SIS Limited (SIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SIS Security and Intelligence Services India Limited Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Vamshidhar Guthikonda, President, M&A and Investor Relations. Thank you, and over to you, sir.

Thank you, Vikram. Good afternoon, everyone. A very warm welcome to our second quarter FY '21 earnings conference call. Along with me, I have our Group Managing Director, Mr. Rituraj Sinha; and Mr. Devesh Desai, the Group CFO. I hope everyone has had an opportunity to look at the results, which are uploaded on the stock exchange and the company's website yesterday at www.sisindia.com. We are extremely happy to report a strong and a rigid performance by the group during the second quarter and for the first half of FY '21. Our consolidated revenues for Q2 stood at INR 2,158 crores and for H1 at INR 4,325 crores, which is a 5.6% increase over the first half of last year. As you all know, it's clear that the Indian economy has been growing [ with ] steepest decline in many decades, probably many of us will not have seen. But we are extremely proud of our business stability that comes from the essential nature of what we provide. Our revenues in September '20 were INR 739 crores as against INR 720 crore in March '20. That's already putting us on a good upward growth trajectory. Our sales teams, operations and finance teams have executed with great focus during this turbulent times to ensure continued customer business continuity. We have seen strong performance on the margin front with a group EBITDA margin at 6% for Q2 and 5.8% for H1. We've been able to retain our margins despite significant continued investments on profit-related expenditure for training, for PPE kits and other welfare expenditure for our 2.4 lakh employees. We had INR 251 crore EBITDA for the first half, which was hopefully the [ toughest ], and we are probably on [ 2 title ] quarters ahead, we are confident of a very strong end to the year. While SIS International, which is our business in Australia, Singapore and New Zealand is also significantly up for the March '20 levels in terms of revenue. India Security is at 94% of March revenues. The FM segment has been impacted because -- largely on account of facility management such as railways, retail and entertainment. But as the economy is being unlocked or steadily unlocking with the festival season ahead, we are seeing [ good times probably ] going ahead. And finally, I think the -- I think what gives us utmost pleasure during the quarter is our very strong collections and trade controls. During the time when most of the clients would have been stressed, it actually ended up with 188% conversion from EBITDA to operating cash flow, which is the highest ever in our history for the SIS Group. We've been able to bring down our net debt by INR 213 crores from Q2 -- from Q1 to Q2. We also brought down our leverage. Our net debt has come down from 1.3 to 0.9, the net debt-to-EBITDA ratio. We've been upgraded by CRISIL from A+ to AA-, which also very strongly reaffirms our cash flow position and our business stability and resilience. Overall, it has been a great quarter for us, especially in light of the whole macro situation we're seeing. It showcases our business resilience on the P&L side and the strong cash flow performance and net debt reduction on the balance sheet side. With those remarks, I open the floor to questions. Thank you. Operator, probably you can start the Q&A session now.

[Operator Instructions] We have a first question from the line of Sudhir Bheda from Right Time Consultancy.

Congratulations for good and healthy cash flow and good cash from operations. Hello. Am I audible?

Yes, you are.

Am I audible now?

Yes. You are. Please go ahead.

So congratulations on a good set of numbers and good cash flow and healthy cash flow as far as cash from operations are concerned. Sir, my question is, I have heard your conf call in the first quarter also, and you were very optimistic about the future growth. And from 1,500 contracts, I think given [indiscernible] I don't know, but you received and [indiscernible]. But seeing the number, that doesn't reflect in the domestic outlook, I think, domestic figures. So of course, export figures are quite healthy. So what's the outlook as far as next half is concerned in India? And my second question is there is INR 167 crore in the cash outflow from some investing activity. That is an increase in the restricted balance. So any flavor on that?

Rituraj, would you like to take that question?

Am I audible? Any take on the question?

Yes. This is Rituraj Sinha. So I'll answer the first part of the question, which is about the growth outlook. So I think the first half of the year, April through to September, the real point to note is the resilience of our revenue. There have been various types of industries and businesses that have had severe drop in revenues and they have picked up in the second part of the Q2. But if you see the SIS numbers, SIS numbers are intact. Our security business, which is a mother ship in India, is currently operating at 94%, 95% of March revenue level. Our international business is operating at 115%, 117% of March level. So -- and these 2 businesses put together is more than 85% of our overall group revenue. So the only impact we have seen is on facility management side. That business, facility management business, is operating currently at 70%, 75% of March level. Against INR 116 crore monthly revenue run rate in March, the facility management business is down to INR 80 crores, INR 85 crores in September. That is the only segment that is down. That segment is down for 3 specific reasons. Number one, a large part of our facility management revenues comes from railways. And for the first time in 160 years, railways have been completely shut down. This is unprecedented. Similarly, in the last 6 months, the retail and mall sector also have seen almost a big closure, as a result of which, volume is reduced. Our contract has not been canceled -- our contract continues. But because there is no footfall, the volumes have shrunk. Now in the festival season, we are witnessing a significant uptick in volumes again in the FM side. We have also a very good pipeline of carryforward orders on security side. We believe that Q3, Q4, you will see a very strong recovery. And like Vamshi said, our September month invoice is already higher than our March month invoice. So that basically, in summary says, as I had called out in April that I did by the last financial year call as well, I clearly said to everybody that essential services are needed in good times. They are needed also in crisis. And our H1 month-to-month revenue is a testimony to that. And we are very confident that we're not only the least impacted, we will be amongst the first to recover. I hope I've given you a full picture of where the revenue stands. Second part of your question, I'll request Devesh or Vamshi to take up.

Devesh will answer that question.

So your question was on the restricted balances. These are in the [indiscernible] at the request of members in Australia. We have created a 20 million investment results in Australia with cost to be used to procure the balance of 10% in Southern Cross Protection. At the end of the quarter, based on the agreement we reach with the shareholders and as explained in the earnings call, this amount will be [indiscernible] into cash. And that is why this is now showing up as a negative investment, which is a use of cash and is definitely reflected in the cash balance at the end of the quarter.

We have a question from the line of Aditya Bagul from Axis Capital.

Rituraj, Vamshi, Devesh, congratulations on a great set of numbers. So I had a couple of questions. I hope, I'm audible.

Yes. Go ahead.

A question predominantly on our international business. If you can probably talk about the key businesses, right? If you can split how the business in Australia is going -- the business in Australia, New Zealand and investment in Singapore. If you can probably talk about all of these 3 businesses combined, that would be helpful. Also in terms of margin, right, I mean you've seen 150 basis points improvement in terms of margin in this quarter. Can you help us understand what is the genesis of this?

Devesh, why don't you take that up? I can, but why don't you go ahead.

So as you can see from the segment results we have put out, most of the businesses were on a steady trajectory percent of revenue versus the previous quarter. They actually held up nicely. As Rituraj explained, the FM business was the most impacted. As you will know, the FM business is mostly taken to commercial spaces, the entertainment space, the retail, the mall and a lot of it is in the commercial spaces. And we are aware that those are fully getting back to the pre-lockdown periods, they're taking longer than most of the subsidies to get back to normal operations. But if you look at the India security business, this actually held up our revenue well with small dip in revenue. We've managed to add new clients at the end of the quarter. We see at the end of the quarter, our revenue is almost back to the March month level. And that is giving us an outlook that we think that will be [ recovering ] into Q3 and Q4. FM business is also now looking back up in September. But yes, it is a bit far from the March level. It will be back probably on [indiscernible] longer. I would also like to tell everyone that on the healthcare segment and in the sanitization and pest control segments, we are seeing significant increase in our revenue over there. That will give us some hope on the revenues there. As far as the international business is concerned, there are only 2 sectors which were impacted by the COVID lockdown restrictions and [indiscernible] issue that's happened -- taking place. One is the regulation segment. We have our contracts with airports in Australia to provide [ custom ] cleaning services to them. Now because of the restrictions in international operations and domestic operations, that revenue has been down because the number of passengers going through are less. We've seen a couple of [indiscernible] also, which are having a bit of a downtime in the operations. But clearly, we have managed to offset these revenue reductions in specialized corporate services, which we have contracted both in our mobile and patrol business and also in our MSS and security business. The businesses there also have a large outsource component from the government and the government outsources broad security services to private players. So there were hotels which were earmarked for quarantine by the government for international travelers returning to Australia. We have provided both services in Q1, Q2. Some of those services continue to [indiscernible]. These are coming in at much better margins than our existing businesses. And that is one of reasons we see -- saw an increase and improvement in the margins in the international business. For New Zealand, of course, also the restrictions [ were lifted ] earlier than the rest of the world. Special events have started back. Sporting events have started back. Revenues have started moving back in New Zealand [indiscernible] in the margin in our Australian business. Profit improvement measures, we continue to implement over there by managing the rostering and making more efficient use of our [ off-stream ] tools, which we have. And all of these are contributing to the improvement in the margins in our international business.

So just 1 second. Let me just pitch in with a few numbers, maybe it helps your understanding. If you look at MSS stand-alone, MSS last year, Q2, did INR 690 crores of revenue. This year, Q2, they have done INR 817 crores of revenue. And that's on the back of a large number of quarantine work and other works extended by our regular customers, ad hoc business that we have received. If you look at the second business in Australia, SXP, the mobile patrols. They did INR 127 crores last year. This year, they have done INR 152 crores for Q2 same period. If you look at Henderson, which is the Singapore business, they reached INR 72 crores last year. This year, they reached INR 70 crores, so flat. And the New Zealand business called P4G, they did roughly INR 14 crores only in Q2 last year, and they have done INR 27 crores, INR 28 crores in Q2 this year. So overall, it's not a result of any one-off or any one business. It's a clear indicator that in international markets, the government tends to use private security and private enterprise tends to use private security to manage exigencies and crisis much more because there is no equivalent of a large state police force or a CISF. They don't have the habit of pressing in Army for managing their natural disasters and things like that. So private security has a large part of that work in international markets, and that's clearly evident. And I think Devesh has already explained the margin, 1.5%. I hope the numbers help.

Yes. That's very helpful, Rituraj. Just wanted one small clarification. The margin improvement that we've seen, that stems across all the 4 companies that you have or the 3 geographies that you operate in, right? So it is not because...

No, it is not because of any one-off exceptional gains. All of these segments have undertaken what we call casual work or temporary work on behalf of government, which comes at higher margins. [indiscernible] did so, MSS did so, SXP did so, P4G did so. All of them picked up government work, which are temporary in nature, and therefore, we price them at higher margins.

Okay. Just 1 last query that I had. We've seen a very, very healthy tax conversion this time around. Just wanted your thoughts as to what you aspirationally target this number to be on an annualized basis. I'm not going to hold you to that number, but where is it that you want to be aspirationally?

No. So I'm glad you asked that question, and let me clarify that the OCF-to-EBITDA conversion at 188% is a one-off that is not standard in our line of work. I have said at multiple occasions in the last 3.5 years since our listing that SIS targets a 20% growth, a 20% return on capital and a 50%-plus OCF-to-EBITDA. That is what I have maintained in the last 12, 14 quarters that SIS has reported on. I believe that 60%, 70%, 80% OCF-to-EBITDA conversion is a fantastic result for a business like us. So you must factor that in as -- one-off should not be -- or 188% cannot be the benchmark.

I agree that. I'm sorry to be picky, but I just wanted to know if there was a higher guidance to the -- earlier beyond 50%?

No. I've fallen for your trap more than one occasion. So...

We have next question from the line of Sanjeev Mohta from B&K Securities.

Congratulations for great numbers. Can you hear me?

Yes.

So just a couple of questions on the balance sheet side. As you've been pointing out, a fantastic balance sheet management this time, but receivables are stable. But given that you just mentioned about retail industry, for example, that you still have the contracts, are you seeing any stress on the receivables?

So I think the most important thing is that your concern around receivables are very genuine and we share the same concerns. And that's the reason why in Q1, SIS had taken provisions to the extent of INR 50 crore plus, which is completely exceptional to a business like us. Having looked at where the collection performance stands in the first 6 months of the year, one estimates that we might end up the real result in terms of bad debts and any issues like that would be significantly lesser than the provision we had taken, right? But having said that, we are very watchful about the situation on real estate, on retail, a lot of our other segments. It's been an exceptional result, the way the elections have been managed in the first 6 months. If I look at India alone, out of the 6 months, in 5 months, we have collected more than our monthly invoice value. Now that's pretty exceptional. That doesn't happen each year. Going forward, we want to maintain the same amount of tenacity with regard to collections. We have identified customers that are in danger zone, and that's a monthly valuation that's happening. And one hopes that the result may be better than what initially we had in results April, May and June. But I would still say that we should wait and watch for the next 4 to 6 months until the economy fully recovers.

Second thing, in terms of -- because of this COVID, is there any business line that you want to kind of discontinue, you think that is no longer a grade 9 within this or...

Quite to the contrary. Like I'll give you an example. SIS, if you look at it today at this time, we have added 1 section in our result note, which is the business [ solution ] section. And I don't know if you have the time to look at it, but we've tried to outline that when businesses in this line of work -- in this industry, when businesses mature, they grow slower, like our Australian businesses or Singaporean businesses. They generate 60% upward return on capital employed. When businesses are in high-growth phase like our Indian security businesses, which has more than 20% year-on-year growth for the last 10 years, they still generate 18%, 20% return on capital employed. So if you look at international operations and Indian security, both of which total 80-odd percent of our revenues. 80% of our revenues generate the return on capital employed of very high 30%, 40% plus. The next 2 things that -- I'm giving you a long answer, but just to help you -- everybody understand. The next thing is SIS does a lot of acquisition activity. And we, for the first time, giving you disclosure on stand-alone return on capital employed of each acquired entity. Even there, you will see that our return on capital employment is fairly healthy. It's 30% range. Where we have a negative return on capital employed is on businesses that we incubate. For the last 8, 10 years, we've been incubating our pest control business, which has been negative capital employed. We have been investing in cash business, which has given us negative returns. For the last 5 years, we've been investing in our alarm monitoring and response business and tech SIS business, which are in negative return zone. These are investment businesses. These are in negative return zone. But I'm very happy to say that in this COVID crisis, the Terminix SIS business has continued to grow through the period because of disinfection and other services and it is currently generating an EBITDA margin of 28%, albeit on a very small revenue base. But it is generating a positive EBITDA margin for the last 18 months, and the business is going to start becoming return on capital positive for us. The cash business in the last 18 months has completely turned around from a 0 EBITDA business to a 8%, 8.5% EBITDA business. It is again at 99% of revenues pre-corona. So it's again, very resilient. It's turning around. Our VProtect business, our alarm business, which is the future of security. The future of security is not guards. The future of security is more technology. And as pressure mounts on banks and various other businesses, they are pushing forward to technology solutions. Our VProtect business, which has been in losses for 4 years, has turned EBITDA positive now in the last 6 months of corona period, which is exceptional. And with the order pipeline that we have, we believe that will also, in the next 6 months, be quite exciting to look at. So we are not looking to close any businesses. We, in fact, believe that the businesses that we've incubated in the last 5 years, like the tech business, like the pest control business, like the cash business, these businesses are just turning the corner. And in the coming 2 years, they will be boosting our return on capital employed overall and the SIS philosophy of operating high-growth, high ROCE businesses is going to be more evident than ever before.

Okay. Great. And last question for me. This upgrade from CRISIL, does that mean your cost of borrowing has come down? And by the end of the year, what would be your net borrowing?

Look, I think, personally, our cost of borrowing in India is sub-8%. Our cost of borrowing in Australia is sub-5%. Our blended cost of capital is 6.5%. I don't think the CRISIL rating does anything for our cost of borrowing. We were any way borrowing -- our bankers were lending us money at far better rates because they knew the strength of our balance sheet. I think the rating agencies have woken up a little late. So I mean, personally, for me, that's a catch-up by the rating agencies. It's not as if our balance sheet turned stronger just in the last 2 months. I will, anyway, like to take this opportunity to again clarify that I have always guided the market that we believe that our net debt-to-EBITDA level of 1.5x is a fair level of indebtedness for a business like ours, which is highly cash generative. Given the current environment, macro environment, economic environment, we believe that SIS will now be pursuing a net debt-to-EBITDA level without factoring lease liabilities. Without factoring lease liabilities, we will be pursuing a net debt-to-EBITDA level of 1x ballpark. Now currently, it's at 0.7x, 0.8x. It might move up and down a little bit but -- quarter-to-quarter, depending on when and how we make our payments, et cetera, and how the collection performs. But broadly over the next 12 months to 24 months, we are looking at maintaining that 1x net debt-to-EBITDA without lease liability zone.

Next question from the line of Bhaskar Chaudhry from Entrust Family Office.

Just a couple of questions on the balance sheet. Can you please...

Sir, I'm sorry to interrupt. Your voice is not very clear. Could you please use the handset?

Is this better?

No, sir, it's not. Could you please Lift the handset?

Hello?

Yes, go ahead. We can hear you.

So can you please provide the breakup of the other current financial liabilities figure of about INR 1,600 crores on the balance sheet?

What was the other current financial liabilities?

Yes. The breakup for that?

Okay. I don't have a breakup ready for that figure, but it could involve -- it could include liabilities for the acquisitions we need to pay out in the current quarter. That would be a big component over there.

So let me take that up. I think, firstly, Devesh will send you that breakup separately offline. But that gives me the opportunity to clarify a very important point. I have heard from many of the friends in the investor and analyst community about their concern about our future payouts, and that figure is at INR 1,500 crores, INR 1,600 crores like you're saying. But I must ask you to please factor that SIS is acquiring assets basis and earn-out structure. Some of these earn-out structures are 3-year period. Some of them are 5-year earn-out structures. So you basically forecast that in 3 to 5 years where the revenue and EBITDA will be and what the potential payout will be. We take a rather conservative approach on it. And therefore, we factor the maximum possible payout in each instance. But the reality is that the payouts are significantly lesser than what is provided on the balance sheet. Take the case for SXP, which is the recent closure. We have paid $8 million less than initially estimated. That's INR 40-odd crores less payment. Same thing happened in the other business, SLV. There, also, we paid INR 20 crores or INR 30 crores less than what we had initially anticipated or provided for in the balance sheet. So I think SIS will continue to provide for the maximum possible payment, but you need to kindly factor that if you pick up the last 3 to 5 transactions on earn-out structure, in each of those instances, we have paid significantly lesser than amount provided, right? So you should bear that in mind, and Devesh will send you the breakup of the future liabilities.

Also, this is relating to the current liability. So I don't know what portion of that is for acquisitions, but I'm guessing what -- I mean, over the next 12 months, what you're estimating would be a more accurate representation. But in any case, let's wait for the breakup. The other question was on the debtor bill. Sir, what do you think is a sustainable figure going forward? There has been a substantial improvement if you look at the H1 numbers vis-a-vis the full year '20 numbers in debtor bill. But what do you think is a more sustainable level for the business over the next 2 to 3 years?

Well, I think the debtor numbers that have been delivered this quarter are one of the best. And we expect that we will be ballpark in the same range. I don't see us getting significantly better than this. You have to understand that in our line of work, the employees are our employees, unlike staffing, we don't collect first and pay them later. We pay them regardless. So there is a minimum level of working capital intensity, which is the inherent nature of this business. And I think the DSO levels that we have currently are pretty much in good range and ballpark. That's where they will remain. I don't see them to be getting significantly better from here on.

Sir, that was not the question, Rituraj. I mean they appeared quite healthy right now. So the question was -- I mean one would anticipate that it will probably slip a little bit. So just wanted to understand what is the [indiscernible] level. The question was not whether they might improve in the future.

So I think if you look at the last 12 quarters' DSO levels, you will find that they are in a broad range. In the -- if you look at the last 12 quarters, you'll be able to clearly see what's the best and what's the worst. That broad range is our range.

I'd just like to clarify on the other current financial liabilities, the 3 large components. One is the NCDs of INR 150 crores, which are due for maturity in April 2021. And the second is the NAB loan, which is due again for maturity in April 2021, and discussions are ongoing for the rollover. So this would be a second or first time we'll be able to achieve the rollover. And the third large component is the liability for the SXP acquisition because it is due within less than 12 months. In fact, it was paid in this quarter. That is why it was classified as the current financial liabilities. These are the 3 large components over there.

Sure. Sir, you said the first large bucket, the NCDs, are INR 150 crore. Could you also just quantify the next 2, the loans which are due for repayment in April '21.

NCDs are INR 150 crores and the NAB loan is around INR 450 crores.

Okay. And the remaining?

[indiscernible] liabilities around INR 200 crores. So these are the 3 large components over there apart from other items.

We have next question from the line of Ashwini Agarwal from Ashmore Investment Management.

Congratulations on a decent set of numbers in a very difficult environment. A couple of things. On the India business, in the opening comments, if I heard Rituraj right, he said that the September invoicing was ahead of March. Was that -- did you refer to facilities management or aggregate? Or did you include overseas in that? It's a little bit confusing. Could you give us a sense of how monthly invoicing has improved in India or has progressed in India over July, August, September for security and for facilities management?

Right. Ashwini, I'll just help you with the numbers. Vamshi was doing the opening remarks, and he did speak about consol numbers, but let me give you the breakdown. So the consolidated SIS Group monthly revenue for March '20 was INR 746 crores, and this includes the cash business, right? I'm -- just for ease of understanding, I'm clarifying that. This includes the cash also where we have 49% only. So it's not consolidated in the reported numbers, but I'm giving you a full and complete picture. So INR 746 crores in March. In September, the corresponding number is INR 766 crore, INR 20 crore up.

Okay. And if you break this down to India and offshore, how would these numbers read?

So if you look at India, just India consolidated, India was INR 439 crores in March. It's currently INR 412 crores.

In September?

Yes.

And the other thing is that in Australia and New Zealand, you've got a lot of one-off government business. I'm assuming as time progresses, some of this might roll off. So how are you thinking about the rest of the year? I mean we've had very good compensating revenue trend in the first 2 quarters of this year, especially in the September quarter offshore. But do you think this trend continues for the next 2 quarters as well? Or we might have some air pockets there?

So I think the important thing is that Melbourne is going back into lockdown. And that's happening in several parts. So I don't see the quarantine facility revenue or the ad hoc revenue falling off in October, November, but it eventually has to, but not in the immediate term. But what happened is that in the interim period, we've also picked up significant orders for second half of the year. So I think net-net, it will neutralize. I don't see a very significant air pocket, but I'm only saying based on the visibility I have today. I mean one can't forecast where we will be in December amidst this uncertainty. But I see 2 trends. I see, one, the ad hoc revenues continuing for longer. And I see the non-ad hoc, the regular business order pipeline that had completely sort of evaporated in Q1, there has been reasonable tender activity in Q2. And I believe that in Q3 and Q4, you will see new permanent revenue coming online in international markets.

Okay. Okay. And last question from my side, the cash position that you reported as of 30th September of INR 884 crores, this includes the INR 200 crores that you would have paid out for SXP in the current quarter?

SXP payment was made, I think, early October. So that is not currently factored. But even if you factor that payment, Ashwini, the important thing is post-factoring that payment, also your net debt-to-EBITDA will be close to 1.2x broadly, if my quick math is right. So we are not way off our guidance of 1x net debt-to-EBITDA. And I've said that SIS has reset its debt appetite from 1.5x down to 1x net debt-to-EBITDA. And we'll progressively be taking other actions, including generating additional cash to ensure that we are in the broad range of 1x.

Fair enough. Just to summarize, so the way I should think about the rest of the year is that facility management and security in India should see sort of growth from here? Because I'm assuming the way the revenues have panned out, you've probably grown September over August and August over July. So that trend probably should continue for the rest of the half. And internationally, some of these offset revenues or onetime revenue opportunity should continue for the rest of the year. So at least stability is something that we should look forward to. Would that be a fair assessment of the near term?

So I'd say that -- I mean I'm not in a position to give you any guidance for the rest of the half year, not 6 months. But I can tell you what I see in October, November, December. In October, November, December, I see the facility management business -- that is operating at 70%, 75% of pre-COVID levels. I see that to start recovering as the schools and the malls and the railways and the metros reopen. I see that service volume going back up. I don't see that going back to 100% level though, but I see it going up from 70%, 75%. The India security business is at 94%, 95% of pre-corona levels already. I see that recovering fully and potentially getting into growth mode. The international revenues are currently at 115%, 117% of pre-corona or March revenues. I see that to be holding up for Q3.

We have next question from the line of Alok Deshpande from Edelweiss Financial Services.

And congratulations on a very resilient set of numbers. My first question is on the Indian security piece. So given the split between sectors your -- on your client side, in your annual report, you had mentioned that the Indian security business has about 11% to 12% coming from IT sector. And as we look at the Q2 presentation that you have put out, that number is still at 10% to 11%. And the piece that which has really taken a hit is the manufacturing piece. So just wanted to get some color on that. I would have thought that IT would have got hit badly given that they have completely gone work from home and it's 1 sector which is really talking very seriously about work from home continuing even after COVID. So your thoughts on that.

Alok, I think you're trying to gauge what IT will do basis on our number. But look, IT has -- IT obviously has a very organized procurement and cost management system. And clearly, we see all the IT majors doing whatever they can to optimize their costs, right? Having said that, we haven't seen any IT majors as shutting down their security at campus or shutting down their sanitation and hygiene services on campus. That's not happened even a single instance. Where we've got impacted marginally is that our security business used to do a lot of escort guarding. When you have female employees coming to work in late shift, they have a vehicle that goes for pickup and drop and several IT firms use private security to secure those vehicles and track those vehicles. Now volume in that has completely collapsed. But we have seen some of that picking up. Now it's very hard for me to forecast whether IT will continue to work from home forever or that will be for 3 months, 6 months. But what I can tell you is that IT as a major buyer segment has not shown a complete collapse of revenue and volumes for us, either on FM or on security. These are marginal volume blips, and I don't see them getting worse. If anything, I see the volumes going back up and not further down basis March. I would have been very worried in May, June, July, but looking at where things stand in September, October, I'm not as worried.

Sure, Rituraj. And a similar reading can be made about what you put out as education sector also because it sort of stayed constant at about 7%, 8% for last year and now for the first half.

I think, Alok, that's exactly the same. And I think again, I'd like to reiterate the point. These are beautiful examples of the essential nature of work we do. I mean schools have been shut down for 6, 7 months now. But the security guards are there, and they are keeping the premises, the hygiene sanitized, cleaned and maintained. All of them are talking to us about how the kids come back to school, how they will do the fever checking at gate, what they will do in the buses, what they will do in the toilet areas and the assembly areas and how to maintain social distancing and queuing systems and whatnot. So in a complete shutdown mode, they needed our services. And when they reopen, they will need our services more than ever before. That is the unique correlation that our services have to economic activity. If economic activity goes up, we go up 2.5x, 3x. When we got economic activity contracts by 24%, we see a decline of 2%, 3%. We don't see -- or maybe 5% decline. We don't see a 25% decline. So that's a very, very interesting example. And I think COVID has been the ultimate test for demand resilience for our sector.

Sure. That's helpful. Just 1 last question. I think the -- this time, the presentation has this very useful section on business-wise ROCE, which you also referred to earlier. Just wanted to understand this India acquisition. You have said that the India acquisitions return on capital cumulatively is 32%. Any sense you can give that if we were to add the goodwill back? I think because these are the return on capital that are made by the businesses on their operating capital employed. But if we were to add based on what you paid for those businesses, any broad range that cumulatively we can look at?

So Vamshi will come back to you with that table. See, Alok, the point of this business ROCE compute -- computation was that we wanted to give full clarity on the factors that, our businesses, even if they grow slower, like Australia, will be highly -- high-ROCE generator. Even if they are growing like India with high working capital intensity, there still will be 18%, 20% return on capital employed. Our acquisitions also are 30% plus return on capital employed. What is camouflaging our return profile is our incubation businesses and our goodwill. And I will also tell you that the goodwill in our line of work, we value brand here, and we value the value of contracts. Now in our line of business, when I acquire a company, right, the contracts are going to change over a 5-year cycle, right? So we have -- because of accounting, we have to factor that. We factor computers and licenses. This is not a plant and machinery-type acquisition, right? We are valuing contracts and taking goodwill charges, et cetera, on that basis. And we have the option to either write off or impair our goodwill. But we don't see that to be the right thing to do because none of our assets are underperforming. So we don't find a case to impair goodwill. But if you leave the goodwill as is, for -- when you do the math, the return on -- the return on capital employed starts to look like 20% and not 35%. So we've just tried to give perspective of how I look at it. Personally, as a 70%, 75% shareholder in this business, I'm excited about SIS because of high growth and high ROCE. That's what keeps me excited. And unfortunately, the market is not able to fully comprehend the high-ROCE nature, and we've tried to give some clarity. Maybe it works for you guys, maybe it doesn't. But I'll just try to give a perspective of how we look at things. [indiscernible] Vamshi will send you the goodwill table. So you know basically...

Yes. No, just I was coming from the fact that typically, eventually, the market is going to look at what the purchase consideration that you would have paid for the acquisition, right, and try to use that as the capital employed rather than what was the ROCE...

And that's perfectly fine, and we'll share the numbers for you to have a look at. But I think what's more important for you to have a look at it if you want to look at the purchase consideration, go to the last page of the results report, and we have given you perspective on business ROCEs on a cash-in, cash-out basis, what we paid and where the business stands, holding the EBITDA multiple constant at acquisition and today, no arbitrage. Just on cash-in, cash-out basis, MSS delivers a 60% ROCE; Dusters 27%; Southern Cross Protection, 38%; SLV, 23%, Rare, 111%; Henderson, 113%; Uniq, 79%. That is the metric you look at. We don't look at it from a multiple perspective or a goodwill perspective. I mean looking at it, what cash we paid and where the business stands on a constant multiple.

Sure. Sure, Rituraj. And if I could have just one last small question. This incubation, India incubation, I think it was very interesting from if you've heard about how these businesses are turning around. And any sense on what proportion of capital is deployed in these sort of newer age businesses like VProtect, et cetera? And do you expect to, as these businesses turn around and scale up, do you expect some need of more capital in these businesses?

Look, these are still incubation businesses, and we will -- I mean, we will push in the capital needed in VProtect. And trust me, I mean, Alok, from my perspective, the business on a business ROCE, does 35% overall. If I'm not investing in the future technologies, if I'm not investing in VProtect, that is more dangerous for me than anything else could be. So I don't care if my 35% business ROCE goes down to 30%, but I need to invest in the future because we are looking to build a business that can be a 15% to 20% market share owner in the Indian security industry from the current 5% levels. Corona has been a massive trigger. Labor reforms is the biggest legislative change in our sector. And corona is pushing people towards quality and more technology, less contact -- less people, less contact. I think these are great signs. This is the time to invest because a large part of my competitors cannot invest. This is the time to change the nature of the industry from a highly fragmented one to a rather consolidated one, like Australia is or U.K. or U.S. are. So honestly, my friend, I will give you a capital table on where we are investing how much capital. But honestly, don't bother about the micro details. The more important thing is a business like us, which is high ROCE, ought to invest capital in incubating new future ideas, which are business imperatives 5 years down the line.

No, no, absolutely. And I think I asked it more from a positive sense that because these businesses will actually scale up as things are changing on the ground. So my sense was there is actually a need to invest in these businesses. Great. I will connect with Vamshi for that data point.

We have next question from the line of Viral Shah from ENAM Holdings.

Sir, I had a couple of questions. Firstly, on the Fms side, the margins have shrunk a bit in the quarter, and you mentioned in the note that it is largely because of operating deleverage. So can you help us understand what were the gross margins during the quarter? And how were -- how do they compare to the previous quarters?

So Viral, Vamshi here. Well, so the gross margins have been pretty stable in the 12%, 13% range whereas for last quarter or this quarter. As we had indicated in the note, the decline in EBITDA was purely on account of the operating leverage impact, right? Essentially, if we have a business where the top line went down, say, by INR 30 crores and if we have a 12% gross margin impact. The impact on that would be EBITDA -- it will flow directly to the EBITDA because we've not done any people changes, not done any salary reductions, et cetera. So the gross margin hit on the revenue decline would flow directly to EBITDA. That's the reason for the margin decline that you would see.

Okay. Okay. And my second question is in the previous quarter, we had deferred some recognition of INR 34 crores of grant that we would have received in the Australia, Singapore and the New Zealand business. So what is the update on that? Have you recognized any of it now in this quarter, or?

Devesh will answer that question. Devesh?

Yes. So no, we have not yet recognized any income from those grants as we are still in discussions with the authorities as we have updated last time. Now that restriction in Singapore have significantly reduced, the government offices have also started working, and we are able to interact much better with them. I think we will get a sense in the next 1 or 2 months on the final provisions on those grants. Pending that, you of course stick to the size in the balance sheet and also kept the cash effect so that it is -- it is not unnecessarily used up. We hope to give you an update by the end of -- in the next quarter results. We hope to give you an update.

Sure. And then lastly, on the provisioning that -- increased provision that we had done in the previous quarter, how much of that would have slipped into bad debt, or?

You're talking about the credit notes that were provided?

Yes. There was some -- I think around either INR 54 crores, INR 38 crores of credit note and there was another INR 15 crores of provisioning for delayed collection.

So as Rituraj also mentioned earlier, we made a conservative approach towards provisioning considering the increased lift in the current environment. So we haven't yet had to use any of those provisions for the assets. On the credit notes, yes, we have had to use some of it. We still carry some portion. I think this -- of this INR 30 crores, I think is around INR 10 crores this year, this quarter. And we still have the balance remaining in the books. So hopefully, we will not have to use it.

So do I get it right? It is INR 10 crores.

Yes. Yes. It is INR 10 crore of the INR 30 crores.

We have next question from the line of from Aasim Bharde from DAM Capital Advisors.

So just 1 question. On the tax rate front, do you envision that you would be able to comply with the TCJA regulations this year now that October is done and you would have some clarity on the fiscal season in November?

Vamshi, do you want me to take this?

Yes.

So there are 2 areas or there are 2 aspects to it, TCJA. One is the-time forward benefit, which we have from the previous 2 years. As you know, mutual benefit continues for 3 years. So that is certainly we are going to be able to take also advantage of that in the current year. As far as the current year is concerned, I think we are being a bit cautious, both the outlook is possibly less unclear than it was at the end of Q1. We'll still wait and see if our Q3 results in a larger increase in the revenue and the people employed, and we feel that we can take advantage of the new TCJA in this year. We will shortly do that accounting and take that advantage. But current -- the previous year TCJA continues. And as a result of that, there will still be nil tax in India on account of those benefits.

Okay. Okay. So we'll still nil taxed in the India business, [ currently ]? Just to get a sense then that assuming that you don't take the advantage of the TCJA year for employees added this year, what would be the full year tax rate for the company at a consolidated basis?

See in India, it will be, as I said, it will be a nil tax...

0, yes.

in India. Yes. Australia tax is around -- after tax rate and standard tax rate, 30%; Singapore is 30%. I think New Zealand is also 30%. So there will be a blended rate on this based on the different PBTs, which are there from these businesses. But India will be nil and Australia will be on 30% tax.

We have next question from the line of Sanket Goradia from [ VEC ].

Am I audible?

Yes. Go ahead, Sanket. Yes.

So congrats, team, on the great set of numbers. I wanted to just get an understanding on something that Rituraj also mentioned given that on how the market is panning out. Are we looking at opportunities in the current market, given some of the distress with all your peers? Is that a strategy for India? That'd be my first piece. Two will be on how are you seeing some of the [ great ] pipelines coming along the -- with, say, for new customers?

So Sanket, what's the first question, specifically on acquisitions?

Yes.

Okay. Okay.

Well, let me take that quickly, Vamshi. So Sanket, we believe that the current impact of corona, further multiplied by labor reforms, will put a large number of smaller regional operators in distress. They will either need to comply to all the labor laws and manage their cash flows or they will be in deep trouble. So yes, you're right that the weaker players are looking to get weaker in the current environment. Having said that, is SIS is looking to acquire in the immediate term? The answer is a clear no. SIS is completely focused at the moment towards closing out our past transactions, like SXP. We have a few more to close out. So we will be concentrating on doing that. One is always looking out for further opportunities, but our priority lies with closing out what's pending at hand first. Your second question was about order pipeline. Like I said, our pre-corona level of new orders in India was more than INR 10 crores worth. So we used to get more than INR 10 crores worth of new sales, new orders every month for all the Indian businesses put together. I'm not talking [ impact ] -- that shrank steeply in Q1 because of the lockdown and all the other reasons. In September, it's back up at roughly INR 7 crores, INR 7.5 crores. So we are operating at 70%, 75% capacity as far as sales engine is concerned. Looking at what we have in hand to be sort of contracts to be initiated October, November, December period, I see the order volume coming back reasonably strongly. These are existing customers who are giving us additional volumes because a lot of the other service providers are faltering. The other thing that's also happening is that a large part of our existing customers was security customers maybe or FM customers. They are giving us work for other services. They are taking pest control from us. They are taking electronic security from us or something like that. So there's a lot of interesting cross-sell traction also happen. So I think there's reasonably good traction for Q3 in the festive season, but it's still not across all customer segments. There are several customer segments where the new order action is tepid compared to pre-corona. And I think that will take a little bit more time than Q3 to come back on.

Sure. No, I appreciate that, but just if I could add 2 more questions on that. The first is, are you seeing your customers sort of -- while volume may go up, but do you see them kind of being able to pay you the price you're asking? Or are you seeing pressure on sort of for order value?

No. So honestly speaking, in an environment like this, there will be pressure on pricing. But we have made a clear choice. It's gross margin above revenue for us. So you will see that in the first 6 months of the year, we have maintained our gross margin line. Going forward, even as we are pushing the sales engine to revive, We are not looking to bring on orders at lower margins or lower price points. So that will be our approach going forward as well. That maybe at -- in a little bit slower revenue recovery or a little bit slower growth, but then that's fine. I think gross margin over the speed of revenue recovery.

Sure. I don't know if you've already touched on this. Had we had -- could you quantify the amount of write-offs, if at all, you've done in H1?

No. So like Devesh already pointed out, we had taken INR 53 crores, INR 54 crores worth of provisions. And so far, INR 10 crore worth of credit notes have been passed through.

Sure. And just if you could give a sort of a peak into -- in our other expenses, what are the top 3 items, which are contributing to the other expenses?

Just quickly, Sanket, can we take this offline? There are a bunch of people waiting in queue. I can get back to you on separately on this, yes?

We have next question from the line of Yogesh Kirve from B&K Securities.

So if you see the net debt-to-EBITDA is currently less than 1x as you alluded to, I think, it's 0.9x. And then we would be making based on also you talked 50%, 60%. So we are looking at like INR 60 crores, INR 70 crores of quarterly sort of cash flows. So I just wonder what was our source of -- so why are we still guiding to something 1x net debt-to-EBITDA as a comfortable level for next 12 to 24 months perspective? Is it only factoring in the payouts related to the announced transactions we have done in the past? Or you are also building in some other investments?

No, I think, you're Right. That -- I said that from the perspective of what is an efficient balance sheet, right? I mean, you could go to negative net debt, but is that the best way to manage our balance sheet, which is highly cash generative? So yes, I -- global benchmark. If you look at Group 4, if you look at Prosegur, Brinks, ISS World, if you look at all the global majors, which are $5 billion-plus listed entities, they maintain a net debt-to-EBITDA level of anywhere between 2x to 3x. In India, we have maintained 1.5x. Now we are looking to adjust that down to 1x without lease liabilities. So that's our approach. And yes, obviously, it will vary quarter-to-quarter depending on payouts and other factors. But that's the broad range going forward 24 months?

Sir, based on how the things are stacking or it looks like you will be much, much lower than that 1x sort of an thing. So how would -- how will we look to reach to that optimum level? So what do you -- what will be -- are you sort of focusing on acquisition? Or would we be doing some dividend payouts?

I'm not looking to make any forward-looking statements here. I've given your broad guidance only because I'm adjusting. My outlook has been 1.5x. I'm changing that to 1x without lease liabilities. Now how that plays out over the next 8 quarters, I mean, there's a lot of things that could happen. So I mean, I cannot forecast all of that.

And, Yogesh, just to add to that, as yourself asked in the beginning, there'll also be some payouts to on some of these earn-outs on the earlier transactions. So including all of that, I think what Rituraj mentioned was a broad resetting of the guidance on what our net debt-to-EBITDA ratio, comfortable ratio would be from 1.5x to 1x. It's more like a comfort level that we have rather than that this number will be reached by end of the year kind of thing.

Sure. That's fair enough. So second question I had regarding -- so this COVID has given, go to some part of the business, right? You have alluded to some technology-driven security services. While on the other hand, this facility management would take a bit of a time to recover. And so after this thing plays out, I mean from a strategy trend -- strategic trend, do you see the relative importance of the business would be changed for us or compared to what you were looking at to 6 months back?

Well, that's an interesting question. I mean, in March, April, when I spoke to a lot of analysts, I had said that security and essential services will be least impacted and first to recover. And that was a very contrarian call at that point in time. H1 results have established that for a fact, they -- when FM revenues are worst impacted, they are operating at 70%, 75% of pre-corona levels. Today, I'm -- I can say with great confidence in my understanding of the market that over a 12- to 24-month period, out of my security cash and FM business, the segment that will be benefited maximum by COVID is going to be the FM segment. It is worst affected right now, but it will be the biggest beneficiary over a 12- to 24-month period because there is a significant shift in customer behavior. The hygiene and sanitation expenditure for every office building, for every school, for every mall, for every public utility, the hygiene and sanitation expenditure is going to go up. That is my gut feel right now. I may be right, may be wrong, but that's how I see it. It may take more time to recover, but ultimately, it will be the big winner.

We have next question from the line of Vidit Shah from IIFL.

Just got a couple of clarification. Firstly, on the interest costs. Now it's come down by around INR 4 crores versus the first quarter while gross debt levels have remained the same. So can you just help explain what has driven the finance cost there?

So if you look at -- yes. I'm taking it. If you look at the India business, you will see that the debt in India has come down significantly from March and June to September level? And what's happening is because as we clearly explained that our collections have been strong. We've been collecting more than what we've been invoicing. So the mid-month utilization levels on working capital has significantly reduced. Now that is driven by interest reduction. Now the reason you see that the gross debt level is largely the same, it is because of the translation difference, which has happened for the international debt. In fact, debt has remained at the same level in cost in [ times ] terms, but on a calculated level that has gone up, which is from INR 503 crores to INR 564 crores. That's purely on translation basis. So that the whole savings have come from the Indian business where our working capital average utilization has been significantly lower due to the aggressive collection efforts we've been put in over the last few months.

Understood. So now given that the working capital levels are kind of stable now, can we assume this level of debt foreign finance costs going forward as well? Or do we expect these to bounce back?

Well, if you expect things to bounce back and we expect revenue to bounce back, then certainly, I will have some increase in my working capital utilization, though we have generated enough cash this year. We may not have to go back to the same level for the next 3 months, at least.

Understood. All right. And just a clarification on the balance payouts on acquisition now after SXP. Is Henderson and P4G the only ones left? Or are there any other major acquisitions buyouts pending?

Well, there are 2.

The legal lending -- I'll give you the list. Uniq is spending in India. And Henderson has an exit option in current financial year, which if they don't use that exit option, they then have the exit option 2 years down the line? P4G again, is a much smaller transaction. It's only a $4 million, $5 million business at the moment. So it's not -- it's a smaller transaction. But even that will come up next year. So these are the 3 significant trending ones.

We have next question from the line of Aditya Bagul from Axis Capital.

Just 2 quick questions from my end. Rituraj, if you can highlight a few anecdotes about what we've been doing on the whole transition of moving from a product to a service to a solution-based company. I mean we talked about oil and gas pipeline last year. But if you can help us understand a little more as to what is happening on that. And also, if you can help us understand what is happening with another initiative of ours, which is One SIS, leveraging on your existing customers to other -- in other segments. If you can just give a brief update on both of this, it would be very helpful.

No. So honestly speaking, corona and the current crisis management has sort of changed priorities in the last 6 months, and we haven't been able to concentrate to the extent that we would have liked to in normal course on both these actions. But let me give you an example on what's -- what seems to be happening on its own, not something that we have triggered, but seems to be happening literally on its own on the Man-Tech side or the -- like I've said, If you look at the industry stack, you have staffing at the bottom where the value addition is leased, EBITDA margin is leased. Then you have service where we operate, where you do SLA-based contracts. You take ownership of payment and compliance, so your margin profile is better. And the third level is solution business, where you are not providing inputs but complete outcomes, use of high degree of technology, margins are even higher. And the ultimate, the fourth and the last level of this stack is route-based solutions, where you -- rather than servicing a site, you start making it a route service, like the cash business, where we do ATM replenishment solution on a route model. We decide the route and we do the route efficiency. So these are the 4 levels that are there in our sector. If you look at our progression of security business and FM business from service to solutions, I think that's happening extremely well. And I'll give you 2 examples. The first example is banking industry. Banking has been in trouble. Banking has been on a massive cost cut drive. And they are looking to optimize the cost of having guards outside their branch offices and guards outside their ATMs. Now guards standing 24/7 outside of ATM add pretty much negligible value. Currently now the bank is completely transitioning that to alarm monitoring response solution, which is you design an alarm solution with CCTV. You do the remote monitoring 24/7 and you do big patrols. So rather than the guards standing outside every ATM for every 10, 15 ATMs, there is a guard on a bike with a mobile app who goes checking ATM-to-ATM, and he does not only do the security checks, he actually goes there to check whether the air conditioning is working, whether the signage of the bank is operational, whether the space is clean, the ATM area is clean. And this can be done at a significantly lower per-ATM per-month cost for the bank than plain vanilla guarding. The beauty of it is that the bank can save a lot of cost, but our margin on alarm monitoring and response is 4x our margin on vanilla guarding for the ATM. So yes, revenue will shrink, but margin will multiply. That's the way we look at it. We are very excited about this, and this is like the -- I give you the example of oil and gas. I'm giving you the example of banking, another segment where there the customer is forcing migration from service to solutions. And not every competitor of mine who can do guard service can also do alarm monitoring response. They don't have the technology. They don't have the investment capability. So I think that's a very interesting transition, which is happening in the corona period, and I think it will only solidify over the next 12 to 24 months. You spoke about on One SIS. I think One SIS got a massive leg up in the corona period. I spoke to you a few months back about the circle of safety, where we blended our services, access control at gate and then disinfection and smart surface disinfection, fumigation, production support staff. I mean, we've bundled a lot of our services that different SIS Group companies do and created something that we call circle of safety. And One SIS guys are selling this extensively, and we've got reasonably good traction. And I think as labor reforms come into play from April next year. And customers, end users will have to undertake the ownership to comply with social security, irrespective of whether it's our own employee or an outsourced employee. I believe circle of safety-type bundle solutions will see a massive uptick because customers are looking for reliable service providers. They are looking at fewer service providers, and they want to look at service providers that self-deliver. When JLL does a contract, they outsource guarding to SIS. They outsource FM to ISS. They outsource gardening to a third agency. We self-deliver. And because we self-deliver, we can do it at more cost-efficient way than a third party like JLL, which does outsourcing and take some margin-on-margin. So I guess, again, One SIS, with COVID and labor reforms, should see a leg up. But for us to really, really get back into that mode of pushing solutions and One SIS as full-time projects, I think we'll have to watch another 6 months for the organic business to fully recover, go back to growth mode. And then we revisit our pre-COVID agenda like we were in the past.

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Rituraj Sinha for closing comments. Over to you, sir.

Well, nothing much to say. I think we've covered a lot of ground on this conference call. I hope it's not gone on beyond your patience. But thank you so much for participating so actively. We've tried to address all your concerns and questions. SIS, my friends, continues to be a high-growth, high-ROCE story. And even the likes of COVID and the national lockdown have not really upset that apple cart as is evident from H1 results. We hope to continue to develop the business broadly in line with our strategy of maintaining the high-growth, higher-ROCE and OCF-to-EBITDA levels. And I hope that we will continue to see your participation, support and cooperation. Thank you so much.

Thank you very much, sir. Ladies and gentlemen, on behalf of SIS Security and Intelligence Services (India) Ltd., that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.