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Recovery in operating margin on track

We attended Investor and Analyst Meet of SIS Ltd. The management reiterated the high growth potential of domestic business (at ~1.5x industry growth) due to growing formalization, high fragmented nature of business, foray into electronic security and shift towards organized players. EBITDA margin is expected to reach pre-covid level over next few quarters. The business remains resilient to macro cycles due to essential nature of these services.

Key highlights of the Analyst Meet

* India security business is expected to grow at CAGR of around 20% going ahead, gaining market share in the process. It remains committed to double its market share in India Security business from current 5% over next 3 years. Tech based security accounts for 8% of segmental revenue

* The revenue mix of international business has been on a decreasing trend. Currently only ~35% of the revenue is contributed by international segment.

* International Security Segment is viewed as a perfect hedge against India Security business. During covid-19, international business segment grew at high teens due to a few large deal wins. This segment is expected to grow at CAGR of 6% pa

* Facilities management has bounced sharply led by opening up of offices across industries as employees return to office. The covid19 Pandemic has led to increasing traction in facilities management business with greater focus towards disinfection and hygiene requirements.

* The current focus on infrastructure creation in India will also drive demand for security and facility management business.

* Management has been exploring ways to cross sell its solutions across clients to drive overall revenue growth.

* EBITDA margin has improved over last 3 quarters and it is expected to reach precovid margin of 5.5%-6% going ahead led by normalization of business and expansion into tech-based security.

* The company is broadly comfortable with current financial leverage as net debt/ LTM EBITDA stands at 1.9x as of June’ 2023. It might repay a part of its debt in current scenario of higher interest rates

* The focus remains on organic driven growth. However, it has been evaluating select inorganic opportunities, but any acquisition will be done only if it makes strategic sense or to acquire key skills/service lines.

* It is aiming to achieve Return on Equity of 20%+, with OCF/EBITDA of more than 50% for the consolidated business

View and valuation

* We maintain BUY recommendation on SIS Ltd. Our one year target price is Rs 570, based on DCF methodology. It implies PE of 14.4x on FY25E EPS. We estimate revenue CAGR growth of ~14% over FY24-FY33 driven by ~9% CAGR increase in volume and ~5% CAGR increase in realization, with average EBITDA margin of 6.0% during the period. The current valuation remains attractive as it trades at PE of 11.3x on FY25E EPS. RoE profile is on rising trend led by growing scale and prudent capital allocation.

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