IGI Logo

Compelling valuations; rerating to follow growth in FY22

2025 aspiration to double India market share; Maintain Buy

* SIS (SECIS) reported a mixed 4Q performance, with strong growth of 10.7% YoY (led by the International business), compensated by weaker-thanexpected margins (-120bp QoQ) – on account of a) an increase in SG&A expenses (growth expectation pre-second wave) and b) a one-time gratuity accounting impact.

* While the increase in virus cases and accompanying restrictions would impact business recovery in FY22, SIS’ March growth (+15% YoY) should reassure investors of its ability to weather the impact on business owing to its business and geographical diversification. With the situation expected to ease out over the next few months, we expect SIS to return to double-digit revenue growth in FY22 (12% YoY), with positive growth across the three businesses.

* We continue to see a growth uptick in the India business (Security and FM) in FY22, and estimate 11% YoY growth in the India Security business for FY22 on a favorable base. We continue to build in an 8–9% CAGR in the Australia business over the next two years as an expected reduction in ad-hoc business should partially depress recovery in normal business.

* Moreover, SIS should reverse a large portion of the margin impact in 4Q – the company showed the ability to control cost during the peak COVID drag in 1HFY21. With growth returning in FY22, a major portion of the drag in its Facilities Management space should also go away.

* We see a gradual improvement in margins and expect a 30bp increase over FY21–23 – positive operating leverage in the India business should more than compensate for the expected moderation in the International business margins, which benefitted from ad-hoc business in FY21.

* The management highlighted the aspiration to double SIS’ market share across the India business segment by FY25. It expects this growth to be predominantly organic in nature, with acquisitions accounting for just 15% of incremental aspirations. With the company retaining its near-term guidance of 20% growth, 20% ROCE, and 50%+ cash conversion, we see the aspiration as aggressive and difficult to achieve.

* Cash conversion of 123% for FY21 was a positive, leading to an INR3.2b net debt reduction in FY21. We expect cash conversion to return to normal levels in FY22 (50–60%) as business growth picks up in India.

* Given the multi-dimensional opportunity, we value the company at INR540/share (48% upside), derived by assigning an 8x forward EV/EBITDA multiple to the International business (in line with global peers) and DCF to the India business.

Topline marginally ahead; miss on margins due to SG&A spend

* Revenue increased 10.7% YoY to INR24.4b (v/s est. 9.6% growth), while EBITDA declined 10.9% YoY to INR1.2b (v/s est. +6.5% YoY). Adj. PAT also declined 13.2% YoY to INR932m (v/s est. -28% YoY). For FY21, revenue increased 7.6% YoY, EBITDA remained flat YoY, and PAT declined 5% YoY.

* Revenue increased 10.7% YoY and 3.7% QoQ to INR24.4b (1% beat).

* Revenue growth was led by 5.3% QoQ growth in the International business (led by seasonality) and 4.5% growth in the FM business (above expectations).

* The India Security business grew 1.3% sequentially; however, it is still down 2% YoY.

* The EBITDA margin at 5% reported a drop of 120bp QoQ and 130bp YoY (below expectations), partially due to higher SG&A spend in India in anticipation of demand recovery.

* Margin decline was seen across businesses, with the highest drop reported in the FM business (EBITDA margin of 1.9% v/s 4.3% in 3QFY21) – due to higher SG&A investments in March.

* International business margins fell 120bps sequentially, weighed by the tapering down of short-term government contracts (related to COVID-19), which were high-margin in nature.

* Margins in India Security also declined 80bps on one-time expenses related to PPE kits and higher SG&A spend in anticipation of a growth uptick.

* Consolidated PAT for 4QFY21 stood at INR932m, implying YoY decline of 13%. This was due to lower operating income and higher ETR, partially offset by higher other income. PAT came in ahead of estimates owing to higher other income.

* Net debt stood at INR3.75b (against INR4.9b in 3QFY21), implying net debt/EBITDA of 0.7 (against 0.92 in the previous quarter).

* The company was able to refinance its earlier NCD of INR1.5b to fresh issuances of INR1.9b at a coupon rate of 7.9% (v/s the earlier coupon rate of 9.2%).

* Net debt in the India business stood at INR3.5b (against INR6.3b in 4QFY20); net debt in the International business stood at INR0.2b (against INR0.77b in 4QFY20).

* OCF/EBITDA for FY21 stood at 123%. The company generated total OCF of INR6.4b. This implies an over 3x increase from OCF for FY20. OCF/EBITDA for 4QFY21 stood at 88.5%.

Key highlights from management commentary

* In the overall portfolio, the management expects the Facilities Management business to be the biggest gainer post COVID-19 – given that it has transferred under the health and safety issue and clients are now more concerned with hygiene and sanitization.

* Within the BFSI segment, banks are implementing massive cost cuts. They are reducing the number of employees hired earlier for ATMs and moving to alarmbased and moving guard systems.

* SIS announced its Vision 2025 with two goals: a) converting its market leadership into market share and b) achieving 20% of the group EBITDA in 2025 through tech-based solutions.

* In the case of Vision 2025, the management intends to focus on achieving 85% growth organically and the balance inorganically. Inorganic acquisitions are merely a strategic move by the company; the real growth is expected to come by means of organic levers.

Valuation and view

* Over the medium term, as both the central and state governments look to liberalize and formalize the labor markets, SIS should be among the biggest direct beneficiaries.

* We value SECIS at INR540 per share using SOTP: 1) DCF for the India Security business (INR270), 2) an EV/EBITDA multiple of 8x (INR170) for the International Security business (in line with global peers), and 3) DCF for the Facilities Management business (INR100). Adjusting for net debt per share of INR5, we arrive at TP of INR540 per share.

* Our TP implies a target P/E multiple of ~26x/21x for FY22E/FY23E. We view this as reasonable, given its strong growth profile and unique resilience to macroeconomic shocks.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer