Buy SIS Ltd for the Target Rs. 400 by Motilal Oswal Financial Services Ltd
Margin rebuild in motion
But labour constraints to weigh on international business
* SIS (SECIS)’s 4QFY25 revenue was up 9.3% YoY/1.9% QoQ at INR34.27b, largely in line with our estimate of INR34.6b. Revenue growth was aided by 12.9% YoY growth in Facility management, whereas India Security/International security posted 9.6%/7.7% growth YoY. EBITDA margin came in at 4.8%, flat YoY (vs. est. 4.9%). India Security margin was up 10bp QoQ at 5.6%, while International Business margin was up 20bp QoQ at 4%.
* Adjusted PAT stood at INR825m (down 19% QoQ/up 53% YoY). The net debt-to-EBITDA ratio stood at 0.71 (1.07x in 3Q). For FY25, revenue/EBITDA/ adj. PAT grew by 8%/16%/67% YoY. We expect revenue/EBITDA/adj. PAT to grow 11%/19%/30% YoY in 1QFY26. We reiterate our BUY rating on the stock with a TP of INR400, implying a 19% upside potential.
Our view: Focus on high-yield accounts lifts domestic margin outlook
* SECIS delivered decent growth across its key segments in 4QFY25. The India Security business grew by 9.6% YoY, with momentum expected to continue as the company targets low-double-digit growth in the coming quarters. This growth was largely driven by new contracts in sectors like Mining, BFSI, Education, and Retail. Margins improved slightly to 5.6%, but the company aims to push these back to pre-Covid levels of around 6%. We expect the India business to achieve a revenue CAGR of 12% over FY25-27E.
* In international business, there were key wins in Defense and Railways, though the business is still facing some challenges, particularly in Australia, due to tight labor markets and rising costs. That said, margins did improve slightly to 4.0%. The business secured new contracts worth AUD180m in FY25, a substantial increase compared to previous years. We expect margins to stabilize at around 4.5% as labor availability and contract terms improve.
* FM segment posted revenue growth of 12.9% YoY, supported by new contracts across IT, Healthcare, Real Estate, and Manufacturing. We think FM business is currently undergoing a strategic shift, exiting low-margin contracts in favor of solution-led engagements with better pricing power.
* Around 30% of FM revenue is now outcome-based and technology-enabled, laying the foundation for structural margin improvements as scale increases. Management remains focused on pushing EBITDA margins closer to 5%+.
* Margins: The company’s efforts in SG&A rationalization and securing better contracts helped deliver some improvement. Though international labor costs remain a drag, SIS is focused on restoring EBITDA margins to around 6%. 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. We’re expecting gradual margin improvements, with projections of 4.9%/5.0% for FY26E/27E.
Valuations and change in estimates
* We keep our estimates largely unchanged. We value SECIS at INR400 (19% potential upside), assigning a 7x forward EV/EBITDA multiple to its international business and DCF to its Indian business. Reiterate BUY.
In-line revenue and margins; EBITDA cash conversion improves due to better WC management
* SECIS’s revenue grew 9.3% YoY/1.9% QoQ at ~INR34.27b vs. our est. of INR34.6b. For FY25 revenues stood at INR 131.89b
* Revenue growth was aided by 12.9% YoY growth in Facilities management, whereas India Security/International security posted a growth of 9.6%/7.7% YoY.
* EBITDA margin came in at 4.8%, flat YoY (vs. est. 4.9%). Margin for India Security was 5.6% up 10bps QoQ, while the same for International Business was 4% up 20bps QoQ. FY25 EBITDA margins stand at 4.6%
* Adjusted PAT stood at INR825m (down 19% QoQ/up 53% YoY). Consolidated reported loss stood at INR2,234m due to impairment of the goodwill for Henderson, SLV, Uniq and ADIS for a sum of INR3,058m. On a standalone basis, SECIS’s 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 INR4.28b from INR6.3b in 3QFY25. Net debt/EBITDA stood at 0.71 vs. 1.07x in 3QFY25. ? OCF/EBITDA conversion was 174.8% owing to better working capital management.
Key highlights from the management commentary
* A non-cash goodwill impairment of INR3.06b was recognized for Henderson, SLV, Uniq, and ADIS, related to acquisitions made just before Covid, which led to a reported loss of INR2.23b in 4QFY25. Management confirmed that impairment assessments are now complete with no further impairment expected.
* SIS reported its highest-ever quarterly revenue at INR34.3b, up 9.3% YoY and 1.9% QoQ, broadly in line with estimates.
* Secured AUD180m in new contracts in FY25 (4x the five-year average), underlining the success of its long-term investments in business development.
* Labor code implementation (especially minimum wage hikes) remains a potential structural tailwind, but timelines are uncertain due to national focus on security matters.
* The merger of SLV and UNIQ under the new “SISCO” brand aims to unlock panIndia scale efficiencies, increase competitiveness in regional markets, and enhance delivery synergies.
* Management reiterated its goal of restoring ~6% EBITDA margins through revenue growth and operating leverage.
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 (INR226), 2) an EV/EBITDA multiple of 7x (INR105) for the International Security business, and 3) DCF for the FM business (INR103) less net debt (INR30). Consequently, we arrive at our TP of INR400. We reiterate our BUY rating on the stock.
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