Q1FY24 Review: SIS (I) Ltd: Margins get better but cash flows weak

28 Jul 2023 , 01:30 PM

SIS delivered a steady quarter as revenue was largely flattish QoQ, but Ebitda improved ~3% sequentially – driven by a ~40bps margins improvement in the Security Services (India) business. While Facility Management witnessed a flattish quarter, International business saw seasonal downturn. Cash generation was weak, on account of a 6-day increase in DSO. Management is confident of delivering robust growth within domestic businesses and improving margins back to the pre-Covid levels. Analysts of IIFL Capital Services cut their FY24-26 EPS by 0-3%. Their SOTP based TP (rolled forward to Sep’24) goes up to Rs520. 

Sharp improvement in domestic security margins: 

In Q1, Domestic Security business witnessed a ~40bps improvement in Ebitda margins. Management attributed this to the rationalisation of SG&A costs, contract review and operating leverage. Similar actions are being taken across the Facility Management business; the company expects margins to show improvement in a similar manner. Management is targeting to improve margins to ~6% across both these segments. 

OCF weak but expected to normalise: 

Cash generation was weak as there was an operating cash outflow of ~Rs362mn during the quarter. This was on account of a 6-day increase in receivable days. Management stated that collections in Apr/May (post Q4) are typically subdued and thus, expects the DSO days to normalise over the next few quarters. Weak cashflow has caused net debt to increase to ~Rs9.8bn. 

Reasonable valuations: 

Margin improvement in the Domestic Security business comes as a big positive but one continues to await similar recovery for Facility Management. Earnings seem poised for good growth over FY23-26, driven by double-digit revenue growth coupled with margin expansion within domestic businesses. At 17x/13x FY24/25 P/E, valuations remain reasonable for a stock that has proven to be quite resilient in tough times and with robust growth outlook. Recovery in margins could likely trigger a re-rating.