SIS Limited (SIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the SIS Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Vamshidhar Guthikonda, President, M&A and Investor Relations. Thank you, and over to you, sir.

Thank you, Janice. Good afternoon, everyone. A very warm welcome to our Q3 and 9-month FY '21 earnings conference call. Along with me, I have our Group Managing Director, Mr. Rituraj Sinha; and Mr. Devesh Desai, who's our group CFO. I hope everyone had a look at our results, which were uploaded to the stock exchange and our website, sisindia.com last evening. We are extremely happy to report a strong and resilient performance by the SIS Group for the 9 months FY '21 and the latest quarter. Our revenues for -- consolidated revenues for Q3 were INR 2,358 crores and for 9 months at INR 6,682 crores, which is a 6.5% increase over the 9 months of the previous year. During the time when the country saw a very steep GDP decline and businesses and economy was shut for quite a long time during the year, we are very pleased with what we have achieved. And looking back from where we are now, I don't think even in March 2020, we would have foreseen that we would have -- we could have done so well, and we are very proud of how our teams have performed during these difficult times. Our revenues in December 2020, the latest month, were INR 805 crores as against INR 739 crores in September, the last quarter end month, thus putting us on a very strong upward trajectory. All our functional teams, the sales, operations, finance teams have executed with a very great focus and commitment during these turbulent months to ensure that our businesses end up -- the customer business continuity is sustained by being an essential services provider to them during this last 1 year. There has been not just revenue growth but very good performance on the margin front also. Our group EBITDA margin is at 6.2% for Q3 as against 6% in the previous quarter. Our margins continued to rise up because of operating leverage, which has come into play. As and when the revenue and demand recovery happened, our margins have kept inching up because of the operating leverage. And apart from that, we've had very good margins on our international side, where a lot of our ad hoc business and events business is at a much higher EBITDA margin than our regular business. At close to INR 400 crore EBITDA for the [ 9 months ], we are confident of a very good end to the year and a very strong base for FY '22. The SIS international business, as stated, has done fantastically over the last 9, 10 months, and it's already at over 130% compared to March 2020 run rate. India Security is at 97% of the March 2020 run rate. While the FM segment had been impacted, as we have indicated in the earlier call, on account of a few key segments like railways, entertainment, the IT segment, which has not fully started operations, they have just not reverted to historical levels as yet. So that segment has seen a bit of impact, but the FM segment accounts only 12% of our revenue. So that has not hindered the group growth as much. Our one huge achievement for the last 9 months is our great cash flow generation. Our OCF to EBITDA for the quarter was at 145% and 140% for the 9 months. We've generated INR 555 crores of operating cash flow during these 9 months, which has more than 2.5x what we generated in the whole of last year. This has helped us reduce our net debt significantly and consequently also bring down our net debt-to-EBITDA ratio from 1.35 at the end of FY '20 to 0.9 at the end of Q3. Overall, it has been a very strong quarter to the year -- very strong quarter for us, showcasing our business resilience on the P&L side and fantastic cash flow generation and leverage reduction on the balance sheet side. So with those remarks, I now open the floor for questions. Thank you.

[Operator Instructions] First question is from the line of Sudheer Guntupalli from ICICI Securities.

My first question is in terms of the cash generation and debt [indiscernible] quarter from the previous quarter. Cash generation during the quarter seems to be very high. Despite that, the cash and equivalents have not changed much. And actually net debt seems to have gone up because of the current portion of the long-term liabilities. So 2 questions on that front. Why is that strong cash conversion not reflecting in the cash balances? And why is the overall net debt going up? The second part of it is, while over the last 9 months our net debt has come down significantly, is there a thought process behind paying back some of the debt and reducing [indiscernible]?

So we have -- thanks, Sudheer. I'll have Devesh take up that question. Devesh?

Sudheer, answering your 2 questions. The reason why our net cash has not changed is because as you've seen our note, we made the payment for the 49% of Southern Cross Protection during this quarter. So in spite of that -- AUD 37 million payment, which is INR 200 crores odd. So in spite of that, you see the net cash is stable. It shows a strong cash generation, operating cash generation during the quarter. That's the first thing. The second thing is on your gross debt question. On a constant currency basis, between March '20 and December '20, the Indian rupee has depreciated more than 20% against the Aussie dollar. In fact, on a constant currency basis, my gross debt at December as compared to March is [ 1,280 ] versus March gross debt of [ 1,325 ]. So actually, my gross debt has come down.

Yes. That question, Devesh, was -- that Sudheer had was whether there's any plan to use the cash to reduce the debt further.

So at this [indiscernible], we are considering -- if we have any opportunities we require the cash for, we will [ hold the cash ]. Otherwise, we may consider paying down the debt sometime in the next quarter depending on our requirements. But that will be mostly in international business. In the Indian business, since it is mostly working capital debt, [ it actually pays ] itself up and down with the working capital cycle and the cash generation.

Sure, Devesh. And just a couple of follow-up questions on that. The current portion of long-term liabilities, that is number one. And number two, when you mention any opportunities, are you referring to any inorganic opportunities?

So [ 2 things ]. On the short term -- on the current portion [ of long-term liabilities ], which is NAB debt, which was due for maturity in April 2021, but happy to inform that we have an extension of the facility. So in the next quarter, that will now be shown as a long term and no longer as a short term -- current portion of the long-term liability. On the NCDs, which are due for payment again in April 2021, as you would note, we have obtained approval from the Board for a fresh issue of NCDs primarily to replace the existing NCD of INR 150 crores. So once we have that new issue done, this will again move away from the short-term portion to long-term portion. And on the second part, as far as the opportunities are concerned, so there could be some settlement of shareholding -- second tranche shareholding in some of the acquired entities. So if that happens, then we may end up using some of the cash. If that does not happen, we will figure out a more efficient use of the cash.

Sure, Devesh. And one last question. The grants that you have mentioned, right, which are part of our other income this time, so can you elaborate the nature of these grants? And if -- what exactly is this pertaining to? What is the quality? I mean is this a recurring component or a pure one-off kind of a component?

These are grants which we have received from the Singapore and the New Zealand governments, and this is primarily for the COVID period. It's a wage support scheme and a job support scheme and some subsidies of the foreign worker levies, which they have compensated all businesses for. So I don't see this as recurring. It's one-off. We are expecting or we may get some more grants for the next -- in the next few months. We're not sure. But I don't expect this to be a long-term recurring feature year-on-year unless COVID becomes a recurring feature year-on-year, which we don't expect.

[Operator Instructions] The next question is from the line of Aditya Bagul from Axis Capital.

Congratulations on a good set of numbers amidst challenging times. So a couple of questions from my end. First is on the domestic segment, right? Can you talk about how we're looking at Q4 and possibly FY '22 in the context of India Security and facility management? So that is question number one. Just some broad outlook would be helpful. Second is, if you can help us understand within the international segment, you talked about some ad hoc revenue schemes [indiscernible] during this COVID period. So excluding that, how do you see the growth during FY '22? So just a couple of points on that would be helpful.

I'll have our Group Managing Director, Mr. Rituraj, take up this question.

Sir, I'm sorry to interrupt, but Mr. Rituraj Sinha has disconnected at this time.

He is with me.

So look, I think when we met in the -- when we declared our full year result last year, which was in May we had an analyst call, in which we had called out that essential services business has a very interesting correlation with the economic cycle, right? And we had sort of ventured to stick our neck out and say that we hope to be least impacted and amongst the first to recover. Our 9-month result clearly established that trend, right? We have -- what we have seen is not a V-shaped recovery, but a very flat resilience case. Like we dipped marginally in -- up to June, July. And since then, September onwards, we've been back on growth. So I think that's one point that must be registered in a down cycle. When economy is not doing well, we are in a crisis mode, that's how resilient essential services demand remains. However, in growth years, particularly in the one post the budget, looking at the infrastructure push on part of the government, I believe that every single square foot of new airport, railway station, port or metro station or highways that the government intends to build or public or private health care or even expanded manufacturing for that matter, every square foot that is added in this country will need somebody or the other to install cameras, to clean it and to provide security staff around it. So just bear that fundamental concept in mind when you look at forecasting how SIS will tend to do in the coming years, which are, hopefully, growth years. So I don't want to venture into sort of saying what FY '22 revenue will look like or -- I mean that's not something I'd like to do. But if you look at the trend of India Security and you look at the sharp recovery of even the facility management business across Q3, I think our historical performance is giving adequate guidance towards what the future may look like.

Right. Rituraj, let me just ask that question in a slightly different way. You're not seeing any clients who are pulling back on their services or who have reduced their temporary staff a little bit in the security space. So you're not seeing any of that happening. That is...

Aditya, we deal with more than 5,000 clients. There'll always be somebody who's shutting shop, pulling back. All important thing for you to remember is that no single customer adds up to more than 2%, 3% of our revenues. No single segment adds up to 13%, 14% of our revenues. So while these things will always keep happening for a business of our size, they are not going to hamper the broader trajectory of the business, right? And you've seen that. In corona crisis, a lot of our customer segments were absolutely in standstill and shutdown mode. But there were others, which actually increased their requirements. Net-net, we were not impacted. And the results are there to establish that over the last 3 quarters.

Sure. That's helpful. And if you can also probably talk a little bit in terms of how we are looking at Henderson and the Australia and New Zealand businesses.

Sorry, could you repeat that?

My point was that you've seen some ad hoc contracts hitting our international business in Australia and New Zealand. I just wanted to understand how sustainable they will be going into FY '22. And just some thoughts around Henderson if possible.

Look, the quarantine work and other such ad hoc work will clearly taper down. It is already tapering down. If I give you the numbers around it, we've got some $30 million, $35 million of ad hoc work in Australia related to quarantines and such one-off work. And some of our regular contracts, like aviation, events, et cetera, they also did not happen last year or last 9 months. So there was a revenue dip on permanent side. What we are seeing interchange in Q4 and beyond is that as the one-off quarantine work sort of tapers down, the more permanent nature of contract that we had are coming back in terms of volumes. I see this neutralizing. So I think net-net, even when the quarantine work is off, it's not as if our revenue is going to shrink as a result of that one-off work going out. It will probably get compensated adequately or tad more because of the permanent work coming back.

Understood. That's very helpful, Rituraj. One question to Devesh if I may just squeeze in. Assuming a normal year for FY '22, do you think that our tax incentive is likely to be lower given that we'll get to enjoy the 80JJAA benefit once again?

Yes, my tax expense will certainly be, on a net basis, lower, but the tax payment, as far as the government is concerned in India, is 0 and will continue to be 0.

The next question is from the line of Ashwini Agarwal from Ashmore.

Congratulations. Good numbers. A couple of questions. In the previous few calls, you've highlighted some stress on receivables, elongating receivable cycles and possibility of credit losses. How are you seeing that in India? And do you see an improving trend or things are still sticky? How should we think about credit costs and receivable costs?

Ashwini, let me answer that in 2 parts. The first one being that we are taking a provision because -- in Q1 because the outlook was very, very shaky. Six months down the line, the picture is definitely changed and it's changed for the better. So there is far greater visibility on payment cycles and things like that. And I think the proof of that is the fact that our working capital utilization is at an all-time low. SIS has not borrowed a dime extra in 9 months towards working capital. So I think we have greater visibility and greater clarity and a result of which we have released back some of that provision in Q2 and some more has been released in Q3, but we still carry a significant chunk of provisions forward. We are watching closely situation on certain sectors like real estate particularly, malls and certain other sectors, which we believe will take a little bit longer for us to be stable to establish whether there's any serious bad debt risk or not. And as before, Ashwini, we will continue to take a conservative view on this. So if we see a red flag, we will approach it extremely conservatively. Now that's with regard to what business we have. Going forward also, SIS has implemented, which internally we are calling [Foreign Language]. It's basically a metric of 8 sectors, which we don't want to work in. We are clearly calling those sectors out, sectors which we feel unsure about in terms of payment cycles and higher bad debt risk and, therefore, we don't want to indulge ourselves in those sectors. Then there's 8 sectors which are watch and go, and there are 8 sectors, which we believe are going to be the biggest beneficiaries of not just the post-COVID environment, but particularly also of the budget and what it sort of calls out. So that's how we are approaching going forward. We believe this is an opportunity for us to rejig our customer portfolio a little bit, optimize our working capital exposure and our credit risk in general. That's sort of a plus that one has gathered through this COVID exercise. I hope I've given you some color and clarity on that.

Yes, yes, yes. So would it be fair for me to think that in the outside situation, if you have any receivable writeoffs that's more than adequately provided for already?

If you see write-offs at the end of Q4, you must view that as an ultra-conservative view to the extent that some of that may get written back in, in the next year, if it gets collected. But anything which is NCLT might go into NCLT. Anything that looks real estate type, where mall is shut for a while or the construction project is not being sold, we will take an ultra-conservative view. That's what we've always done, and that's how we intend to proceed as well.

So second is proceeding from the previous question, I mean, you spoke about how the one-off revenue opportunities in Australia will be offset by regular business in Australia and New Zealand, Singapore maybe as well. And in the Indian context, the trend on a Q-on-Q basis, obviously, shows a nice trend and one should expect the housekeeping business to also come back. So the revenue outlook sort of appears to be fairly steady with compensating elements in it. On the margin front also, would you say that the headwinds and tailwinds more or less equalize each other and the current margins, the operating margins are sustainable?

So, margins I'll answer in 2 parts, Ashwini. The margins on the Indian business, let's say, the security business, we've always guided towards a 6%, 6.5% ballpark range. That's where we are. That's where we think we will continue to operate. Barring one-off glitches here and there, broad range is that. In FM, the margins have dipped because that's basically operating leverage volumes or revenue slipped. As revenue goes back up, they will also be in the same ballpark, 6%, 6.5% range. International business is currently operating at an exceptional margin level, which is a result of the fact that when we do temporary work, we charge higher premium, right? And that is what is reflecting on the margin. As a temporary ad hoc corona-related work tapers down, margin will settle back to what the normal trend of margins is, historical trend. So I'm just calling that out clearly so that there is no confusion. I mean, I always dread the fact, somebody told me earlier today that because SIS is going to report a higher revenue -- Y-o-Y revenue growth this year and significant margin solidity, it could be that next year you'll be coming back and -- because we won't have much of a base effect. So I just need to ensure that the expectations are set in a way that we're not yet getting punished for doing well in FY '21, where the [ peer set ] is maybe not at par.

I get it. So actually -- that's exactly the question. So the margin lift in India, will that kind of, on a consolidated basis, make up for the loss of these one-off more profitable contracts overseas? It should, right, more or less?

It should, it should, ballpark.

[Operator Instructions] The next question from the line of Vidit Shah from India Infoline.

Just firstly, on the facilities management business, just wanted to understand the outlook. So as I understood, the railway business was roughly 10% of the revenue, which is roughly INR 30 crores per quarter. So how much is this at right now? And what are we seeing on this contract or business in 4Q and FY '22?

Well, this business is still 50% down, more than 50% down because, as you know, the railway operations are very restricted. But yes, what we hear is that more than anybody else, the Ministry of Railways is super keen to restore it to full capacity, right, in near term. And I think the moment they press the button to say that we go back to regular operations, this should move from minus 50% to plus 10% or something. So I think we just have to wait for railways. I don't think India can operate without railways.