SIS (I): Securing future prospects through diversification

20 Dec 2023 , 10:09 AM

Recommendation: Buy

Target Price: Rs. 554

SIS is the largest Security solutions provider in India, with a well-diversified business mix, comprising Security solutions in APAC as well as Facility management and Cash management in India. In the India Security segment, the company should benefit from scale advantages, wage hikes, as well as the faster growth and higher margins of outcome-based ManTech solutions. EBITDA margins in the International Security and FM businesses have bottomed out. 

Analysts at IIFL Capital Services are forecasting 20% EPS CAGR over FY23-26. At ~15.5x 1YF PE, valuations are attractive. Potential monetization of 49% stake in the cash management JV through a demerger or an IPO, could unlock further value.

Leader in the India Security solutions market

Urbanization, infrastructure growth and increasing crime rates are the key growth drivers for the Security solutions market. Within this, rising labor costs and skilled resource shortages are creating demand for advanced technology-based security solutions. Faster growth of the latter is positive for leading players like SIS in an industry with low entry barriers, but with high barriers to scale. The company’s VProtect remote monitoring platform holds promise (already deployed on 17k sites, with another 20k sites in the order book) and operating at ~20% EBITDA margin.

Margins seem to have bottomed out in FM and International Security

SIS is the leader in the highly-fragmented India FM market. Analysts at IIFL expect SIS to grow slightly better than the mid-to-high-teens industry growth rate — thanks to higher incidence of integrated contracts and SIS’ pan-India presence. The take-up of lower-margin contracts during the pandemic has led to margin contraction, despite robust revenue growth. SIS is in the process of renegotiating/exiting these lower-margin contracts. Separately, SIS is the leader in the Australia Security solutions market. With easing supply-side constraints, margins should normalize in this business.

Analysts at IIFL build in 20% EPS CAGR over FY23-26

While India businesses should grow in double digits, International business (43% of FY23 revenue) is likely to grow in mid-single digits. Margin normalization should drive 17% EBITDA CAGR over FY23-26. As of end-H1 FY24, SIS’ net debt to EBITDA was 1.9x — within a target range of 1.5x-2x. Cash management JV is the #2 player in India, with Rs. 1 billion+ annualized EBITDA. Analysts at IIFL value this at 20% discount to CMS, which yields Rs. 24/share for SIS’ 49% stake.