sis ltd share price Management discussions

Global economic review

The global economy is experiencing a broad-based and sharper-than-expected slowdown, with inflation at its highest in decades. The COVID-19 pandemic, financial tightening, Russia?s invasion of Ukraine, and the cost-of-living crisis are contributing to the economic challenges. Global growth is forecast to slow significantly in the coming years, with advanced economies expected to be impacted the most. Inflation is likely to remain high for some time, and a return to pre-covid levels of economic growth seems unlikely in the near future.

Economic Growth Forecast (%) 2022 2023 2024
Global economies 3.4 2.8 3.0
Advanced economies 2.7 1.3 1.4
Emerging markets and developing economies 4.0 3.9 4.2


Source: World Economic Outlook

The global growth forecast is expected to be the weakest since 2001 except during the global financial crisis and the acute phase of the COVID-19 pandemic. Advanced economies are expected to see an especially pronounced growth slowdown in 2023. Emerging and developing economies growth is expected to decline marginally in 2023 and rise to 4.2% in 2024.

India economic outlook

Indian Economy Continues to Show Resilience Amid Global Uncertainties

Overall growth is strong, with 6.9% expected for the full year. The real GDP growth for first three quarters of FY23 was 7.7%, driven by strong investment activity by the government sector and private consumption among higher income earners, while it may take some time for the private sector to join the investment bandwagon. However, there are signs of moderation in last quarter of FY23, and growth is expected to be constrained by slower consumption growth and challenging external conditions. Inflation remains high but is projected to decline to an average of 5.2% in FY24. The financial sector in India is robust, but spillovers from recent developments in financial markets in the US and Europe pose a risk to short-term investment flows to emerging markets, including India.

Australian economic outlook

The Australian economy ended 2022 on a positive note although slightly below economists? predictions, with domestic demand slightly negative and Gross National Expenditure (GNE) falling 0.5% in Q4. However, the $ 6 billion swing in net exports during the last quarter helped prevent negative GDP growth. Due to increased production, there has been a strong demand for additional workers, leading to a decade-low unemployment rate and a decade-high participation rate, resulting in levels of wage growth not seen since 2012. While policymakers in both fiscal and monetary quarters have viewed this increase in wage growth favourably, this wage growth has led to concerns about a ‘wage-price? spiral, further adding to inflationary woes. The Reserve Bank of Australia (RBA) is splitting the discussion around inflation into "goods inflation" and "services inflation" due to the more significant role wages play in the cost base of services production than goods production.

Industry overview

Security Services

The Indian security services market is expected to be valued at H 1,574 billion1 in 2024. India is expected to be one of the fastest growing markets. The demand for security services is driven by various factors such as increasing crime rates, political instability, and the need for protection of assets and individuals. In addition, technological advancements such as the use of artificial intelligence, biometrics, and drones have further boosted the growth of the industry.

Rising labour costs, skilled resource shortages, and the post-COVID era are blurring the lines between the physical and digital worlds, complicating security requirements, and creating demand for more advanced technology-based security solutions. Technology-based security solutions include both system integration (integrated system design, sales, fitting, and project management) and alarm monitoring (constant monitoring by a certified monitoring centre and other adjacent security services). In advanced economies like Singapore, Government is investing in integrating security guarding and technology and it also identified changing the security buyer?s behaviour will be the key to drive this change. The technology-based security solutions market is expected to be valued at H 322 billion by 2024 in India. The technology-based security solutions market is in the early stages of commodification and is anticipated to witness significantly higher growth rates compared to more stable areas such as guarding services.

Facility Management

The Indian facility management market is expected to be valued at H 2,328 billion1 in 2024. The facilities management market is a profoundly fragmented market with high potential for consolidation and continues to grow driven by increased


1 Source: Fredonia Research Report. outsourcing, government?s investments in infrastructure, increasing environmental compliances, convergence towards Integrated Facility Management offerings. Technology is constantly advancing, propelling development in the realm of facility management by increasing efficiencies and providing better value to clients. Large customers are transitioning from input-based relationships to outcome-focused strategic partnerships, with cleaning and workplace management services viewed as critical drivers of corporate culture, employee wellness and engagement. As economies recover from the COVID-19 outbreak and the associated restrictions, the Facility Management market in general is expected to grow and Facility management solution providers are perceived as a hygiene partner rather than a cleaning service provider by the businesses.

Business Overview

The SIS Group is a market leader in security, facility management and cash logistics services and operates in

India, Australia, New Zealand and Singapore.

Through its subsidiaries, associates, and joint ventures, the SIS Group provides security and related services such as manned guarding, training, physical security, paramedic and emergency response services; loss prevention, asset protection, and mobile patrols; facility management services such as cleaning, housekeeping, and pest control management services; and cash logistics services such as cash-in- transit, door step banking, ATM cash replenishment activities, cash handling and processing, and secure transportation of precious items and bullion; and alarm monitoring and response services such as installation of electronic security devices and systems, their monitoring and response.

A summary of our financial performance during the year is indicated in the tables below:

(in H Crore)

Full year Numbers Change
FY23 FY22 %age
Revenue 11,345.8 10,059.1 12.8%
EBITDA 491.6 498.5 -1.4%
% 4.3% 5.0%
Depreciation 130.9 99.4 31.7%
Finance Costs 114.9 98.4 16.8%
Other Income & share of profit/(loss) in associates 42.9 29.6 44.9%
Earnings Before Taxes (Incl. Grants) 288.7 330.3 -12.6%
Less: Acquisition related costs/ (income)
Depreciation & Amortization 3.8 12.1
Gains arising out of adjustment of future tranche of acquired entities 0.0 -25.7
Earnings Before Taxes (Reported) 284.9 343.9 -17.1%
% 2.5% 3.4%
Tax Expenses -61.6 17.9
Profit After Taxes (Reported) 346.5 325.9 6.3%
% 3.1% 3.2%
Profit After Taxes (Operating) 343.9 288.6 19.2%
% 3.0% 2.9%

All businesses continued to report revenue growth during the year signifying the continuation of the business recovery in all segments where the Group operates.

Segmental review

The SIS group has organized its business into the following business segments:

Security Solutions – India: The segment maintained its growth momentum with 19.9% revenue growth, reaching H 4,626.1 Crore, indicating the return of growth in the market post Covid. During the year, we focused our efforts on both growth levers and margin improvement initiatives, resulting in profitable revenue growth and further strengthening the resilient nature of the business. The long-awaited revision of minimum wages in some of the states has also contributed to the growth of business. We continue to focus on leveraging technology in our security solution through our Man-Tech and Alarm monitoring & Response offerings. Our Alarm monitoring & Response businesses continue to grow, with 6,485 new installations during the year, which now services 14,000+ customer connections. Additionally, the VProtect business has a strong pipeline with almost 5,000 sites of confirmed orders to implement in the coming quarters.

Security Solutions – International: The segment reported revenue of H 4,875.9 Crore, a 0.7% y-o-y increase. The revenue from the one-off contracts for the COVID-related quarantine centers business, that contributed to the revenue and margin growth during FY22 is not present in the current year. Despite this, our existing customers and segments which were affected by the pandemic and its restrictions, started coming back strongly and resulted in recording positive revenue growth during the year. However, the post pandemic scenario has presented the industry with the problem of labor shortages across geographies induced by record low unemployment rates and is impacting our costs. During the year, we completed the acquisition of SDS, a Perth based company providing Critical Risk Management, Rescue & Medical Services and Training services across Australia.

Facility Management Solutions: The Facility Management segment reported strong revenue growth, with revenue of H 1,899.8 Crore in FY23 against H 1,394.7 Crore in FY22, a 36.2% y-o-y increase. Our efforts of client base diversification to new sectors such as manufacturing, healthcare, BFSI, Ecommerce/Logistics had paid off well and recovery of IT/ ITES segments also helped to drive the growth. The role of technology in service delivery is increasing with increasing interest from customers for more mechanized, advanced and innovative facility management solutions. Cash Logistics Solutions: The Cash Logistics segment reported revenue of H 543.0 Crore, a 38.3% y-o-y increase.

Revenue continued to grow with our increasing focus on developing and deploying new products and solutions for the customers along with the growth in the traditional service. The revenue from these new and innovative solutions contributes

~ 4% of FY23 revenue. The joint venture business achieved another year of double-digit EBITDA margins, confirming the company?s typical profitability nature.

For a detailed discussion of the segments and industries we operate in, please refer to the other sections in this report from page 22. Our Return on Net Worth (RoNW) was 15.7% and Return on Capital Employed was 12.0% as on March 31, 2023, and displays our commitment to fiscal prudence.

Risk management

SIS has established a formal risk management process to identify potential risks that may affect the business, the capabilities to predict and respond to risks as and when they arise and manage the risk to be within its risk appetite. As a part of its risk management process, we have compiled a comprehensive risk library covering all likely risks under the categories of Operations, Strategic, Human resources, Legal & Compliance, Information Technology & Security and Financial. The key/top risks were then identified and presented to the Risk Management Committee along with the risk mitigation plan. Each risk is properly documented along with its mitigation plan and an owner assigned.

Operating Risks

The possibilities and uncertainties that a firm faces in the process of completing its regular business activities, procedures, and systems are referred to as operational risk. The sources of income in the security or facilities management industries are continuous, giving the income and cash flows a high degree of stability. With a vast operating network encompassing nearly 21,000 venues, we must assure that each of these locations adheres to the same high-quality standards.

We?ve learned a lot about anticipating risks and the mitigation steps that are required over the last four decades. These include hiring, training, evaluation, and quality control methods to guarantee that the risk of lapse is reduced. We also invest in technology to make the process of managing operations at all of these locations easier. Higher standardization is required in order to simplify monitoring and management.

Financial Risks

The Group?s objective is to provide a degree of predictability and consistency in the group?s financial performance while maintaining a balance between offering consistency in the business plan and reasonable market participation because market risk, credit risk, and liquidity risk are all present in the Group?s operations. The Group?s policy does not permit derivatives trading for speculative purposes.

Please see note 40 in the standalone financial statements and note 41 in the consolidated financial statements for more information on the Group?s financial risk management.

Information Technology & Security Risks

As a result of a mix of both organic and inorganic growth over the years, different business within the SIS Group operate on multiple ERP platforms, applications and business systems which are customized to suit their business requirements and are developed internally over the years. Challenges exist in the ability to adequately manage, maintain and constantly improve this platform to avoid operational bottlenecks and a resultant financial impact on the Group. Therefore, the Group has initiated the rollout of common systems to be used across the group which will ensure a more quality and robust management and support and also allow high visibility of key performance metrics across the Group to aid faster and more accurate decision making. With the use of technology being embedded in all facets of our operations, we are conscious of the risks arising out of disruption to our systems and have, therefore, also ensured that we prepare and keep a disaster recovery plan in readiness to allow operations to continue uninterrupted. We also started our cyber security risk management policy to protect and ensure the confidentiality, integrity and availability of Business Applications, Data & IT infrastructure of SIS Group entities from various cyber threats and attacks.

Legal & Compliance Risks

All our businesses are heavily governed by multiple regulations which are not always interpreted and implemented in a predictable and consistent manner. Sometime, general practices followed by the industry may be inconsistent with the regulations or an interpretation of the regulations. Inconsistency in, and differing, interpretations and implementations of the regulations may result in a significant financial impact on the Group. As a Group, we therefore, focus on the highest levels of compliance to avoid reputational damage and financial losses.

Workplace Risks

We have a comprehensive health and safety policy designed to safeguard our personnel and those functioning at our customers? locations. Our HR practices are in line with our businesses? health and safety laws. We believe that accidents and occupational health hazards can be greatly reduced via hazard analysis and control. As a result, we provide proper training to both management and personnel. To maintain a safe working environment at our customer sites, we have developed a set of comprehensive work safety procedures and our workforce is regularly trained and updated on these procedures.

Internal Quality control and adequacy

The Board has established policies and procedures for conducting business in an efficient and effective manner, including compliance with the Company?s policies, asset protection, fraud prevention and detection, error reporting mechanisms, accounting record accuracy and completeness, and timely preparation of reliable financial statements.

While our continued growth in the scale of our business operations has the potential to impose strain on our internal systems and processes, we are constantly engaged in a review and update of our systems and processes, to ensure that they remain current and relevant in an ever-changing business environment. The SIS Group?s information systems are constantly examined and improved in order to provide timely and relevant information to diverse stakeholders, enabling them to compete in a challenging market and environment. We feel that IT and information systems are vital in today?s society, and we engage with numerous expert teams to evolve and improve these systems in order to keep pace with the fast environment.

The Company?s internal auditing system ensures that established processes and practices are followed and adhered to, as well as to ensure that quality processes are followed properly. At all levels of the company, financial discipline is emphasized, and quality processes and a focus on customer satisfaction are vital for the company to retain and attract clients and business, and these are strictly followed. As part of the group?s long-term plan to leverage technology in order to enhance and effectively implement a system of internal controls and efficiency and productivity, we have rolled-out a new financial accounting and reporting system across the group. At the same time the group is also commencing the roll-out of an enhanced and re-developed version of its existing core business systems to help achieve these objectives.

Material developments in human resources/ Industrial relations front, including number of people required

SIS is one of India?s leading private sector employers, and we continue to hire a substantial number of employees across the board. Thousands of families benefit from our consistent income, which is backed up by our strict compliance policies. We also provide health and medical insurance, as well as ESOPs that are forward-looking, in addition to statutory pay and benefits.

The business relies heavily on people, and effective management of this resource is critical for success, profitability, and long-term viability. With an integrated capacity to recruit, train, and deploy a huge labor base, the SIS Group has India?s largest trained manpower supply chain. We have cutting-edge infrastructure and curriculum, with the potential to teach thousands of security guards each year. We have 27 training centres across 14 states possessing state-of-the-art infrastructure and providing up-to-date courses, with capacity to churn out more than 35,000 trained guards , janitors, cash van drivers every year. Furthermore, SIS has strong pan-India recruitment capabilities, ensuring a steady supply of workers. We rejoice in the fact that our people believe in our culture and vision, our tenure demographics of employees with 25+ & 30+ service awards showcase the long-term confidence that our people vest in us. They are the backbone of SIS, and by providing them with a clear career path and the necessary skills, SIS is well-positioned to take advantage of the opportunities that lie ahead. As of March 31, 2023, we had 2,74,206 employees.