SIS Limited

About the Company

Security & Intelligence Serv.(India)is directly and indirectly engaged in rendering security and related services consisting of manned guarding, training, and indirectly engaged in paramedic and emergency response services; loss prevention, asset protection and mobile patrols; facility management services consisting of cleaning, housekeeping and pest control management services in the areas of facility management; cash logistics services consisting of cash-in-transit, ATM cash replenishment activities and secure transportation of precious items and bullion; and alarm monitoring and response services consisting of trading and installation of electronic security devices and systems through its subsidiaries, joint ventures and associates.

Q4 FY22 Updates

Financial Results & Highlights

Detailed Results:

1. Consolidated sales de-grew by 5% YoY & whereas PAT was down 5% YoY (due to impact of deferred tax credit).
2. EBIDTA margins for the quarter were 4.7% while operating PAT stood at 3.7%.
3. OCF to EBIDTA was 46.9% for FY22.
4. Net debt to EBITDA was at 1.4 times in Q4.
5. The Australia business saw new deal wins of AUD 25M of annualized value during the quarter. 
6. The Contribution towards group revenues & EBIDTA –

1. Security solutions India – 39.1% & 32% (EBIDTA% @3.8%)
2. Security solutions International – 46.7% & 53.9% (EBIDTA% @ 5.8%)
3. Facility management solutions – 14.6% & 14% (EBIDTA% @ 4.5%)
4. Cash logistics EBIDTA% @ 20% (Highest Ever)

Investor Conference Call Highlights: 

1. The management states that it is seeing strong volume growth due to the opening up of economies but it is yet to see the rationalization of prices.
2. The company won a multi-year contract for the Mahanadi coal field worth Rs.220 Cr.
3. The company has created a fund incubator strategy with funds of Rs.75 Cr to invest in new-age startups in security services who are finding valuable & innovative uses of AI.
4. The management states that since the average contribution from sectors like IT, hospital etc. range close to 10%, it is not dependent on the growth of any single sector for strong operational performance which can be demonstrated by the growth of 7% even in the Covid-struck year.
5. The management states that there is a delta of 12% between EBIDTA & NPM of cash logistics business due to higher depreciation & financing costs being a capex-heavy business.
6. The management expects to increase Vprotect’s market share to 2-5% of India’s security market, clock revenue of more than Rs.100 Cr within 2 years & increase connection marks from 10,000 to 15,000.
7. The management expects the Facility management business to maintain the highest growth rate in the coming 3 years.
8. The management states that FY21 was a completely exceptional year for international business where revenue grew by 20% & EBIDTA margins were close to 6%, however, it expects this segment to taper down to pre-covid levels with single-digit revenue growth & EBIDTA margins closer to 5%.
9. The company expects consolidated revenue growth of 20% in FY23.
10. The company expects the margin to taper down temporarily in the coming quarter due to high start-up costs for its new Coal project which is the nature of the business.

Analyst’s View:

SIS is the market leader in security, cash logistics, and facilities management in India. The company saw a mixed quarter with revenues decreasing by almost 5% YoY while profit decreased by 5%. The management is expecting significant market expansion in the future for SIS from the anticipated demand for surveillance in upcoming infra projects and the ongoing construction boom. The company is also looking to expand its target market segments to include IT parks, and malls. The new business line of surveillance setup and maintenance only is also expected to do well in the future. It remains to be seen what obstacles SIS will face during expansion into new segments and whether international growth will come about as expected, further high inflation especially in the employee costs can dampen the company’s profitability. Given the market leader status of the company in its operating segments of facilities management and security and the promise of an ever-increasing market opportunity due to the infra boom in India, SIS is a critical stock to look for in the security and facility management space.

Q3 FY22 Updates

Financial Results & Highlights

Detailed Results:

1. Consolidated sales grew by 10% YoY & 7% QoQ whereas PAT remained flat.
2. EBIDTA margins for the quarter were 5.0% (due to one off costs of Rs 5.1 Cr.
3. OCF to EBIDTA was 31.6%
4. Net debt to EBITDA was at 1.4 times in Q3.
5. The Australia business saw new deal wins with monthly revenues of Rs 10 Cr.
6. The Contribution towards group revenues & EBIDTA –
   1. Security solutions India – 38.2% & 32.8% (EBIDTA% @4.3%)
   2. Security solutions International – 47.9% & 53.6% (EBIDTA% @ 5.6%
   3. Facility management solutions – 14.1% & 13.6% (EBIDTA% @ 4.8%)
   4. Cash logistics EBIDTA% @ 12.4% (Highest Ever)

Investor Conference Call Highlights:

1. The management states that due to one-off expenses margins of the Facility management business have been below pre-covid however Gross margins are stable & it expects to recover back to 6% margins in the coming quarters.
2. The one-off costs in the current quarter were for payment to higher salaried back-office employees who didn’t get any increment in the previous year.
3. The management states that the company is the fastest-growing in the industry. Further, since the business is considered as a part of essential services therefore its demand resilience is extremely high, and the company continues to grow in crisis periods just like they grow in growth years albeit at a lower rate.
4. Due to a good customer satisfaction rate, the management believes that consolidation will happen which will lead to a shift from unorganized players who have 65% market share towards organized players.
5. Ad Hoc business related to covid related quarantine will reduce in Australia which might impact the topline for a few quarters, however, the management believes that due to strong pent up demand from aviation and other sectors which were affected by covid, the revenue will remain stable for the FY23.
6. The management believes the tapering down of revenues from the international segment will be covered from recovery in the Indian segment due to demand coming back from railways, IT, IIT & IIM’s & the likes.
7. The management states that despite a 6% EBITDA margin this industry can deliver more than 20% return on capital employed and more than 20% return on equity.
8. The company is focused to double its market share in security, Facility management & cash logistics in the next three to four years.
9. The company’s latest business involves products to protect like an alarm monitoring company, but it does not provide security guards, it provides alarms and does monitoring of customer sites remotely using CCTV footage & that business has crossed 5000 connections this and it is working more to build new technology-based products in its FM business.
10. The company closed the P4G New Zealand transaction they acquired the remaining shareholding there where they had a majority shareholding previously & transformed the business from a very small $8 million business to $25- $30 million over a cycle of three years.
11. The management states that the company’s guided growth rate of 20% is broken down into three components roughly 7%-8% of roundabout came from minimum wage inflation and the remainder 12% came from existing customer new business and new customer acquisition since in the last two years the minimum wage escalation has completely stalled leading to optically lower growth rate despite increasing customer acquisitions. However, management is confident that wage hikes of 8.5-9% might happen in the future due to pressure on Government leading to better growth.
12. SIS is primarily targeting segments like manufacturing, healthcare, and commercial establishments like an I.T park or a mall.
13. The management is bullish about the Budget because India’s commitment to spend 5 lakh Crores last year and 7.5 lakh Crores in the current year towards infrastructure creation is a massive opportunity creation because whether it is building a metro or a healthcare establishment or educational establishment or a railway platform everything any kind of infrastructure any kind of square footage that is added is going to need CCTV cameras, security staff, and hygiene and sanitation staff.

Analyst’s View:

SIS is the market leader in security, cash logistics, and facilities management in India. The company saw a mixed quarter with revenues rising almost 10% YoY while profit was almost flat at 1% up YoY. The management states that it was mainly due to one-off costs undertaken in Q3. The management is expecting significant market expansion in the future for SIS from the anticipated demand for surveillance in upcoming infra projects and the ongoing construction boom. The company is also looking to expand its target market segments to include IT parks, and malls. The new business line of surveillance setup and maintenance only is also expected to well in the future. It remains to be seen what obstacles SIS will face during expansion into new segments and whether international growth will come about as expected. Given the market leader status of the company in its operating segments of facilities management and security and the promise of an ever-increasing market opportunity due to the infra boom in India, SIS is a critical stock to look for in the security and facility management space.

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