Q3FY24 Review: SIS (I) Ltd: Margins on the mend

2 Feb 2024 , 03:09 PM

SIS had a mixed Q3; Ebitda margin expanded by ~60bps YoY as the company focused on profitable contracts which also resulted in revenue growth moderation. D&A and interest went up due to investments in relatively asset-heavy but higher-margin ManTech solutions. Muted headcount addition resulted in lower 80JJAA benefits and in turn higher ETR. With security solutions (India) segment seeing margin re-bound to pre-pandemic level, SIS targets a similar feat in the other two segments. Analysts of IIFL Capital Services largely maintain Ebitda but FY24/25/26 sees 19%/10%/9% EPS cut due to higher D&A and interest cost. FY24 EPS cut is higher on account of elevated ETR. They estimate 12% EPS decline in FY24 followed by 34% Cagr over FY24-26. The stock trades at 17x 1YF PE. SIS has announced its intent to unlock the value of its 49% stake in the cash management JV through demerger/listing, etc. analysts of IIFL Capital Services SoTP-based TP rises from ₹554 to ₹581 on roll-forward to Mar-25. 

Margin expansion drives Q3 Ebitda beat: 

SIS reported 20% YoY Ebitda growth to Rs1.51bn; security solutions (India) margin bounced back to preCovid levels while facilities management (FM) saw a modest margin uptick ,with the company targeting pre-Covid levels within four quarters. Reported PAT declined 64%, due to higher finance cost and 60% ETR. Adjusted PAT (without considering the deferred tax impact of DTA benefits) grew by 17%. Net debt-to-Ebitda stood at 1.86x. 

Positive management commentary: 

Key takeaways from the earnings call: 1) the focus across segments is on solutions-based offerings such as alarm monitoring that entail significantly higher margins; 2) security solutions (International) segment saw some weakness in Australia even as Henderson (Singapore) achieved the much-awaited break-even; 3) FM segment saw 30bps YoY margin expansion to 4.3% and the company targets pre-pandemic levels (~6%) within four quarters; 4) SIS will explore monetisation of its 49% cash management JV (SIS-Prosegur). 

Maintain Ebitda but cut PAT; new TP Rs581: 

Analysts of IIFL Capital Services trim their revenue estimates but raise margin assumptions, inline with SIS’ strategy of focusing on profitable contracts. They incorporate higher D&A and interest costs. Slower-than-expected headcount additions also weigh on ETR in FY24. Analysts of IIFL Capital Services ascribe Rs31/share in their TP for SIS’ 49% stake in the cash management JV, valuing it at 20% discount to market leader CMS.