SIS: Focus on improving domestic margins

21 Apr 2023 , 10:58 AM

Recommendation: Buy

Target Price: Rs 500

While the company is confident of increasing margins of the FM business by ~150 basis points over FY24 and FY25 (mainly through cost rationalization), the Security businesses (India + Oversees) will focus on augmenting the mix of tech-enabled solutions offering. Cash Logistics business has recovered strongly post the difficult COVID years. Analysts at IIFL Capital Services have cut their FY24/25 EPS estimates by 4-5% and their Target Price to Rs 500.

Significant margin improvements in FM

Management guided to improving margins of the FM business by ~75 basis points each in FY24 and FY25. This will largely be driven by the planned reduction in SG&A costs and conversion of certain low-margin “fixed fee contracts” to “percentage contracts”. Management stated that the FM business is on track to becoming the market leader by the end of FY23; it is confident of cementing this position in the coming years. The Pan-India presence of the business is one of its biggest competitive edges.

Security Solutions (India) to focus on improving contract mix

The business is concentrating on increasing share of the higher margin tech-enabled solutions offering (versus traditional physical guarding). SIS has consistently made investments into technology, to stay ahead of the competition, and has increasingly started to monetize this investment. VProtect is the fastest growing alarm monitoring company in India and offers an optimum solution that is a mix of physical guarding and CCTV solutions. Its customer site count has grown at a CAGR of ~74% over the last three years.

Margins of International business to normalize

Margins are expected to normalize to ~4-4.5% in future, as the high-margin onetime contracts cool off in FY24. Going forward, the segment shall focus on increasing the patrolling and monitoring service offering with the current customers. While supply-side challenges have eased to an extent, they continue to remain a headwind (especially in Henderson).