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Improving growth trajectory in India businesses

Our view and valuation

Overall, mixed performance for the quarter. While revenue for the quarter was slightly below estimates, EBITDA margin was inline with expectation. India Security and the Facilities management business has bounced back sharply and expected to drive revenue growth going ahead. The growth will be fueled by rising penetration of security and facility management business in India and the shift of market share from unorganized to organized players. The business performance remains resilient even during economic downcycles. Also, the vendor consolidation would benefit large players such as SIS.  The EBITDA margin profile should improve going ahead led by normalization of business environment. Also, the falling share of International business would support overall EBITDA margin. We estimate revenue CAGR of 15.8% over FY22?FY24E, with average EBIT margin of 4.2%.

We maintain BUY rating on the stock with revised target price of Rs 580/share, based on DCF valuation. The stock trades at PE of 14.4x on FY24E

Result Highlights

* Reported revenue of Rs 26.8bn( up 1.1% QoQ, up 12.6% YoY). The sequential revenue growth was led by 10.6% QoQ growth in Facilities management and 2.1% growth in India Securities revenue; While International Security Services declined by 2.5% QoQ, due to winding down of covid related temporary contracts

* EBITDA margin declined by 19 bps QoQ to 4.5% in the quarter. The sequential dip in EBITDA margin was due to dip in the margin of international business, as certain high margin covid related contracts tapered down.

* Margins of Security Solutions – India improved from 3.8% to 4.0% QoQ; while the Facility Management margins remain stable, resulting in an overall improvement in India business margins as business growth in the Indian economy normalized.

* PAT was down 15.2% QoQ to Rs 825 mn, with decline in PAT margin of 60bps QoQ  to 3.1%

* Net debt increased by Rs 508mn QoQ to Rs 7,376mn, with Net Debt/ EBITDA of 1.48x as of June 2022, which is higher than 1.38x in March 2022. This increase in Net Debt / EBITDA was a result of increase in DSO during the quarter.

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