Buy SIS Ltd For Target Rs.420 by Motilal Oswal Financial Services Ltd
International business faces short-term blips
But India business margins to attain pre-Covid level
* SIS (SECIS)’s 3QFY25 revenue was up 9.4% YoY/4.4% QoQ at INR33.7b, largely in line with our estimate of INR33.9b. Revenue growth was aided by ~11.1% YoY growth in International Security, whereas India Security/Facility Management posted 7.7%/9.7% growth YoY. EBITDA margin came in at 4.7%, down 20bp YoY (vs. est. 4.7%). India Security margin stood at 5.5%, while International Business margin was 3.8%, up 30bp QoQ.
* Consolidated adj. PAT stood at INR1,021m (up 48% QoQ). The net debt-toEBITDA ratio stood at 1.07x (1.4x in 2Q). For 9MFY25, revenue/EBITDA/PAT grew by 7%/1%/17% vs. 9MFY24. We expect revenue/EBITDA to grow 12%/102% YoY (owing to low base) in 4QFY25. We reiterate our BUY rating on the stock with a TP of INR420, implying a 27% upside potential.
Our View: Focus on rationalizing margin-dilutive/tail accounts
* SECIS delivered decent growth across its key segments in 3QFY25. The India Security business grew by 7.7% YoY, with momentum expected to continue as the company targets low-double-digit growth in the coming quarters. Its expansion into the defense sector and consistent wins in sectors like BFSI, logistics, and transportation offer a stable growth outlook. However, profitability pressures persist, as limited wage hikes have constrained price growth. SIS aims to restore margins to pre-Covid levels of ~6%. We expect the India business to achieve a revenue CAGR of 12% over FY24-27E.
* The International business remains under pressure, particularly in Australia, which is projected to post a modest 6% CAGR over FY24-27E. Management anticipates short-term challenges in this business, due to a tight labor market and increased wage costs in Australia and Singapore.
* Margins: The company reported a margin expansion of 30bp QoQ in 3QFY25, driven by SG&A rationalization. International Security is facing labor shortages and high labor costs, which affected overall profitability. We believe that these trends are expected to continue in the short term.
* Management focuses on driving EBITDA margin expansion by utilizing growth leverage, rationalizing tail accounts and optimizing SG&A costs. We expect overall margins at 4.6%/4.9%/5.1% in FY25E/26E/27E.
Valuations and change in estimates
* We keep our estimates largely unchanged. We value SECIS at INR420 (27% potential upside), assigning a 7x (earlier 8x; to factor in ongoing pressure in the Australian business) forward EV/EBITDA multiple to its international business and DCF to its Indian business. Reiterate BUY.
In-line revenues and margins; EBITDA cash conversion improves due to better WC management
* Revenue grew 9.4% YoY/2.9% QoQ to ~INR33.7b vs. our est. of INR33.9b.
* Revenue growth was aided by ~11.1% YoY growth in International Security, whereas India Security/Facility Management posted 7.7%/9.7% growth YoY.
* EBITDA margin came in at 4.7%, down 20bp YoY (vs. est. 4.7%). India Security margin stood at 5.5%, while International Business margin was at 3.8%, up 30bp QoQ.
* Consolidated adj. PAT stood at INR1,021m (up 48% QoQ). On a standalone basis, the current tax rate continues to be close to NIL due to the benefits accruing under Section 80JJAA of the Income Tax Act, 1961.
* Net debt amounted to INR6.3b from INR8.6b in 2QFY25. The net debt-to-EBITDA ratio stood at 1.07x vs. 1.4x in 2QFY25. ? OCF-to-EBITDA conversion was 163.5% owing to better working capital management.
Key highlights from the management commentary
* Every SECIS contract is linked to the minimum wage code, meaning wage hikes will proportionately increase contract billing without the need for renegotiation.
* Volume growth has been satisfactory. However, price growth depends on the government's decision on minimum wage hikes, which have been subdued since pre-Covid levels.
* Security Solutions – India: The company has expanded into the defense sector, which will contribute to growth in the coming quarters.
* Security Solutions – International: Seasonal activities in southern Australia (such as the Australian Open and cricket events) contributed to revenue growth. Margins remained stable.
* The post-Covid tight labor market conditions in Australia and Singapore have affected margins.
* Debt on the balance sheet primarily consists of working capital borrowings to ensure timely salary payments to employees, regardless of client payments.
Valuation and view
* With the liberalization and formalization of labor markets and laws, SECIS should be among the biggest direct beneficiaries. It has managed to gain market share during the last few years, and the trend is expected to continue.
* We value SECIS using SOTP: 1) DCF for the India Security business (INR247), 2) an EV/EBITDA multiple of 7x (INR114) for the International Security business, and 3) DCF for the FM business (INR106) less net debt (INR44). Consequently, we arrive at our TP of INR420. We reiterate our BUY rating on the stock.
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