Equity Research: Updater Services Ltd.

UDS looks strong for further growth along with growing network and strategic acquisition of high margin businesses.

Updater Services Limited (USL) is a leading, focused, and integrated business services platform in India offering integrated facilities management (“IFM”) services and business support services (“BSS”) with a pan-India presence. USL is the second largest player in the IFM market in India and have the widest service offering in the industry. The company operates in the Business-to-Business (“B2B”) services space offering a spectrum of business services.

USL offers Audit and Assurance services through Subsidiary, Matrix and, Matrix is a leading Audit and Assurance company for dealer / distributor audits, and retail audits and its strong branch reach and field associate reach has driven the company to reach the top spot in India, with a market share of 19.2% as of March 31, 2023. USL also offers employee background verification check services through Matrix and in this segment, Matrix is the third largest company in India with a share of 5.4% as of March 31, 2023. In addition, the company provides sales enablement services through Subsidiaries Denave and Athena. Denave is the largest player in this segment with a market share of 20.1% in India in the Financial Year ended March 31, 2023. In addition, the company provides mailroom management services through Subsidiary, Avon which is a market leader in India with a share of 11.1% in the mailroom management services market in the Financial Year ended March 31, 2023. USL was founded by Raghunandana Tangirala who has over 30 years of experience in the integrated business services industry and commenced operations in 1990 as a housekeeping and catering services company situated at Chennai, Tamil Nadu. Over the years, it evolved into an integrated business services platform with a pan India presence serving customers across industries and business service lines.

USL services are primarily in the nature of annuity based services whereby the customer, once acquired, generates revenue over an extended period of time. Its annuity based model helps in spreading out the customer acquisition costs and offers the opportunity to cross-sell and up-sell other services, thus resulting in a higher wallet share from customers. USL’s all services are an integral part of customers’ business and assist in forming an important part of customers’ core value creation. These services are also mostly such that they are created and offered through a combination of people, processes and technology. Except catering, none of offerings involve any raw materials and are therefore not dependent on any commodity cycles or unpredictable input cost variations. Further, most of offerings do not involve any major deployment of fixed assets and are therefore asset light.

USL’s portfolio of services has also evolved over the years to cater to the needs of diverse customer segments across a range of sectors including FMCG, manufacturing and engineering, banking, financial services and insurance, healthcare, information technology / information technology enabled services (“IT / ITeS”), automobiles, logistics and warehousing, airports, ports, infrastructure and retail, among others. As on June 30, 2023, USL served 2,797 customers across various sectors, including certain marquee global and Indian customers such as Procter & Gamble Home Products Ltd (“P&G”), Aditya Birla Fashion and Retail Ltd (“ABFRL”), Microsoft, Hyundai Motor India Limited (“Hyundai”), Saint-Gobain India Private Limited (“Saint- Gobain”), Tata Consultancy Services Ltd (“TCS”), LTIMindtree Ltd (“Mindtree”), Honda Motorcycle and Scooter India Pvt Ltd (“Honda”), IIFL Finance Ltd (“IIFL Finance”), SBI Life Insurance Co Ltd (“SBI Life Insurance”), Sony India Pvt Ltd (“Sony”) and Shriram Transport Finance Co Ltd (“Shriram Transport”). Over the years, USL widespread network consisting of 4,331 locations (excluding staffing locations) managed from 129 points of presence with 116 offices situated in India and 13 offices situated overseas, as of June 30, 2023.

Shareholding Pattern:

 Industry Research:

India has emerged as the world’s fastest-growing major economy with its robust democracy and strong partnerships and is anticipated to be one of the top three economic powers in the next 10-15 years. Real GDP at current prices is ₹147.72 lakh crore in the Financial Year ended March 31, 2022 as per the provisional estimates of annual national income for the Financial Year ended March 31, 2022. The Indian GDP growth rate posted a V-shaped recovery in calendar year 2021 and rose to 8.9% as compared to -6.6% in calendar year 2020.

INTEGRATED FACILITIES MANAGEMENT MARKET ANALYSIS

IFM services can be broadly classified and defined as below:

• Soft Services: This includes Housekeeping/ cleaning/ janitorial, Disinfection & Sanitation, Landscaping & Gardening and Pest control services. More than one or all the services are combined in a Soft Services contract.
• Hard Services/ Engineering Services: Heating Ventilation and Air Conditioning (HVAC) maintenance, fire safety systems, Mechanical, Electrical, Plumbing (MEP) maintenance and Green Building Services (energy management, waste management etc.) and other services such as lighting systems.
• Production Support Services (PSS): This is defined as supplying the workforce to the manufacturing companies for production support, material handling, maintenance, utilities etc.
• Hygiene Services: Hygiene Services refers to providing products and solutions such as air fresheners, sanitizers, washroom hygiene solutions including feminine hygiene units such as sanitary pad vending machines and sanitary pad disposal bins and bin liners, etc.
   

Global Facility Management Market Overview:

The global Facility Management (FM) market is witnessing a major transformation driven by technology innovation, new business models, emerging value propositions, competitive disruption, and new service offerings as value propositions are shifting to service outcomes, user experience, and business productivity. Outsourcing is evolving rapidly across the world; in the past decade, the main objective of outsourcing was cost optimization but today organizations want to outsource FM services to free-up internal resources to deliver strategic value.

The global FM market is estimated at USD 828 billion in 2021, registering a growth of 4.3% from 2020. Asia is the largest FM market with a share of 33% of the total market followed by North America and Europe. Asia is the largest FM market and is highly diverse. While Australia, the most developed market in the region for both FM and IFM, has reached some degree of maturity, other markets, including China and India, are still in a stage of infancy and will grow steadily and become more competitive. The low penetration of FM services markets in many of Asia’s fast-growing economies indicates that immense potential exists for market participants to grow and develop, as outsourcing becomes more commonplace in the next 10 years. IFM market in India has been growing steadily over the last decade and is set to witness significant growth momentum over the next 5 years. The total IFM market in India in the Financial Year ended March 31, 2022 is valued at ₹ 89,475 crore and around 39% of this is outsourced to 3rd party companies. Between the Financial Year ended March 31, 2018 and the Financial Year ended March 31, 2022, the outsourced Indian IFM market grew at a CAGR of 8.4%. In the Financial Year ended March 31, 2022 the outsourced IFM market was estimated to be worth ₹ 34,550 crores.

The market revenues declined in the Financial Year ended March 31, 2021 due to the global pandemic and then recovered bulk of it in the Financial Year ended March 31, 2022. The demand for IFM services has increased as people’s preferences for a safe, clean, and secure environment have grown. The government’s plan to develop 100 smart cities will result in a surge in infrastructure creation. The Union Budget 2022 allocated ₹ 14,100 crore for the ‘Urban Rejuvenation Mission’—Atal Mission for Rejuvenation and Urban Transformation ‘AMRUT’ and Smart Cities Mission. Given the current expansion and increase in investments in IT and IteS and BFSI segments, the demand for professional IFM services is increasing, IT sector is shifting to more personalized/ customized services utilizing both Hard and Soft FM services. Investments in other segments such as healthcare and retail are also propelling the demand for IFM services.

The market is now shifting from single service contract model to integrated services model which is a method of consolidating many or all the office/ building’s services under one contract and management team. The intent is to streamline communication and make day-to-day operations easier to manage while improving the building performance. Pandemic had a severe impact on IFM market, and the market revenues witnessed a decline of 9.6% in the Financial Year ended March 31, 2021. Soft Services segment was the most impacted, registering de-growth of 14.7%, followed by Hard Services at -10.3%. Intermittent lockdowns and remote working models adopted by IT, IteS, Institutional Segment etc. driven by the pandemic resulted in lesser demand for IFM services. Despite challenges, the pandemic also created several opportunities for FM companies. Disinfection and sanitation services were the most sought after during 2020 and 2021. The pandemic guidelines and protocols encompass several measures related to health and safety and this is expected to boost the demand for deep cleaning/ sanitization services in the medium-term.

Investment Rationale:

Leading integrated business services platform, operating across diverse segments: The company is a leading, focused, and integrated business services platform in India offering IFM services and BSS to customers, with a pan-India presence. Within the IFM & Other services segment, Company operates across service lines such as soft services, production support services, engineering services, warehousing management, pest control and horticulture. The company has also organically expanded into procurement and supply of consumables, machines and related items for the facilities management industry. The company has also grown inorganically through multiple acquisitions and have expanded services portfolio over the years by venturing into higher margin services such as mailroom management and niche logistics solutions, Audit and Assurance services, employee background verification check services, washroom and feminine hygiene care solutions and sales enablement services, and became one of the leading integrated business services platforms.

The various acquisitions undertaken over a period of time, in addition to resulting in the expansion of services portfolio, the company achieved leading positions in a number of its business segments. USL has not only expanded horizontally by venturing into entirely new service lines but also offered services that are complementary to existing services portfolio such as washroom and feminine hygiene care solutions, mailroom management services and catering services and expanded geographic presence in key markets in India. The company’s diverse range of services, customer base across sectors, ranging from manufacturing to retail sector and healthcare to metro rail and airports, and the strength of brand, have enabled to strengthen its leading position.

Longstanding relationship with customers across diverse sectors leading to recurring business: USL provides IFM & Other services and BSS to customers across a diverse range of industries and sectors. Within the IFM & Other services segment, USL offered services to industries including such as healthcare, manufacturing, automobile, BFSI and consumer products with some of marquee customers being TTK Healthcare Limited (“TTK Healthcare”) within healthcare, Saint-Gobain within manufacturing, Hyundai, Honda Motorcycle and Eicher Motors Ltd within automobile, Shriram Transport, SBI Life Insurance and IIFL Finance within BFSI, and Sony within consumer products, among others. Within the BSS segment, USL offered services to industries including such as retail, IT / ITeS, consumer products, global technology, IT and electronics, airlines, and telecom and communications with some of marquee customers being More Retail Private Ltd (“More Retail”) and ABFRL within retail, TCS and Mindtree within IT / ITeS, P&G and Hershey India Private Ltd (“Hershey”) within consumer products, Microsoft within global technology, Logitech (Electronics) India Private Ltd (“Logitech”) within IT and electronics, Spice Jet Ltd and AIX Connect Private Ltd (“AIX Connect”) within airlines sector and Tata Communications within telecom and communications. USL top ten customers within the IFM & Other services segment accounted for 35.39%, 35.30%, and 33.96% of total income amounting to Rs 38,774.22 million, Rs 41,625.62 million and Rs 51,011.84 million, respectively, whereas top ten customers within the BSS segment accounted for 47.91%, 46.76%, and 54.95% of total income amounting to Rs 5,994.84 million, Rs 20,946.69 million and Rs 28,454.98 million, in the FY21, FY22 and FY23, respectively. While the company has established relationships with many customers, and the company do not have any material dependence on a single or a few customers. Well known international brands including such as Hyundai, Saint- Gobain and P&G, have been customers for over 10 years, as on June 30, 2023.

Track record of successful acquisition and integration of high margin business segments: USL has established a track record of successful inorganic growth through strategic acquisitions to supplement business segments, diversify revenue streams, and integrate such acquired businesses to further strengthen services portfolio. The company pursued selective strategic acquisitions as a means to expand its operations, enhance global competitive position and capitalise on potential operational synergies. The company’s focus has been to acquire companies and businesses whose offerings are complementary and supplementary. All acquisitions have added either a new customer segment, new service line, or a new geography. The company has been able to identify strategic acquisition and investment targets in the past, and make successful acquisitions and integrate to grow. These acquisitions have also enabled to leverage the existing businesses and brand equity and to diversify revenue streams, obtain employee talent and thus expand presence across the value chain. Consistent with its conservative funding philosophy, these acquisitions have primarily been undertaken through internal accruals rather than through any significant acquisition financing.

Pan India presence with large and efficient workforce coupled with strong recruitment capabilities: As of June 30, 2023, USL had a widespread network consisting of 4,667 locations (excluding staffing locations) managed from 125 points of presence with 112 offices situated in India and 13 offices situated overseas. These offices are spread across 25 states in India, comprising 22 offices in north India, 45 offices in south India, 14 offices in east India and 31 offices in west India, giving a nation-wide presence as well as 13 locations overseas. The company’s nation-wide presence enables to offer services to customers who prefer a single service provider for their operations at multiple locations. For instance, through these points of presence, USL has deployed resources for SBI Life Insurance at 535 number of locations and for Sony, the company deployed resources at 516 number of locations, across the country. A pan India presence enables to recruit, train and deploy resources at various customer locations within a short span of time and enables to respond to changing customer requirements, efficiently and effectively. This presence also allows to monitor the work of employees at various customer locations and to administer to the needs of employees quickly and in a manner relevant to them. USL offers services and products in India and overseas markets such as south-east Asia, south Korea and Europe, among others. Further, the company acquired 54.07% of the outstanding equity shares of Denave in the Financial Year ended March 31, 2022 which has allowed entry into south-east Asia and certain selected European geographies for sales enablement such as demand generation, lead management, inside sales, data base management services, and digital marketing, amongst others. In addition, Matrix also provides Audit and Assurance services to customers located outside India.

Technology at the forefront of current and future business: Technology has been an integral part of USL’s business and technology is a huge enabler in driving speed, accuracy, efficiency, customer satisfaction, better service delivery and as a result, deriving revenue and profitability. USL and its subsidiaries have adopted and developed appropriate technology that not only helps them become more efficient and effective but also drive customer satisfaction and market competitiveness. The company has a developed technology function with group Chief Technology Officer and an in-house operating team driving many initiatives such as building cloud based digital attendance and onboarding platform for the workforce in order to help optimize productivity and improve cost efficiencies as well as digital transformation to re-platform and upgrade the current background verification application underpinning the core platform for Subsidiary Matrix.

Highly experienced Management team with support from Investors: USL was founded by Promoter and also company’s Chairman and Managing Director, Raghunandana Tangirala, who has led the company for over three decades with his vision, leadership and guidance. Raghunandana Tangirala, has over 30 years of experience in the integrated business services industry and has driven growth over the years. Another key element that guides that the management is Board that comprises qualified and industry experienced Directors with a proven track record in the corporate world. USL is also supported by a robust management and operations team of individuals who are well-qualified and experienced in their respective areas and who have demonstrated their ability not only to manage and grow operations organically, but also to assist in acquiring and integrating other businesses. This team has also been instrumental in establishing and maintaining enduring relationships with customers. USL’s business growth is also attributable to strong management culture fostered by an entrepreneurial spirit and an ownership mindset. Each of its service verticals is independently managed by experienced vertical heads having in-depth knowledge of industry.

Retain, strengthen and grow customer base with a focus on deepening relationships with existing customers: USL contracts with most of customers is for a period of at least one year which subsequently gets renewed, on an ongoing basis. The company’s business is on an annuity-based model where a customer once secured, generates revenue over a long period of time. The company has developed long- term relationships with customers leading to recurrent business engagements with them and the company has been able to retain existing customers and attract new customers because of its brand, strong market position and delivery of quality services.

USL is focus on quality customer service delivery and operational excellence on a daily basis, thus delivering superior customer service and satisfaction and focus sharply on leveraging technology to improve service delivery, improve the visibility of service delivery via dashboards and also improve reliability and cost of service delivery. USL customer retention levels reflects ability to provide high quality services, and its consistent customer servicing standards have enabled to increase its customer dependence. This has also allowed to cross-sell offerings to customers thus resulting in a higher wallet share.

Introduce new products and services catering to existing and new customer segments: USL is a leading, focused, and integrated business services platform in India, the company intends to further grow in the market and towards this end, the company aims to introduce new products and services to fill gaps in current portfolio or to enter new segments which USL sees as potentially large and margin accretive. The outsourced IFM market is also expected to grow at a CAGR of 17.0% from Rs 39,480.0 crore in the Financial Year ended March 31, 2023 to the Financial Year ended March 31, 2028 and reach Rs 86,442.0 crore. Majority of the growth is expected to be driven by the consistent growth in demand from the commercial, retail, and industrial sectors. The business support services are also forecasted to grow over the next few years. (Source: F&S Report)

USL intends to leverage this growth and introduce newer products and services within the traditional definition of integrated facilities management as well as within the overall segment of BSS portfolio. The company’s strategy on new products and services is constantly evolving basis feedback from customers and perception of market trends. Some of these new products and services will be organically developed and in some cases, the company will examine an entry through different routes such as partnerships, alliances, minority investments, joint ventures as well as acquisitions. This will be in line with prior investments and acquisitions such as Matrix and Denave, among others, pursuant to which, the company added services such as employee background verification check services, Audit and Assurance, sales enablement services and airport ground handling services, amongst others, to service portfolio. All acquisitions have added either a new customer segment, new service line, or a new geography.

Pursue inorganic growth through strategic acquisitions of high margin businesses: USL has focused on moving up the value chain of complexity and specialization over the year by enhancing product and service portfolio, including through acquisitions, in order to be able to provide diversified and more complex services to customers. USL intends to increase its focus on further diversifying services portfolio and providing higher value added and consequently, higher margin services to customers. The company remain continues to focus on maintaining and enhancing organic growth momentum, and the intends to further explore inorganic expansion by leveraging on the experience, gained through prior acquisitions, with a particular focus on niche high-margin businesses. USL has grown business, geographical presence and service portfolio over time, through strategic acquisitions in the past, further enhanced business operations, growth, margin profile and future prospects. Certain of USL recent acquisitions comprise the acquisition of Matrix, Washroom Hygiene Concept, Global Flight Handling, Denave and Athena pursuant to which, the company has been able to add high margin services including such as employee background verification check services, Audit and Assurance services, feminine hygiene care solutions, sales enablement services and airport ground handling services, among others, to service portfolio. USL also intends to pursue similar opportunities to undertake acquisitions, that allow to enhance its scale and market position, achieve operating leverage in key markets by unlocking potential efficiency and synergy and provide with a platform to extend its reach to new geographic markets within India and selected.

Financials:

Balance Sheet

Profit & Loss

Cash Flow

Opinion & Analysis:

UDS provides a wide array of specialized services. This includes sales enablement services, employee background verification checks, audit and assurance services for FMCG and consumer durables, airport ground handling through global flight handling, and mailroom management plus niche logistics solutions. Notably, Denave leads the B2B sales enablement market, while Matrix excels in audit and assurance. Avon is the leader in mailroom management. These services cater to diverse industries, ensuring comprehensive support to clients across various sectors. The company looks attractive With the unique business model that caters to niche markets and strong industry growth for IFM and BSS sectors with CAGR of 19%, the company is poised to grow organically under this segment. The company is also looking for inorganic growth through the strategic acquisition of a high-margin business that will supplement the company’s operations. All this make company looks attractive at current value.

Key Risks:

• USL markets for products and services are evolving, it is difficult for to predict the future results of operations or the limits of market opportunity. Higher operating expenses and unable to generate adequate revenue growth and manage expenses and cash flows, could incur significant losses in the future.
• USL has undertaken acquisition of various businesses over the years to acquire and integrate businesses, further inability to complete such transactions may adversely affect competitiveness and growth prospects.
• There are several outstanding legal proceedings against the company, Directors, Promoters and Subsidiaries. These proceedings are pending at different levels of adjudication before various adjudication forums. Any adverse outcome in any of these proceedings may adversely affect the company’s business.
• USL is providing services in different business environments over the years. A failure to manage operational risk including any errors, defects or disruption in service or inability to meet expected or agreed service standards, could impact its business and Regulatory agencies in different states and courts in India may interpret compliance requirements differently, which may make compliance with laws and regulations more complex, time consuming and costly.
   
  
  

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