, which it is selling Schneider Electric India. While the company attributes stiff competition, falling margins and requirement of new technology among the key reasons to exit its core business, post the sale growth rates in the remaining business is expected to slow down dramatically.
Core business, sold
The company's businesses comprised of security products and services for the commercial, government and household segments besides, the fire protection systems business. With the latest move, the company proposes to sell the security products (related to government, commercial and industrial segments) to Schneider for a consideration of Rs 225 crore. This also includes giving the latter rights to use Zicom's brand for three years.
More importantly, this business was growing at a fast pace of over 25 per cent and propelling overall growth. With the exit, the company would also be giving up almost half of its current revenues, which earns about 4-5 per cent profit margins. The positive aspect of the deal is that the sale proceeds could now be used to retire its debt. Says Pramoud V Rao, MD, Zicom, "Currently, we have about Rs 150 crore of debt and pay interest of about Rs 18 crore, which now hopefully will become zero and straight away add to the bottom line of the company." The remaining funds equivalent to Rs 60 crore will be retained for the company's new venture. While the same is yet to be finalised, chances are that Zicom will use it to buy a stake in an existing business, to avoid starting from scratch.
The way forward
The company aims to develop its retail business, which so far hasn't been growing at impressive rates, thanks different consumer preference in India vis-à-vis consumers in developed markets. The company plans to introduce new products and services to improve growth rates. That apart, its fire protection systems business will also receive enhanced attention, which interestingly enjoys higher margins (compared to security systems).
Meanwhile, with the company exiting the core business, the immediate concerns are how fast it can replicate its growth rates and achieve scale in the remaining businesses and secondly, where it plans to deploy the surplus funds (of Rs 60 crore). These concerns have taken toll on its stock price, which is currently hovering around Rs 105.