Elvis Has Left Town

The Man: Diwan Rahul Nanda, 37, Chairman
The Company: Topsgrup. With close to 85,000 employees and Rs. 867 crore in revenue, it is the second largest security services provider in India.
His Goal: Create a multinational security behemoth from India by acquiring other security companies around the globe.
The Risks: Acceptance of an Indian company in Western markets will be a challenge, especially as private security companies there run jails, man borders and guard cities. Nanda will have to battle perceptions about Indian companies being synonymous with cost cutting and lowered standards for training.

Around 1.15 p.m. on October 7, an auto-rickshaw pulls up outside Gate 2 of Hewlett-Packard’s campus in Bangalore’s Electronic City suburb. The lone passenger in the auto-rickshaw, a young man of average build, pays off the driver and hurriedly walks through the campus gates along with a group of other employees. He is carrying a shoulder bag.

When one of the security guards asks him for his identity card, he tells him that it is inside his pocket. He is lying, for HP had sacked him over three years ago. Since then he had found it impossible to find another stable job in India’s IT capital. Worse, his wife had left him a year back, taking their daughter with her.

Siraj Ahmed, 34, had come back for revenge.

Inside the campus he unzips his bag and takes out a gleaming new machete and starts slashing passing employees, screaming, “They have stolen my brain!” By the time the security staff overpower him, three HP employees, including a woman, are bleeding from deep cuts.

For the $100 billion HP, which like other major IT companies goes to great costs to provide a secure and comfortable work environment to its thousands of employees, the incident was a rude jolt of reality.

For the $9.5 billion G4S, the world’s largest security services provider and HP’s security contractor in India, the incident was an inopportune embarrassment.For the Rs. 867 crore (revenue) Topsgrup, the largest Indian security services provider, the incident couldn’t have come at a better time.

That’s because HP was in the process of reviewing its security services contract, and nothing would have pleased the 37-year-old chairman of Topsgrup, Diwan Rahul Nanda, than to displace his arch-nemesis G4S. In the last two months, Nanda has already done that at two of G4S’s big clients, Bangalore International Airport and IBM India.

Mr. Security
Barrel-chested and stocky, his biceps bulging through his form fitting shirts, Nanda is an imposing personality. With two black belts, a Ph.D in martial arts and a licensed revolver, he projects security like Vijay Mallya projects “good times”. The similarities don’t end there. Like Mallya, he takes his partying as seriously as his work. He is a regular on the Mumbai party circuit. And like Mallya, he too inherited his business from his dad. Okay, maybe that last comparison was stretching it. That’s because the business Nanda inherited from his father, Major (Retd.) R.C. Nanda, was more a liability than an asset. Tops Security was started in 1970 by Nanda Sr. after he retired from the Indian Army. The company spent its first few decades limited to Mumbai and Ahmedabad because a poorer and safer India didn’t really see the need for private security.

In 1991 when Nanda Jr. took over, there were less than 40 employees, Rs. 35 lakh in annual revenues and years of piled up losses to boot.

Eighteen years later, the view is quite different. “Four years back we touched Rs. 100 crore, this year we’re close to Rs. 1,000 crore and next year we will be Rs. 2,000 crore,” he says in his booming voice. Topsgrup, as Nanda renamed his father’s company after taking over, is today the second largest security services provider in India with close to 85,000 employees.

The largest is G4S, with over 130,000 employees. Not for long, if Nanda has his way. “We are looking at a few strategic acquisitions, and if things go well, we will overtake G4S within a year,” he says.
He said this during a visit to India a few weeks back. That’s right, a visit to India. That’s because Nanda shifted permanently to London five months back.

The Chairman Goes Global
The secret to Nanda’s relocation is the prefix that’s been added to his title, “global”. As the global chairman for Topsgrup, he now wants to expand Topsgrup into a global security services firm that will give biggies like G4S and Securitas, the $7.9 billion second largest player in the field, a run for their money.

In May 2008 Topsgrup acquired a 51 percent controlling interest in UK-based Shield Guarding, a $121 million security services provider. The company is now raising money to buy out the remaining 49 percent in Shield Guarding and possibly acquire newer companies. “We have signed a memorandum of understanding with a $300 million US security company for acquiring them. After that we want to get into the Middle East, Africa and some parts of Asia as well,” says Nanda.

“We want to become the Shah Rukh Khan and Narayana Murthy of the security industry — humble, accessible and down to earth. And our aim is also to do $10 billion in revenue by the year 2020,” says Nanda.

The Indian security market is estimated by various experts at between Rs. 2,500 crore to Rs. 5,000 crore, of which 60-80 percent is “manned guarding”, i.e. security provided by guards on location. In contrast, the global security services sector is estimated to be over $150 billion.

Taking on the global big daddies of security is an audacious goal. Topsgrup has failed twice in such an attempt. Between 1999 and 2001 the company’s greenfield operation in UK and joint-venture in the Middle East both came unstuck.

“I was only 29 then,” says Nanda. “Though we lost Rs. 5-6 crore for those attempts, we are wiser now. In the UK I realised that customers would never work with a brand new company. In the Middle East after the wining and dining by our partner during the initial stages, they didn’t have time for us later on.”

Topsgrup then compiled a “white book” of lessons learnt from its failed international forays, and the top two lessons: “We will not do joint ventures but only outright acquisitions,” and “we will only acquire a company that is among the top 10 in its field.”

Acquisitions are the standard operating procedure for most large security companies going global. Because security is a very local, relationship-led business, customers are loathe to entrust their security to a new entrant. Acquiring a local security provider is often the only way to expand into other countries.

Secondly, large multinational corporations prefer to give consolidated contracts spread across multiple countries. This helps them standardise vendor and contract management as well as drive down costs by dangling the volumes carrot before vendors. Therefore an India-only Topsgrup was unable to even bid for large security contracts of MNCs in India.

Even so, with the Indian market growing at 20-25 percent annually, does Topsgrup really need to risk going global again?

When Bulls become Bears
No, says India’s favourite stock market diviner, Rakesh Jhunjhunwala. “There is a big difference between being No. 1 and No. 2 and I would want Topsgrup to clearly establish its leadership in India before going global. Besides, I would prefer the tailwind in Indian markets to the headwind in Western ones.”

Jhunjhunwala currently holds over 23 percent of Topsgrup and sits on its board.

Nanda says he turned to Jhunjhunwala, a “good friend”, in 2005 when he was in dire need of working capital funding for growth and he did not want to take on debt. In return, Nanda sold Jhunjhunwala slightly over 30 percent of his company at an overall valuation of Rs. 120 crore.

In two years, the value of Jhunjhunwala’s stake had multiplied seven times. That’s because in 2007 ICICI Ventures and Indivision, the private equity arm of the Future Group, collectively bought over 20 percent in Topsgrup, valuing the company at Rs. 840 crore, according to Nanda.

In return for the money they provided, which Nanda used for acquiring UK’s Shield, the funds sought a defined timetable for an exit.

“Part of our agreement with them was to go in for an IPO next year, the first for any Indian security provider,” says Nanda. He feels the IPO might take place by June 2010. “Our pro-forma revenue by then should be more than Rs. 2,000 crore [up from this year’s 867 crore], though we will go public with the projected revenue for 2011, which should be over Rs. 3,000 crore,” says Nanda.

Pro-forma revenues are projections made by company managements for future revenue, taking into account their past experience as well as future plans. In Topsgrup’s case, this increase will come mostly from acquisitions.

In fact, says Nanda, part of the IPO proceeds will be used for the acquisition of the $300 million US company.

But once again his earliest backer, Jhunjhunwala, doesn’t seem to agree. “I would like to wait another 18 months before going public,” he says.

Crusin’ for a Bruisin’?
Jhunjhunwala’s bearishness could possibly be traced to the challenges involved in becoming a global security player. “Are there synergies in international acquisitions?” asks Sandeep Singhal, a managing director with Sequoia Capital.

It is a pertinent question. That’s because unlike mergers in industries like manufacturing or high-tech, where idle factory capacity can be made productive or expensive work outsourced to a lower cost destination, in security services there is very little you can do.

“Sixty percent of the security market is in the US alone,” counters Nanda. “If I go to Sri Lanka or Thailand I’ll have to sell them the concept of security, and I don’t have time for that!” He also claims Topsgrup has been able to generate some synergies from its Shield Guarding acquisition. For instance, by bringing back the production of guard uniforms to his own factories in India, he was able to bring down the per-uniform cost from £180 to £50. He has also brought back some of the back-end financial and legal processes to India, in addition to training his India telemarketing team to handle many of the customer service calls and audits. “We have also let go of some employees, in order to ‘right size’ the company,” he adds.

But all of these, he admits, added up to £500,000 in savings — hardly radical.

Another challenge is the acceptance of an Indian company in Western markets, especially as private security companies there run jails, man borders and guard cities. “Indianisation of a company might have negative connotations internationally. Companies might think costs are being cut or training reduced,” says Bijal Doshi, India head of boutique investment bank Euromax Capital which is helping Topsgrup raise money to acquire the remaining portion in Shield Guarding.

Nanda seems to agree, relating a recent incident when the CEO of the American company he planned to acquire told him, “Rahul if the deal happens, please don’t say an Indian company has acquired us.”
“I understood where he came from,” he adds. “Eighty-five percent of Americans don’t have passports and think America is the world. For them India, Sri Lanka, Afghanistan are all in the same breath.”

He says he plans to retain the local brand of companies that he acquires, and let the existing management largely run the show. “If we go to China, I will never have an Englishman as the local face, in America it will always be an American. In fact, even on the Shield Web site, you won’t see me. We will come in as an active investor and let the entrepreneurs run the show, while remaining involved in key decision making and the board processes.”

Holding on to local brands is something even the big players have often done, like G4S with Wackenhut and Securitas with Pinkerton’s in the US. But being a hands-off investor might be a risky strategy, all the more so because the companies Topsgrup acquires outside India might in many cases be significantly bigger than itself. “A small fish digesting a big fish time and again is going to be tough. There is a reason why Bharti-Airtel waited all these years before attempting large international acquisitions,” says Singhal.

Finally, there is the issue of margins. Nanda is clear his focus for acquisitions would remain manned guarding, the fee model for which in India and most of the world is based on a “cost plus commission” basis — clients pay security companies a slim profit margin over guard salaries. As a result, net profit margins are usually in the low single digits (Topsgrup’s post-tax profit for 2008-09 was 3.4 percent).

While this at 25 percent is the largest segment within security services, it is also the one with the lowest margins and annual growth rates, both in the low single digits. Larger companies have been trying to move towards high-margin segments like electronic security. While this means Topsgrup could possibly acquire manned guarding operations at cheaper valuations, like the acquisition of $295 million ArmorGroup for $85 million by G4S recently, its profits will be razor thin.

“We do not want to compete with a GE or Zicom in electronic security,” says Nanda. “Our core competency is manned guarding, it is an annuity business with lower risks. Besides, human beings can never be out of service!”

By attempting to go global, he is not re-inventing the wheel. But just as its opportunities are big, so are its risks. But Nanda isn’t backing down for now. “Security is the only bubble that can never burst. Good times or bad times, you will still need it.”