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Our Take:

Security and Intelligence Services (India) (SIS) Group is a market leader in security, cash logistics and facility management services and operates 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 2.41 lakh trained workforce as on Mar-2020. In the India Security business, SIS is the largest and one of the fastest growing security service provider.

The company enjoys leadership in Australia with 21% market share. We see limited risk from competition owing to its unmatched pan-India presence, strong brand, 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.

Company is the largest private security services player in India whose portfolio of offerings also includes Facility Management Solutions (FMS) and Cash Management Services. Private security is a non-cyclical, recession proof business and has a unique advantage of long term customer retention and stickiness which provides strong visibility of future cash flows. With leadership position in private security services industry in India and International mainly Australia and entry into Singapore and New Zealand territories through acquisitions, SIS is in a sweet spot to capture demand in Asia Pacific region and serve clients who prefer single service provider for operations at multiple locations.

The company has deep penetration spread across geographies. In India, it services 7000+ customers across 18,500 locations, while in Australia, it services ~280 clients. 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.

View & Valuation:

Over FY15-20, SIS has registered 19% revenue CAGR led by organic and inorganic route. Margin has remained in the range of 5-6% in the same period. Operating margin witnessed 100bps expansion yoy due to lower other expenses. Strong focus on cost and operating leverage across segments would help to maintain overall margin at about 6% in FY20-23E. We estimate ~8% revenue CAGR over FY20-23E led by growth from across its verticals.

Strong revenues and steady margins coupled with lower finance costs would drive 16% PAT CAGR over FY20-23E. A consistent improvement in cash generation and deleveraging would be key upside catalysts. Organic revenue growth is expected to remain strong in India businesses with growth in international geographies also likely to pick up.

The labour reforms passed by the Parliament are among the biggest legislative reforms for labour intensive service businesses. A more regulated labour market has preceded market share consolidation globally. The Code on Wages Bill, seeks to empower the Centre to set a minimum wage across all sectors. Considering 22% of revenue comes from companies which follow Central minimum wages Act, SIS has a potential for growth in revenue and earnings going forward. The stock trades at 16.5x FY23E EPS which is reasonable given strong earnings growth expected in the coming years.

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