Recurring terrorist attacks in India have once again brought security concerns to the forefront. Now, technology is playing a key role in helping security forces prevent such incidents and track down the culprits.

This process is enabled by companies engaged in providing security systems to armed forces, utilities, commercial establishments and residential units. It is no surprise that the industry is expected to grow at about 25-35 per cent every year.

The FY06 results were a pointer to the growth potential of these companies. Zicom Electronics posted a 30 per cent growth in topline, even as the bottomline inched up close to two per cent.

Bharat Electronics [Get Quote] posted a growth of 10 and 31 per cent, Avantel Softech [Get Quote] 55 and 91 per cent and Astra Microwave Products [Get Quote] 54 and 118 per cent.

Revenues in FY07 are expected to be skewed towards the second half, when large orders are placed by the government to exhaust the defence budgets. Thus, the first half could look weak, unless a large order is executed in the near-term in light of the recent incidences of security lapse.

Expansion and new orders

Zicom Electronics, primarily into residential and commercial security products like gas leak sensors, motion sensors, metal detectors, fire alarms and access control, has plans to open over 100 retail outlets in the country to market its home and business security systems.

These systems enable one to keep vigil over movement of people and controling their entry.

At the macro level, the company's security systems can also be used at airports, banks, government establishments, industrial locations, commercial complexes and temples.

The company has also bagged the order for setting up a traffic surveillance system from the Commissioner of Police, Mumbai. This system, in its first phase includes implementation of a computerised, remotely managed video surveillance at 100 locations.

The CEO of Zicom Electronics' security solutions group, Rathin Banerjee says, "The growth in BPO, ITES, malls and multiplexes is a major driver for the security industry. Rise in terrorism, domestic crime against elderly with watchmen being part of the crime at times and vandalism has led to a growing awareness about the need for electronic security."

He attributes the slow growth in the FY06 bottomline to investment in establishing retail business and the price sensitive market and competition, which do not allow higher margins.

Bharat Electronics, which offers security equipment to defence and government establishments, supplies systems like surveillance radar, anti-aircraft weapon control, combat net radio, night vision devices and jamming systems, along with new additions like ship-borne data network and Edusat equipment (for ISRO).

In the civilian segment, the company supplies to the telecom sector, along with solar signaling system and electronic voting machines. It has identified diversification into the civilian market as the growth driver.

It is also setting up manufacturing facilities, which will help it indigenise and reduce costs. The turnover from products, based on indigenous design now stands at over 70 per cent as compared to about 60 per cent in the previous year. The company has also achieved about nine per cent growth in exports in FY06.

Avantel Softech is into component designing for wireless industry, including radio frequency and microwave sub-systems, multi-access rural radio systems and mobile satellite services.

Going forward, the foray into US and Europe augurs well. But dependence on a few clients can be a cause for concern. Thus, gathering more clients in the private sector is considered essential. Avantel has also developed embedded software and network management systems for access products.

According to Kejal Mehta of Karvy Stock Broking, Avantel is expected to touch net sales of Rs 25.8 crore (Rs 258 million) and net profit of Rs 2.4 crore (Rs 24 million) in FY07. Strong orders from the defence sector could help in boosting the performance.

The strong topline growth in FY06 can be attributed to execution of projects like mobile satellite services for the navy.

Recently, the company bagged a defence order worth Rs 23.9 crore (Rs 239 million) from Bharat Electronics. The need for jammers and pre-detonators is being felt due to rising insurgency. The company is also expected to see a growth in its telecom orders giving stability to revenues.

Zen Technologies, engaged in the supply of products like training simulators in the defence sector, would benefit from its policy of directly contacting key customers like the military and para-military forces, even as it continues to explore strategic tie-ups in a bid to develop its markets.

Thus, according to Mehta, the company's long-term prospects look good, despite some order delays and termination of a marketing tie-up, earlier in FY06.

Astra Microwave's prospects from defence and space ventures look promising. India's ongoing missile program also augurs well for it, despite temporary setbacks. The company supplies components and sub-systems for wireless applications.

Concerns

The order-based nature of business from armed forces, coupled with delays, higher variable expenses and import costs, could bring uncertainty in revenues. But the long-term potential remains with the government encouraging private sector participation in the defence sector.

Over the past one year, the stock performance of these companies have been a mixed bag. While, Zicom appreciated by 26.84 per cent, Bharat Electronics went up by 49.21 per cent, even as Zen Technologies dropped by 66 per cent and Avantel Softech by 65 per cent. Delays in orders and the strong market correction can be held responsible.

Valuations

A Karvy Stock Broking report expects Avantel to report an EPS of Rs 4.6 in FY07, resulting in a P/E of 8.86x on the current price, while the P/E of Zen Technologies stands at 6.92x on FY07 earnings and Astra Microwave at 22.24x.

As per the estimates of Enam Securities, on the current price, the FY07 P/E of Bharat Electronics stands at 12.5x. On trailing 12 month earnings, Zicom trades at 22.11x.