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Our Take:

Security and Intelligence Services (India) (SIS) is a market leader in security, cash logistics and facility management services in India. Company has presence in India, Australia, Singapore and New Zealand. SIS is no.1 security service provider in India and Australia. The company is no.2 player in Facility Management and Cash Logistics segment in India. SIS had a total of 2.15 lakh trained workforce as on Jun-2021. Company sees limited competition owing to pan-India presence, strong brand equity, and diversified business mix. Organic growth, partnerships with leading global players, and the acquisitions have enabled the company to achieve a dominant position in its respective areas. Security solutions contributed 87.6% of overall revenues while Facility management accounted for remaining 12.4% of revenues. International segment stood out with 22% growth in revenues and 29% growth in EBITDA in FY21. Company got benefit due to COVID-related security needs. All the geographies – Australia, Singapore and New Zealand did extremely well in FY21. In Jun-2021, the company completed buy back of 18.2 lakh equity shares through tender offer route at Rs 550 per share and spent Rs 100cr in the buy back. SIS has announced its Vision 2025 with two main goals: i) converting its market leadership into market share and ii) achieving 20% of the group EBITDA in 2025 through tech-based solutions. Management intends to focus on achieving 85% growth organically and the balance via inorganic opportunities.

Despite being market leaders in security services and facility management, SIS has around 5% market share in these areas. Company plans to double market share over the next four years. Company is the largest private security services player in India and also offers services in Facility Management Solutions (FMS) and Cash logistics. In India, it services ~7200 customers across 19,500 locations. In international security business, it services ~8700 clients across 22500 operational sites. We are positive on SIS because of the leadership position in India and Australia, steady rise in margins and strong demand for private security services in India and internationally. On Jan 29 2021, we had initiated coverage on SIS for the base case target of Rs 435 and bull case target of Rs 471 and our bull case target was achieved on Jul 07, 2021. SIS recorded strong performance in FY21 mainly led by international security business. Given leadership position in the security market, eyeing higher market share and strong balance sheet, we are positive on the stock. After strong set of numbers in FY21, we have revised estimates and increased target price for the stock.

Valuation & Recommendation:

We estimate 10.5% revenue CAGR over FY21-23E led by growth from across its verticals. India Security business may clock 12% CAGR while international security revenue is expected to grow at 5.5% CAGR over the next two years. We expect margin to remain around 5.5-6% over the same period. We have revised upwards revenue estimates by 2.4%/3.6% and PAT estimates by 5.5%/15.5% for FY22/FY23. Organic revenue growth continues to remain strong in India businesses with growth in international geographies also likely to pick up as seen in FY21. Over the medium to long term, as both the central and state government look to liberalize and formalize the labor markets, SIS should be among the biggest direct beneficiaries. SIS has been able to reduce working capital intensity as it adds fewer new contracts and resultantly, cash generation is higher. This has helped in strengthening the balance sheet. Net debt to EBITDA is the lowest ever since the IPO year - FY17. OCF/EBITDA for FY21 stood at 123%. The company generated operating cash flow (OCF) of Rs 640cr; it is 3x jump from OCF for FY20. A consistent improvement in cash generation and deleveraging would be the key upside catalysts. SIS’s business model participates in growth during economic upturns and remains highly resilient even during severe downturns. The stock trades at ~18x FY23E EPS which is reasonable given strong revenue and EBITDA growth expected in the coming years. We feel that investors’ can buy the stock in the Rs 478-485 band and add on dips to Rs 434 for base case fair value of Rs 532 (19x FY23E earnings) and bull case fair value of Rs 573 (20.5x FY23E earnings) over the next two quarters.

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