SIS Limited (SIS.BO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the investor and analyst call discussion on New Labor Codes and its impact hosted by SIS Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vineet Toshniwal, President, M&A and Investor Relations from SIS Limited. Thank you, and over to you, sir.

Thank you very much, and I welcome all of you. Good evening, and thank you for joining today's call. Look like a full house with a lot of participants. So we felt it was important to organize the specially focused call conversation because the new labor codes, which were implemented last Friday, notified rather, are finally moving to reality. We've been talking about it, I know, in various investor conferences and in one-to-one interactions as well, right? And post the implementation, there was -- there's a lot of noise, rightly so, questions around cost structures, around how the compliance frameworks will change, what will happen to the margins and more than that, what does it all mean for a business like ours, right? So let me just put some basic framework in place, and then we will get into a very detailed Q&A, right? So to open up, we genuinely believe that this is the GST moment for labor in India, right? As when the GST came in, it formalized the tax system and it accelerated the shift from unorganized to the organized players. The new labor codes are doing something very similar, but on the employment side, which is pushing India's large workforce into a more formal, more compliant and a fully auditable framework. So for a company like ours, increased compliances are actually not a headache. They are -- I would say they are a growth tailwind. We are India's largest fully compliant security facility management platform. We already run on proper auditable books. and transparent accounting. We are fully compliant on PF, ESIC, social security, and we have a very transparent rate structure. And all our contracts are formally documented. So as the rules get cleaner and stricter, it doesn't break our model, it actually validates it. So in very simple terms, as India formalizes its labor, we are structurally designed to be one of the biggest beneficiaries of this whole shift, right? Now let me come to the second aspect. As you all know, we are not a temp staffing company, and we have been emphasizing on and off in all our interactions. We run mission-critical operations, guards at factories, warehouses, data centers, office parks, hospitals and alongside housekeeping and SOC services 24/7. So what the new labor code really do is raise the bar on how you manage large distributed workforce across the state, across country. And our clients are telling us very clearly, we don't want the hassle and risk of managing thousands of blue-collar workers, guards and the facility staff under the new regime. We want one specialist partner who can take care of everything, end-to-end and be fully compliant. That plays straight into our integrated model, manpower, strong management layer and a very robust compliance fine, all under one roof. So as these codes raise the bar, they don't hurt us. They push more business towards us because we are an organized specialist. Now let's come to the cost margin aspect of it. Briefly, let me touch upon very frequent questions which were coming up. Under the new rules, as you can see, wages are more standardized. The definition of wage has been made very tight. There will be a new national minimum floor wage, which will be notified on a pan-India basis. Government has indicated this, and I believe there is a committee being formed and soon it will be notified. Social security contributions are going to be more visible and more digital. This means less room for playing games with basic versus allowances as the practice of unorganized sector was and less scope for underreporting. So for us, this is exactly how we operate. Our contracts are built in with full statutory pass-through. I repeat full pass-through. We earn our margins on top of a fully compliant cost structure. So when PF, ESIC or any other statutory element moves up, it flows through to the client as a line item. It is not absorbed by us. So the nature of the client conversation shifts from being who is the cheapest provider to who is the most reliable compliant partner at a scale. That's why we say when the codes are implemented, they may squeeze the noncompliant unorganized sector. But for us, they reinforce a simple truth, quality, compliance, scale are worth paying for. Now touching upon the consolidation opportunity these codes bring ahead of us because we've been talking about consolidation, industry consolidation in various investor conferences. A very large part of India's security facility market is still served by small informal vendors. The enforcement of labor code tightens that model makes it more harder and riskier, especially for large corporate MNCs, et cetera. So they simply cannot afford noncompliance on thousands of frontline workforce. So with our pan-India footprint and a fully digitized payroll and compliance system and a long track record, we are extremely well placed to capture this consolidation that is ahead of us. Every step India takes from informality towards formal -- towards moving a more formal system, we are actually ready. Now talking about the softer aspects, this is all about the people at the gate, the guards and thousands of soft housekeeping workforce. For them, the bigger questions are how predictable are my wages now that wages are mandated to be paid on exactly 7th of the month, are the wages credited on time? Am I getting my social security, job stability, et cetera. So tightening the definition of wages, enforcing minimum wages, strengthening PF, ESIC moves the system in that direction, right? So I would say we have not opened up to these codes overnight. We've been preparing for them for years and investing behind in this direction for a very, very long time with all digitized system, pan-India platform, strengthened integrated security and facility management offering and a sharpened portfolio, right, which is -- which basically helps us capture this whole opportunity. So let me close my remarks. As India's largest fully compliant security and facility management platform, we are built for this GST moment for labor, turning the new labor codes and the shift from informal to organized into a long-term growth tailwind as a quite compounder and an execution arm of Make in India. Now let me open the floor to questions. We have with us Mr. Rituraj Sinha, our Group Managing Director; and Mr. Brajesh Kumar, who's our Chief Financial Officer. We'll be happy to take each and every one of your questions and answer them to the best of our ability. I would request given the large number of participants on the call, please make your questions brief and only 1 question per participant. Thank you very much. Let's start.

[Operator Instructions] First question comes from the line of Rushil Selarka from Wealth.

Sir, my question is that since there has been now been gratuity for the workers after 1 year, so like do we see that the attrition rate will come down because of those benefits, we'll also get a benefit in tax under 80JJAA?

This is Rituraj. So gratuity as per the payment of Gratuities Act was applicable after 5 years of service earlier. Now with the change in labor codes, gratuity is going to be applicable to both direct employees and fixed-term employees as well as contracted workers effective first year of service, which basically means that those who are not charging gratuity to clients or not creating a gratuity fund as an employer, both will need to incur such expense. However, SIS has been funding its gratuity fund for over 3 decades now. And every contract of ours, we have a gratuity payment clause, which obligates the customer to pay us gratuity payable to our employees as and when the incidence happens. So given that the incidence has changed from year 5 to year 1, we simply have to now pass this through. However, the contractual right with us is already preset in all our contracts. So long story short, in part, you're right, there is a change in law with regard to gratuity. Part 2, there will be additional cost to such employers who are not funding gratuity. Part C and most importantly, the impact on SIS will be negligible or nil.

But sir, like one more thing, are we going to see that more stickiness in terms of employment, like people will not leave at least for 1 year because we see attrition rates are very high. So I think because of all those benefits that psychology will help them to retain for 1 year, and this might help us in bottom line by paying less taxes under 80JJAA. Just wanted to understand thought process...

I think to that, I will say that labor mobility is far more complex than just gratuity being applicable or not being applicable. However, at a high level, given the code on wages that is likely to push up the minimum wage payable to guards, janitors, cash van crew, given the fact that gravity and other such things will be also available. Overall, if you were to ask me at a macro level, is this going to increase retention and reduce attrition for the sector as a whole? I would say yes.

Okay. Got it. And sir, like are we going to see consolidation happening in the industry because now there will be less compliance required in whichever state you work earlier, there is a lot of compliance, but now there are -- it's been converted into 4 cores. So are we going to see that organized market will pick up and they will start taking share from unorganized because of this less compliance and whatever has happened in the industry?

Yes, you could see this as a trigger for organic consolidation and a shift in preference by the customers from unorganized noncompliant players to more organized larger players for a simple reason. Me as a customer, if you are a customer, as long as you are getting some benefit by operating with a small unorganized, noncompliant player, you were saving some money, maybe you were enticed to do so. But now that the labor regulation is going to require a single register filing, scope of cutting [ corners ] is lesser, if the smaller unorganized player is going to ask you for the same rate of pay or same compliances as a market leader, common sense says that an average customer for the same price would rather have a larger compliant operator than stick with bottom end of tier operators. So yes, it should trigger organic consolidation and a shift for -- in favor of more organized, larger players in the market.

Sir, just last question, like are we going to see any impact in our working capital since the payment has to be made on every 7th of the month to the workers. So sometimes the billing -- when we bill it and then we receive the money. So are we going to see any working capital issues over there or increasing working capital cycle because of this?

I think -- I don't see any reason why the working capital cycle should increase. I actually see reason for the contrary. Code on wages has a provision where the principal employer, which is also defined as the user of the service, the end user of the service, is now directly responsible for payment of salaries to all direct staff as well as contracted staff by 7th of the month, which effectively means that as principal employer, they have to now look out for their contracted service provider, may it be a security company or a cash logistics company or a facility management company that they are also paying all statutory dues on time, failing which liability would land at their doorstep. So -- it's a great question. What will happen? I don't think this will be an instant reaction. It will take a few quarters, maybe more than a year to settle. But at this stage, I don't see labor reforms as increasing working capital requirements in the business. In fact, I see it doing the contrary, which is encouraging customers to pay earlier because now they are equally liable for payment on time. Thank you for reading up on labor reforms.

[Operator Instructions] Our next question comes from the line of Siddharth Zabak from IIFL Securities.

I have 2 questions. Do workers who join for a few months and then return home and later rejoin, will there still be social security benefits? And the second one is, will clients push to renegotiate contracts once the social security clauses under the labor codes come into effect?

So answer to question #1 is that once a person joins formal employment, he -- what is joining formal workforce. Formal workforce is defined as any individual who is getting minimum wages as per statute, who has a Provident fund number, who has an ESIC number health care is generally considered to be a part of the formal workforce. So if such an individual was to work for 6 months, 9 months and then go back, take a break and come back after staying at home for 6 months in his village, his Provident fund number will still be alive. His ESI number will still be alive. So as long as he goes to the previous employer or a fresh employer and share details of those numbers, his account remains active. This is what the government is defining as social security portability, whether you work for employer A, B or C, you could carry your social security across, which is the concept of universalization of social security coverage for the average Indian worker. The second question you asked, could you repeat that and clarify a little bit, please?

Sure. I just want to know whether clients will push to renegotiate the contracts once all the social security clauses kick in as it will potentially increase costs for them?

Well, I think every client will look to reduce their cost. That is only natural that doesn't need my confirmation. So at any point in time when there is increase in cost, people will chase avenues to reduce cost. Having said that, I think the impact of such pressure will depend on which entity you're talking about. Like, for example, if you're a staffing company, where your service charges is a fixed rupee value per head per month. there is no impact because a customer -- if the cost increases, the customer is going to say, I used to pay you INR 1,000, I want to pay you INR 1,000 or lesser. As it comes to service providers like us, which are percentage service fee-based, we are very well tuned to this because social security might be sort of the discussion of the country today. But the fact is the industry that we work in, our pricing is linked to minimum wages. And minimum wages is a state subject. So 30-plus states in the country revise their minimum wages. And that, too, they do it twice a year, once in April, once in October. So we undergo 60 or more price resets each year. For us, this is fairly routine. Therefore, our contracts are built for it. Our contracts clearly underline that any statutory change will be a pass-through on a pro rata basis. So long story short, I don't see any negative impact as such on SIS because we go through the -- 60 times a year is pretty much as routine as it can get. I hope that satisfies your question.

Our next question comes from the line of Riya Mehta from Aequitas Investment.

My first question is with the minimum wage, which we were discussing since a long time, but it's not been corrected. So with this new labor law do we get any sense of when the amount or the number would come by?

Well, I think let's spend a moment to understand the Minimum Wages Act itself. The Minimum Wages Act as it were pre labor reforms spoke about setting the minimum rate of pay for scheduled employment. Now scheduled employment only covered 30% of all job roles. So 70% of workers were not even covered under minimum wages. What the government has now done that first big changes, and I think you guys should -- anybody who's interested in labor laws must sort of really make a note of this because minimum wage is very fundamental to the cost structure of any industry, forget security or staffing. The first big change that the government has made, they have universalized minimum wage. So no matter what type of job you do, you could be a bidi maker, you could be a rag picker or you could be whatever else job you can think of, the Minimum Wage Act applies to everyone. That's #1. Number two, there is a basis now for fixation of minimum wage. What job role will get what minimum wage, there is a logical basis for setting that minimum rate of pay. And that criteria is, #1, skill level, what skill the job requires; #2, location of the job, whether it is in Himachal Pradesh or it is in Bangalore city. And third, the working conditions. Does this job require you to work in a mine in extremely hard conditions or it is a job that requires you to sit in a pretty comfortable place. So these 3 parameters put together determine the criteria on which the wages will be determined. And #3, mega changes that the government has prescribed a national floor minimum wage, which says that now the states cannot arbitrarily keep their minimum wage low so as to keep the cost of production lower. For example, a lot of you will be surprised that the minimum wage of an industrialized state like Gujarat is literally 60% lower than the minimum wage in an industrialized state like Tamil Nadu or even 70% lower than -- sorry, not 70%, 40% lower than Maharashtra. If I put numbers to it, in Gujarat, a minimum wage is INR 12,000, INR 13,000, INR 14,000. In Maharashtra for the same job role, you could be earning INR 23,000, INR 24,000, INR 25,000. It's that much of a disparity. For the same job, you could be a driver. In Gujarat, you could be a driver in Maharashtra and your pay will vary by INR 10,000 per month. Now this disparity was a traditional or how do I say, a historical anomaly in the labor markets of this country, which are now being rationalized. So when you talk about code on wages and the minimum wage, you must understand these 3 things. Number one, that minimum wages now is universal, so no shortcuts. Number two, that minimum wage fixation criteria is now defined and crystal clear what comprises wage. And #3, that there is a rule for national floor minimum wage. No state can set minimum wages, which are lower than the national floor. Now the golden question, what is it and when is it going to lead? My answer to that is I don't know. I don't know when the government is going to formally announce the national floor minimum wage. And I don't know whether that will trigger a 5% increase in wages for security, for janitorial staff, for cash crew members or that is going to result in a higher increase. In 2017, a similar change happened, not labor law change, but a recategorization of security staff. In 2018 January, if my memory serves me right, at which point in time, there was a onetime catch-up of 54% in certain regions. So my guess would be as good or as bad as yours. But directionally, I'm sure that the government cannot reduce minimum wages. And as long as it increases minimum wages, whether it is 5% or 50%, that will have a direct bearing on higher revenues and correspondingly higher margins for SIS Group. Sorry for the long answer, but I hope it clarifies.

Our next question comes from the line of Amit Chandra from HDFC Securities.

So my question is on the minimum wage that has been set across the country. You said that it will be a minimum floor. So we will see the cost for a lot of industries or a lot of states going up. So is there a risk that some of these increased costs for clients of yours will be passed on to some of the staffing companies and the kind of margins that we are enjoying right now, there could be a risk to it and they could offer some discounts or ask for some discounts maybe because of the increased cost. So is that a possibility? And because our understanding was that with these new labor codes coming in, the industry which was seeing a lot of margin pressures over the last many years, maybe we can see some easing in terms of the margins and the gross margins can go across the industry.

I think there is a fundamental difference that this labor law change will underline, which is the difference between staffing and service. The difference between a business model that generates 1% to 2% EBITDA margin and a business model that generates 5% to 6% EBITDA margin. Honestly speaking, I have said this earlier, customers will look to reduce cost in every way they can. But the fact is minimum wages go up every year across every single contract of ours at least one time, mostly 2 times a year on April and October. We pass through these costs to clients without taking a hit on our service fee, which is a percentage of cost. So I have no reason to believe that this change, we will not be able to pass through. But then again, that time will tell. I think our business model, our contracts and our past experience give me reasonable confidence that this should be both a revenue and a margin kicker for SIS as a result of higher minimum wages.

Okay. So if you are able to maintain your -- if you're able to maintain your service fees, then apart from that, most from an industry tailwind, what other things that you think that will drive your gross margins if the client, if you're able to pass on whatever the hike is there any minimum wages, what all things that you believe is more positive from a long-term perspective for the industry? And also in terms of timelines, how do you see the timelines in terms of implementation of the labor costs? Maybe it will take a quarter or 6 months or a year in terms of the implementation, full scale implementation because it's a big reform, maybe it can take much longer time versus what we have anticipated.

Let me give you a broader answer. I think it's important for everybody to understand the scale of this change. In India, we have 1.3 billion people, 95 crore voters, who are above 18, 55 crore labor force, people who are actually in that age and are working. That is an estimate from the labor organizations. Out of the 55 crores, only 25 crores work in the farm sector. Remaining 30 crore people are either self-employed, government employed, private sector employed. As of now roughly 8-odd crore people were provident fund registered. So out of 30 crore, only 8 crore people was getting some kind of social security in the form of provident fund. This initiative, the government is likely to increase social security coverage from 8 crore towards 30 crores. I don't know where exactly they will end up, but it is going to increase social security net, universalizing social security is one of the key objectives of the government. Why I'm telling you this is that when you absorb that scale of change, like Vineet was saying, this is as big as GST. So now when they are saying that every employer will have to get a single registration, single online filing, single license, getting this done, getting the IT system to work, it will take a while. Even GST took a while. It didn't happen in a quarter, if you remember. Even this will take some time. There will be sets and resets and setbacks and -- but I'm not in a position to give you a timeline on this, my friend, because the code on wages was enacted in 2019. It has been implemented in 2025. So what I can tell you today is the impact is going to be massive, impact is going to be across sectors, impact will take time, at least a year, if not a little longer. But overall, this is good for India. This is definitely good for SIS.

Our next question comes from the line of Dipesh Mehta from Emkay Global.

Just to understand it better, can you help us understand what would be the cost difference between organized player and unorganized player today in security services as well as facility and cash management, if you can help us understand that part? And do you expect now cost will start converging and scale player rather have some advantage in cost structure compared to unorganized player? If answer is yes for the second part of the question, do you think it can -- I think partly you alluded about consolidation in your -- one of the answer earlier, but whether it can have a significant implication on the number of players operating in the space going forward because of the scale advantage in business?

Well, that's many questions rolled into one. Let me try and answer one by one. I think labor reforms is a trigger for organic consolidation of the industry. There is no denying that. And I will give you evidence. I operate extensively in Australia for the last 15 years. Our subsidiary company in Australia has 18% market share. And that is largely because the labor laws are extremely explicit. I can give you a similar example for U.K., I can give you a similar example for many other countries where labor reforms have occurred in the last 2 decades. So is labor reforms going to trigger organic consolidation? Is it going to trigger shift away from unorganized noncompliant towards organized? The answer is a clear yes. As regards to cost comparison between unorganized and organized player, I mean, I'm assuming you live in Mumbai. So let me give you a Mumbai example. The minimum wages in Mumbai is such that an SIS security guard in Mumbai would cost you close to INR 50,000 per head per month for an 8-hour shift. Technically, if you go to one of the old construction buildings, RWAs, which have been there for 100 years or 70 years, you will find a Johnny sitting inside the lift generally wearing Chappal sitting on a stool. If you ask him his salary, he'll probably be getting maybe INR 20,000, INR 25,000 in hand and no PF, no ESI, no bonus, no gratuity, no nothing. He's just getting salary and his owner is taking INR 2,000 on top. Both of this could be happening at a source distance. Same RWA will have an ICICI Bank branch or ICICI Bank ATM or Axis Bank ATM, their ICICI will be paying full compliance. They will be paying INR 50,000 for a guard. [Foreign Language] This is the condition of labor laws implementation in this country today. So I don't think our addressable market is the RWA. It has never been. SIS is primarily industrial focused. So we don't work for individuals, we don't work for households. We don't work for such RWAs. In our existing customer base or our addressable market as we call it, I don't think there is anybody who is looking for a INR 25,000 service in Bombay. They all understand that when labor reforms will come, maybe the cost of the same guard, which is INR 50,000, thereabouts, might go up 15%, 20%. It might be now INR 60,000. But then the same bank or the same corporate client used to have a guard or security manpower 20 years back in his building. And at that point in time, the minimum wage was lower. So he may be only paying INR 20,000 for that job role. Today, he's paying INR 50,000, tomorrow, he might end up paying INR 60,000. But because the value addition is reasonable and justified, industry rolls on. I hope that helps.

It helps. Sir, only follow-up is broadly what you are indicating is because we are operating in -- so our addressable market is not including situation like RWA building, then our target market, we don't see much change in terms of cost difference between us versus our similarly organized player.

Let me clarify. Let me put it in numbers, maybe you understand it better like that. The GST code for private security indicates that roughly INR 8,000 crores plus of private security services are rendered each month and GST for INR 8,000 crores worth of services is deposited to Government of India. SIS revenue from security is INR 600 crores approximately in a month. So technically, our market share is somewhere between 5% to 10%. Now I clearly call out that every single buyer of security is not my addressable market. There is a lot of people we will not go and serve simply because they are not corporates, they don't believe in compliance. There is no Managing Directors, there is no Board, there is no listed company. So they are more casual about their compliances. So everyone who's buying security is not my client. Everybody who's buying cleaning service is not my client. But even if you exclude 30%, 40% like that, our headroom is still from maybe INR 600 crores to INR 6,000 crores till I reach a point that I'm getting into nonaddressable market. So I don't think we are at all worried about that aspect. We have enough headroom to grow. In the U.S., the largest security company, Allied Universal has 15% market share. In the U.K., the largest security company has more than 15% market share, which is Group 4. In the Scandinavian countries, Securitas has more than 25% market share. In Australia, our own subsidiary has 18% market share. We have maybe 5%. So I don't think we are worried about the size of the market at all.

Our next question comes from the line of Anant Mundra from Mytemple Capital.

Sir, just wanted to understand the impact of this 48-hour per week cap that is there because I understand security is a 12-hour shift business. So I mean, how would this impact the company and the industry overall?

Ladies and gentlemen, the line for management has been disconnected. I'm reconnecting the line. Please stay connected.

Sorry, I dropped out.

Anant, please repeat your question.

Yes. So I just want to understand the impact of the 48-hour weekly cap on working hours because from what we understand, security is a 12-hour work shift. And because there's going to be like a -- I mean, if you just divide it by 6, there's an 8-hour cap and beyond that, everything has to be, I think, double the regular weight. So how could this impact the company and the industry overall?

Firstly, who told you that security is a 12-hour work shift industry. I think this is completely false and wrong information. Please correct for everyone involved. Security, like any other industry, complies with the same set of labor laws as everybody else. So if 12-hour shift is not common to every industry, it is not common to security. Right? 12-hour work shift is more likely in a bank, is more likely in a call center. It is more likely in a textile garment industry than private security. So I think that's the first point in correction. The second is that it is true that our guards opt voluntarily to do extra shifts. That is because they are mostly migrant labor, and they look to maximize their earnings, monthly earnings. They'd rather do an extra shift that is available than not do it. As of right now, through our proprietary technology, which is the MySIS app, we have restrictions on who can do OT, where he can do OT, how much OT we can do. For us, it is simple -- as simple as changing one rule in the code to say that 40 hours and no more. The person will not be able to log in attendance. He will not be able to punch attendance. So noncompliance at the trigger point is being addressed by SIS as we speak. So effective the first full month, which is 1 December, we are hard coding a 40-hour OT cap for all our employees. I hope that clarifies.

And just one more question. So it's also expected -- I mean, do we expect the take-home pay of our employees to go down because there's some -- the base on which PF calculation is done is going to get revised. So do we expect the take-home to go lower for our employees?

No. As of now, no, because we already -- whatever the law is prescribing, why is the take-home going down? Please understand this also. This is one of the biggest misnomers. So let's say, your salary is INR 1 lakh or my salary is INR 1 lakh. And for the purpose of provident fund, my HR department had defined my basic pay as INR 10,000, and they were paying 13% provident fund, on INR 10,000, right? So the new law says that at least 50% of your take-home pay will be considered as base for PF deductions. So now my HR department in this case, would have to rebase my PF computation at INR 50,000. So which basically means that the company will have to cop up more, but it also means that there will be a greater deduction from my take-home pay as a result of which my in-hand salary will reduce. In SIS, pre-corona, I think maybe 2017 or something, we rebased our PF calculation in our pricing with customers and in our calculation for payment to PF department at 50% of gross take-home pay. And that was because there was litigation in this regard where such matters were taken to court. And the court had already ruled that PF should be deductible on 50% of gross pay. Now because that was not enacted, some people opted to be extra cautious. Others decided to take advantage till it became clear enough. We were cautious. We have no extra cost. Our guards are not going to have lesser take-home pay.

Our next question comes from the line of Riya Mehta from Aequitas Investment.

I understand the kind of impact will be neutral to positive for our security business and -- am I audible?

Yes, Riya, you are. Please go ahead.

So I understand for our security business, I think this has been kind of something which we've been waiting since long. For a facility management where our -- where we don't charge a percentage and it's an absolute amount, how does it impact that business for us? If you could just help me.

I think, again, I'm glad that you guys are asking all these questions. Again, who told you that facility management does not work on percentage service fee?

So how is the fee structure...

Please do not confuse us with a staffing company. I don't know how staffing companies who have also entered into facility management price their contracts. But we've been in this industry since 1974. We've gone through many such waves. Our pricing model is exactly the same across security and facility management. Let's say, let me give you a very detailed example. If minimum wages in Bangalore is INR 20,000, then on INR 20,000, the janitor gets his PF, ESI, bonus, gratuity, leave, everything calculated. On top of it, we put INR 200, INR 500 for his uniform and training and other such charges, supervision charges. And then we charge our service fee as a percentage of that overall cost. So if that adds up to INR 35,000 already with all these wage plus statutory plus training and uniform put together, we charge, let's say, 10% on that. So our service fee is INR 3,500 on a cost base of INR 35,000 and the net cost to customer is INR 38,500 plus GST. Now for example, government decides tomorrow that the GST on facility management services is reduced to 5%. So nothing happens in our pricing. Simply instead of invoicing out at INR 38,000 plus 18% GST, we invoice out INR 38,500 plus 5% to GST. If the government says that no minimum wages effective next month is going to be INR 21,000, then we simply reprice our contract, INR 20,000 minimum wage becomes INR 21,000 and PF, ESI, bonus gratuity, everything else gets computed. We were getting 10%. We continue to get 10% because the cost has now moved from INR 35,000 a month to, let's say, INR 36,000 a month for simple understanding, we get 10% of INR 36,000. So we start to get INR 3,600 for that individual per month. That's how the margin of this industry operates. Now many would say, oh my God, labor reforms has happened. So this practice may not hold. What they are missing is that this minimum wage hike business has been happening twice a year for the same contract for the past 10 years. There is nothing new about it. What is the government going to do? Worst case, the government is going to say minimum wage goes up by INR 5,000. Instead of INR 1,000, they'll say INR 5,000. Should that happen, we have to go back and talk to the customer. But the contractual right to pass through remains. The customer will call us and say [Foreign Language] that is what solutioning is all about. I think it will either boost revenue through higher cost or it will boost revenue through higher use of mechanization automation. Both ways, it's a booster on margin.

Got it. Also in terms of incremental cost with all these things like maybe health checkups, gratuity in 1 year, et cetera, et cetera. If suppose can you help me with an example like if for a person who is earning INR 10,000 or INR 20,000, how much as a percentage that cost will increase? Or how much is the actual cost to the company going to increase with all these incremental statutory obligations?

So every individual that works for SIS today is already covered under ESIC, Employee State Insurance that basically has a health care network, hospitals across India. So you get a card -- see it as the predecessor of Ayushman Bharat. So as an employee enrolled in ESIC, you get a card which has a picture of your family, husband, wife, children and now the government has added in-laws and parents. So all of these people will become eligible to free health care from ESIC hospitals. So for us, is this a cost increase? The answer is no. We were anywhere charging our clients and paying. What is new is the government has said that employees above 40 years of age will also be entitled to preventive annual health checkup. Now we don't have that provision currently in ESIC. Now for the government to effect that for 10 crore people, they will have to extend this service to ESIC enrolled members also. Otherwise, how is the government going to say that this is a new rule book everybody gets preventive and curative health care, but ESIC will only do curative and preventive, you go find for yourself. [Foreign Language] So the government -- ESIC will now have to catch up and offer preventive health care also luckily for us. This provision clearly underlines that this is an obligation of the principal employer. As per law, principal employer is defined as the end user of service. So there might be some confusion for a Zomato delivery boy, whether you as a person who orders Zomato is the principal employer or not. There, the buck might stop at Zomato itself. But for us, our employees is either working in Max Hospital or Lilavati Hospital, is either working in Tata Motors or ICICI Bank, is either working in American Express Corporation or Boeing Corporation. So the principal employer is crystal clear. There is no ambiguity about that.

Okay. But in terms of like say, gratuity has -- tenure has been reduced or other incremental legal cost, could you give me a ballpark number which -- or just a sense of how much cost for a noncompliant company it would increase?

Company that is noncompliant for gratuity?

No, for all the incremental compliances, which -- let's say, I understand that SIS has been among the organized player. So I want to understand how much is the delta between unorganized to organized? How much will the cost increase for the unorganized?

I don't know the level of noncompliance you're talking about. There could be somebody who's not even paying minimum wages.

Yes.

So in Bombay, you could have somebody who is paying a guard INR 10,000 salary. So to catch up with minimum wage, he has to first increase salary by INR 15,000 to be equal to the rate of pay in Mumbai. Then if he's not paying minimum wage, he has to -- he most certainly is not paying PF, ESI, bonus and gratuity. So he has to pay 13% PF, 3.75% ESI, 8.33% bonus, 4.81% gratuity, I'd say, weekly off and leave 16.66%. So depends how noncompliant you are. So I mean, it's...

Okay. Got it. And with the current implementation, we had read reports that it would take around 45 to 50 days for the final draft to come. Are we expecting similar timelines?

This act was legislated in 2019, '20 and '21. It has been effective date in November 2025. Only God knows when the portal will be ready for single registration, single license, single online filing for the draft rules to be out. I would not venture a guess. But I know for sure, there is no stepping back. In the farm laws, the government had to step back. In land reform, government had to step back. Luckily, in tax reform, they were able to implement. I think labor reform is going to go the tax reform way simply because I haven't read anything -- there's no trade unions on the street. There is nothing that sort of says that there's going to be another farm law type situation.

Our next question comes from the line of Girish from GJ Capital Partners.

So my question is on working capital, which is already addressed by you. But just to clarify on one fact. If you look at the code of wages central rules, there's Rule 55, which requires principal employer to pay to the contractor before contractor pays salaries to the contract labor. And as per the Wages Act, it is within 7 days of the month closure. So there's a clear case for SIS to reduce the receivable days in India business. And logically, it should come down to close to 7 days from probably 70-plus days currently and release a lot of working capital. So how do you see this building up in SIS? That's my question.

Firstly, my compliments, and I'm glad to know that you've actually taken the pain to read the act. It's a great question. I think theoretically, this gives us very solid grounds to contest payment terms with our clients. We could -- if the law is implemented in letter and spirit, you are right. We are supposed to give the bill by 1st of the month. They are supposed to pay before 5th or 6th of the month, and we are supposed to pay our employees on the 7th of the month, just like they will pay their direct employees who are sitting in their factories. So 7th everybody gets paid. That's the ideal condition. Should that happen, our DSOs which is SIS maintains probably one of the better DSOs in this industry, our DSO still sits at 70 days. Now if this theoretical situation was to prevail, there should be a very significant reduction in our working capital intensity. Having said that, it is too early to make a forecast, prediction or claim about this. I think we have very solid grounds to reduce our working capital. We have legislation to back us. But how this will actually get played out is to be seen.

So your -- if I'm not wrong, your receivables -- trade receivables are INR 2,200 crores. Even if I assume half of it is in India, which is INR 1,100 crores. And even if we are able to achieve 50% compliant principal employers, there is a potential of release of INR 500 crores to INR 600 crores of cash, which makes you a net debt-free company. So I'm sure you will be making full efforts towards that.

I think we are anyway sub 1x net debt-to-EBITDA. And even without that working capital release, we will work towards a net debt -- negative net debt company that you can take regardless of what happens here. But you are right. I think if your math is correct, the first thing that will happen, net debt is the side. The main thing that will happen is the return ratio of SIS will go beyond 30%.

Our next question comes from the line of Dipesh Mehta from Emkay Global.

Just on the -- I think broadly you answered on working capital side. But do you think any changes in the facility side also? So let's say, between security and facility management, is there any -- are there any terms different in working capital between these 2 business with the customers? And second question...

The contracting -- so just to be clear, please do not try to dissect security and FM. Our operating model, our pricing model, our payment terms and contracting model with customers are pretty much same for security and for FM.

Ladies and gentlemen, in the interest of the time, that was the last question for today. I would like to hand the conference over to Mr. Rituraj Sinha for the closing comments. Thank you, and over to you, sir.

Thank you very much for all those who have joined the call. Anyone whose questions could not get addressed today, kindly feel free to write to Investor Relations, and we will get back to you with answers. In summary, I would like to say that this is a mega trend. Labor reforms change because of the scale of impact that it has on the labor environment in the country is a mega trend, is a mega change. It will take time to get implemented, just like GST did. This is even more complicated because this is literally covering every single employer in the country and potentially every single non-farm employee in the country. So this will take time. It will go back and forth. The key thing to remember is that this has happened. And as and when it fully gets implemented, it will transform the labor market environment for India. In my judgment, in my last 23 years of experience in this sector, I started out in 2002 when the minimum rate of pay or the minimum wage in Delhi was INR 2,800 per head per month. There was nothing like service tax. And I still remember going to customers where they asked me [Foreign Language]. So I have seen this industry evolve in the last 23 years from that to where we stand today, where nobody is challenging the fact that minimum wages has to be paid or GST has to be paid. There were some shortcuts that people were making around things like bonus, things like leave, I think even minimum wages in certain cases. I think all of that will get addressed over time. This is not just good for India. This is particularly good for businesses like SIS because our revenue is basically volume into price. And price is a function of wage. So if the wage is going to go up, if the statutory compliance is going to go up, then price is going to go up. And if price is going to go up, revenue is going to go up. Please understand we have 3 lakh-plus people if minimum wages was to go up by INR 1,000 starting tomorrow morning. Each of these individuals will have to get INR 1,000 extra every month, and we will have to claim that from our customers. That will reflect on our revenues, reflect on our profit line. It's as simple as that. So please do not be overly concerned about our capability to pass through. I think this is also a moment of time, which will clearly underline the difference between staffing industry as a 1%, 2% EBITDA margin business and a flat fee model vis-a-vis security and facility management, which are a service at 5%, 6% EBITDA margin on a percentage service charge basis. So I think these are interesting times. I'm sure we will learn as we go ahead. But let me assure you that SIS has been preparing for labor reforms since the code on wages was enacted, we have worked in very close coordination with all government agencies. We are glad to see that the government has been extremely receptive, especially listening to the feedback of large blue-collar employers like SIS. By virtue of having 3 lakh-plus employees, we are also one of the top 10 private employees in the country. And amongst blue-collar workforce, we'd probably be top 5 private employers in the country. So we are very happy that this has happened. We welcome it. There will be teething trouble. We are prepared for it. Overall, I see this as an inflection point for our industry. Thank you very much.

Thank you so much, sir. Ladies and gentlemen, on behalf of SIS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.