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Strong beat led by robust growth in the International business

Healthy cash conversions during 3QFY21

* SIS reported strong growth of 8% YoY (6% beat to our estimate), led by 26.5% growth in the International business as Aviation and Special Eventsrelated businesses resumed. While India Security and Facilities Management business saw healthy QoQ growth, they continue to remain down 2% and 15% YoY, respectively.

* We continue to see a pick-up in growth in the India business (Security and FM) in FY22, helped by a quick rebound in macroeconomic activity. Given the strong performance in Dec’20 (4% above average revenue of the preceding two months), our estimate of ~15% YoY growth in FY22 may be conservative. We continue to build in 6-7% growth in the Australia business next year as expected reduction in ad-hoc business should partially depress a recovery in the normal business.

* On the margin side, we were encouraged by the 20bp QoQ improvement and continue to expect a 40bp YoY improvement in FY22 (to 6.4%) as positive operating leverage in the India business should more than compensate for the expected moderation in International business margin, which has benefitted from the ad-hoc business in FY21.

* Cash conversion of 145% for 3QFY21 (and 140% for 9MFY21) was positive and led to a INR160m reduction in net debt for the India business. International business saw only INR460m of net debt addition, despite payment of INR2b for the remaining 49% stake in SXP. We expect cash conversion to return to normal levels in FY22 (50-60%) as business growth in India picks-up.

* Given the multi-dimensional opportunity, we value the company at INR620/share (51% upside), derived by assigning 8x forward EV/EBITDA multiple to the International business (in line with global peers) and DCF on the India business.

Big beat in revenues led by strong growth in the International business

* Revenue increased 8.2% YoY to INR23.5b (v/s our expectation of 2.2% growth). EBITDA rose 10% YoY to INR1. 5b (v/s our estimate of +3.5% YoY). PAT grew 26.5% YoY to INR990m (v/s our expectation of +12% YoY).

* Revenue growth was led by 27% YoY growth in the International business (v/s our estimate of 15% YoY growth).

* India Security/FM business grew sequentially by 11.4%/10.7%. However, the same was still down 2%/15% YoY.

* EBITDA margin rose 20bp/10bp QoQ/YoY to 6.2% (in line with our expectation).

* Margin was flattish in the India Security and FM business. For the FM business, margin increased 190bp QoQ, led by positive operating leverage.

* Consolidated PAT for 3QFY21 stood at INR990m, a QoQ growth of 26.5%, and PAT margin at 4.2%

* Net debt came in at INR4.9b, implying a net debt-to-EBITDA ratio of 0.92x (below the management’s guidance of 1x). 4 February 2021 3QFY21 Results Update | Sector: Staffing SIS 5 February 2021 31

* Net debt for the India business fell INR160m, but rose by only INR460m in the International business despite an INR2b payment for balance stake in SXP.

* OCF-to-EBITDA ratio for 3QFY21 stood at 145%.

* RoCE in 3QFY21 stood at 19%.

* The management guided for annual interest cost reduction target of 20% on an annualized basis due to lower cost of borrowing.

* SIS plans to raise up to INR2.5b through NCDs to replace the older liability of INR1.5b coming up for renewal.

Key highlights from the management commentary

* The management has identified eight distressed sectors that it does not wish to operate in and eight sectors which are expected to be the biggest beneficiaries going forward. This process is intended to change the customer portfolio and assist in better working capital.

* The management expects India Security business margin to continue in the 6- 6.5% range, while those in the International business may reduce given the reduction in ad-hoc revenue. However, permanent revenue in the International business is expected to completely offset the foregone ad-hoc revenue.

* The management alluded that it will hold cash in case some opportunities come up, otherwise it will use it to pare down debt in 4QFY21.

Valuation and view

* Over the medium term, as both the Centre and state governments look forward to liberalizing and formalizing labor markets, SIS should be among the biggest direct beneficiaries.

* We value SECIS at INR620 per share using Sum of The Parts, with EV of INR640 using: 1) DCF for India Security business (INR300), 2) EV/EBITDA multiple of 8x (INR190) for the International Security business (in line with global peers), and 3) DCF for the Facilities Management business (INR150). Adjusting for net debt per share of INR15, we arrive at our target price of INR620 per share.

* Our TP implies a target P/E multiple of ~27x/21x for FY22E/FY23E. We view this as reasonable, given its strong growth profile and unique resilience to macroeconomic shocks.

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