SIS (I) Ltd: Focus on margin expansion

16 Feb 2024 , 01:23 PM

Analysts of IIFL Capital Services hosted the management of SIS at IIFL’s Enterprising Bharat Conference. SIS sees India Security business growing at 15-20% and the Facility Management (FM) business growing at 20-25%. Both will benefit from higher outsourcing (especially the latter) and the overall growth of the market. SIS targets 18-20% return on capital and 50%+ FCF-to-Ebitda ratio. Weak headcount addition was due to focus on margins (profitable contracts) as opposed to volumes. This also drove significant margin expansion (6%+) in India Security segment, similar to pre-Covid levels. SIS expects FM segment margin to recover to pre-Covid levels in 2-3 quarters. ETR for Q3FY24 was higher since DTA pertaining to 80JJAA benefits had to be reversed as the headcount addition in FY24 has been weak. 

Wage hike and government entities are drivers for India security: 

Wage hike is a growth driver for India Security business as the wages are mandatorily passed on. The other drivers are more business from existing clients and addition of new clients. Government entities like Railways are increasingly resorting to also outsourcing. The India security market is highly fragmented. SIS, despite being the market leader, has single digit market share. While SIS and G4S are relatively big, the industry has a long tail. 

V-Protect is highly sticky business; diversifying cash management business: 

Most investments in the ManTech portion of the security business is on V-Protect (remote alarm monitoring) related hardware. VProtect is operational on ~22k sites (ATMs and bank branches). These contracts are for 4-5 years and add to customer stickiness. In cash management, SIS-Prosegur (49% owned JV by SIS) is consciously moving away from ATMs (3 years back ATM was 50% of the revenue now ~20%) and is focusing on bullion movement, doorstep banking (retail cash management), treasury management, etc. 

Henderson (Singapore) has turned Ebitda positive: 

In the international Security segment, Henderson (Singapore) achieved a small positive Ebitda in Q3FY24 after going through a challenging phase. Contract-wise costing analysis, change in incentive conditions as well as onerous clauses, and improved availability of labour from Malaysia after the post-Covid reopening helped.