Buy SIS Ltd for the Target Rs.450 by Motilal Oswal Financial Services Ltd
Solid start to FY26
Margin aspirations remain intact
* SIS (SECIS)’s 1QFY26 revenue was up 13.4% YoY/3.5% QoQ at INR35.4b vs. our estimate of INR34.5b. Revenue growth was aided by 18.9% YoY CC growth in Facility Management, whereas India Security/International Security posted 9.2%/12.1% growth YoY. EBITDA margin came in at 4.3%, down 10bp YoY (vs. est. 4.6%). India Security margin was flat at 5.4%, while International Business margin was down 100bp QoQ at 3%.
* Adjusted PAT stood at INR929m (up 12.7%/ 44% QoQ/YoY). The net debt-toEBITDA ratio stood at 0.87x (0.71x in 4Q). For 1QFY26, revenue/EBITDA/ adj. PAT grew by 13.4%/10.7%/44.7% YoY. We expect revenue/EBITDA/adj. PAT to grow 8.0%/13.4%/65% YoY in 2QFY26. SECIS remains the largest security solutions provider in India, leading the integration of technology in the traditionally manpower-driven industry. We reiterate our BUY rating on the stock with a TP of INR450, implying a 16% upside potential.
Our view: International security margins to remain soft in near term
* SECIS reported robust growth across all three segments. The international security and facilities management businesses delivered double-digit growth, while the India business recorded high single-digit growth. Minimum wage escalation continues to be a key growth driver, with contracts aligned to prevailing wage rates. Rising economic activity, particularly in infrastructure and utilities, is further supporting the deployment of security personnel.
* International business growth was driven by new contract wins in the energy and airport sectors. These engagements will entail initial onboarding costs, which are expected to impact margins over the next few quarters. Additionally, the company is undergoing a restructuring exercise, including the exit of underperforming management in the SXP business — a move that will continue to weigh on margins through 3Q. After the restructuring, margins are expected to normalize to the 4-4.5% range. We believe this will address operational challenges in the segment, and current headwinds are likely to be short-term in nature.
* Clients in energy, automobile, construction, and manufacturing sectors drove growth in company’s Facilities Management business. The company also rebranded its pest control business (INR500m ARR) and remains optimistic about its long-term potential, targeting ARR of INR1,000m over the next five years. That said, the business will continue to be offered as a complementary service within the broader Integrated Facility Management (IFM) portfolio.
* Margins: The company expects its India businesses (Security Solutions and Facilities Management) to return to ~6% EBITDA margin levels. Margin performance remained steady despite wage revisions for back-office employees. We expect a gradual improvement, with EBITDA margins reaching 5.7%/5.8% in FY26E/FY27E.
Valuations and change in estimates
* We keep our estimates largely unchanged. We value SECIS at INR450 (16% potential upside), assigning a 7x forward EV/EBITDA multiple to its international business and DCF to its Indian business. Reiterate BUY.
In-line revenues and margins; EBITDA cash conversion steady due to better WC management
* SECIS’ revenue grew 13.4% YoY/3.5% QoQ to ~INR35.4b vs. our est. of INR34.5b.
* Revenue growth was aided by ~18.9% YoY CC growth in International Security, whereas India Security/Facilities Management posted a growth of 9.2%/ 12.1% YoY.
* EBITDA margin came in at 4.3%, down 10bp YoY (vs. est. 4.6%). India Security margin was 5.4%, while International Business margin was 3.0%, down 100bp QoQ.
* Consolidated adj. PAT stood at IN929m (up 12.7% QoQ).
* Net debt amounted to INR5.4b from INR4.28b in 4QFY25. Net debt/EBITDA stood at 0.87 vs. 0.71x in 4QFY25.
* OCF/EBITDA conversion was 105.7% owing to better working capital management in International and tax refunds.
Key highlights from the management commentary
* The company is increasingly promoting technology-based solutions over traditional guarding services. However, customer adoption of technology remains limited, as manpower remains relatively inexpensive. The pace of wage increases has a direct bearing on tech adoption.
* Security Solutions – India: The segment reported new contract wins worth ~INR380m of monthly revenue during the quarter. Historically, the company has delivered EBITDA margins of around 6% and remains committed to returning to that level in the coming quarters. Despite the annual compensation review (ACR), the Security Solutions – India segment maintained a stable EBITDA margin at 5.4%.
* Security Solutions – International: International Security posted ~18.9% YoY CC growth. Initial onboarding costs for new contracts impacted margins temporarily and are expected to normalize over the next few quarters.
* Restructuring costs related to SXP also weighed on margins, as SIS exited underperforming management. Some margin volatility is expected through 3QFY26.
* Facility Management Solutions: Growth was primarily driven by clients in the energy, automobile, construction, and manufacturing sectors. Pest control remains a highly profitable but small-scale business. The company has set a fiveyear plan to double the scale of this business to INR1,000m in ARR.
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 (INR262), 2) an EV/EBITDA multiple of 7x (INR116) for the International Security business, and 3) DCF for the FM business (INR109) less net debt (INR38). Consequently, we arrive at our TP of INR450. We reiterate our BUY rating on the stock.
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