SIS Limited (SIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SIS Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bharat Bakhshi, President, M&A and Investor Relations, from SIS Limited. Thank you, and over to you Mr. Bakhshi.

Thank you very much. Good afternoon, everyone, and welcome to our Q1 FY '23 earnings call. Along with me, I have our Group Managing Director, Rituraj Sinha; and also our Group CFO, Devesh Desai. I hope everyone has had a chance to look at our results and the earnings note, which has been uploaded on the stock exchanges and also the company website, sisindia.com. Let me just start with a little commentary. I think broadly, we are very happy to report again this quarter our highest ever quarterly revenue, which came in at INR 2,678 crores, which is a 12.6% year-on-year growth over the same quarter last year. So as you can see, compared to last year, the growth momentum certainly is coming back well, especially in our India Security and Facility Management businesses. India Security revenues are actually up on -- about 20.2% over the same quarter last year and Facility Management is up very significantly at 39.8% over the same quarter last year. Of course, last year it was impacted -- the Facility Management businesses, as you know, were impacted especially by COVID. But it's good to see that the recovery coming back and coming back pretty strong in Facility Management especially. On the margin front, I think as we had indicated in our last call, we do expect margins to move back to pre-COVID levels in the next few quarters. In fact to that end, the India Security business has already seen margins move up by 20 basis points over the previous quarter. So, we can see -- already see the trend starting to play out. On the international front, again, as we had -- we have been indicating for the last couple of quarters, based on what we were seeing, this quarter the revenues have been flattish since some of the temporary COVID-related work on the international front has gone down. But it's still -- revenue is still flat because it is being offset by segments, which were earlier hit by COVID, and which are now coming back. International margins have reduced from last year. Again, as we had indicated that the temporary COVID-related work, which we had got last year, was at significantly higher margins. So, that's broadly where we are on the businesses. I think again I'll at least close this by saying, overall, we are happy to see the growth recovering well post-COVID across all the businesses, and we are already investing for this -- for the growth that we see coming. With this, I'll hand it back for the question-and-answer session, please. Thank you.

[Operator Instructions] We have the first question from the line of Vidit Shah from India Infoline.

So, my first question was around the margin front itself. So last quarter, we had indicated there were some COVID-related costs, which had kept margins in the domestic business subdued. Now -- I mean my guess would be that wouldn't be that this quarter. So, I actually would have anticipated a higher growth in margins versus 10 bps or 20 bps Q-o-Q in securities and so -- and likewise in facilities as well. So what has kept the margin subdued, like are there any other costs which are currently high?

So Vidit, it's good that you referred to what I had mentioned last time. There are no COVID costs this time, but I clearly and specifically stated 2 things on my last call. One, that as we go back to rapid organic growth, there will be contract startup costs, which will hang heavily on the margin profile. Second, I had said that as growth picks up rapidly, working capital employed in the business will increase and free cash flow will reduce. So, you are seeing this trend now and it will continue to play out for the next few quarters till we normalize back to our regular growth.

Okay, understood. So, would it be just like -- just for the sake of clarity be able to quantify the startup costs that we've incurred or -- just so that we know what like normalized margins are for this...

I think we watch our margin, the gross margin line and we're seeing consistently that our gross margin has been stable through the COVID period. We are not taking on contracts at lower margins to drag down the overall margin. So our gross margin line is intact. Previously, there were a lot of levers. Again, I'll recap and jog your memory. During COVID, we know we had massive savings on account of travel and rental cars, et cetera, which were beneficial for margins. But then there were cost of PPE, there were later cost of vaccination and last year, we obviously started to spend more money on back to travel and back to reviews and back to everything. And we've also done a massive pay review this last quarter. So I think there has been moving parts and pieces. Some of them have dragged down SG&A, some have boosted SG&A and all the fluctuation happens at the SG&A level. Our gross margin is intact. That's why I'm so sure they will revert to 5.5%, 6% range. As far as splitting the raising cost, the contract mounting cost is concerned, I will ask Devesh to organize that for you on a one-to-one basis.

Sure. Just one follow-up on the gross margins that you mentioned. While they have been maintained -- they were maintained at like the 77%, 78% the number that I state is the employee benefit expense in your P&L as a percentage of revenue, that has gone up as well to 80% this quarter. So, is there -- which in your presentation...

I know my friend, when you mount a lot of contracts, people have idle days to mount the contract from first. I've mobilized people from [ 28 ]. There will be downtime. We have to wear the cost of contract mounting. There is uniform cost, there is logistics cost, there is direct costs. You know, there's a lot of costs, which are linked to the startup of contract. So you're seeing all these fluctuations.

Okay, fine. Got it. And as you mentioned that working capital will obviously increase as rapid growth kicks in. So, is this what we can expect as the OCF to EBITDA conversion or will it just get better from here?

I have said very clearly last time only 100% OCF to EBITDA is not a good signal for my business. That means I'm growing too slow. We have, since our IPO indicated that our goalpost is 50% OCF to EBITDA. We want to be ballpark in that range and that is what we are trading towards, okay. But please do not benchmark with 100% plus OCF to EBITDA because that can only happen when you're not growing enough organically.

Fine, got that. And just one last question from an accounting perspective for the tax expense. Is that -- you have around INR 260 million worth of deferred tax that you booked. Is this all of 80JJAA and should we expect a similar trend if the growth trajectory remains the way it is in the coming quarter?

Yes, almost all of it is on account of 80JJAA. And [indiscernible] conclusive growth, then there will be at least this much of deferred tax assets in the coming quarters.

[Operator Instructions] The next question is from the line of [ Aditya ] from SIMPL.

Sir, when I look at the #1 player in Facility Management for India, you used to enjoy margin double-digit margins, while we had margins close to 6% to 7% leap over. So just wanted to understand why there's such a difference in margins? Is it related to the contracts we take or we have some inefficiencies as again the leader?

Could you be more specific? Sorry, I couldn't understand who you're trying to benchmark us with?

The BBG.

Sorry, I'm not able to answer for that, but my limited understanding is that globally, if you see ISS, which is the largest global listed FM player or you see any other security company ranging from Prosegur to Securitas to G4S, globally, the EBITDA margin range, broad range is ballpark 6%-ish. So if somebody who is delivering double-digit is complete standout performance. Unfortunately, SIS is not one of them.

All right. And I just wanted to understand one more thing, you just recently did a buyback of around INR 500 crores to INR 550 crores, and we have long-term loans of around INR 600 crores. So what was the thought process of the management? Was it not feasible to pay off the long-term loans at least, rather than by having a buyback?

So firstly, I think let me help you with the numbers. We have announced a buyback of INR 80 crores. I don't know how you got INR 550 crores. So [ INR 550 ] is the price for the buyback. Buyback value [indiscernible] is INR 80 crores, okay.

Right. Sorry. Yes.

Number 2, since we listed 5 years back, if you look at our track record, we have returned money to shareholders every single year. For the first 3 years, it was through dividends and the last 2 years, it's been through buybacks. Over the last 5 years, SIS has returned more than INR 250 crores back to our shareholders overall. And sometimes we do it through dividends, sometimes we do it through buyback. These are just modes of returning money, whichever is more efficient. Coming to whether it puts pressure on our organic growth requirements or our inorganic growth requirements, let me point out that SIS is maintaining a net debt to EBITDA of a healthy 1.5x. This is useful for our return on equity profile overall. And I've said this before as well. I don't intend to be a 0 net debt company. I don't see that to be a very capital-efficient way of running your business.

Next question is from the line of [ Sanjay ] from Envision Capital.

Sir, my question was on this cash management business, which we are looking at this moment. And the revenues have been almost similar sequential basis. Can you tell me, I mean, how are we moving ahead with this cash management business? And what is the market share currently, which we are holding in this market, Indian market?

So like I said before, the cash management piece, a lot of people discount the fact that SIS owns the second largest cash management business in the country. And as you can see, through the COVID period, it hasn't had a single quarter of revenue decline, and the margins are in the range of 12% to 15% ballpark now. The pipeline is very strong. Looking at the Q1 numbers, I see that cash business could potentially be reporting its best year of growth ever in FY '23 and that's demonstrated by the fact that the quarter-on-quarter change in revenue, Q1 FY '23 versus Q4 FY '22, we've almost reported 8% change in revenue, so 8% growth in a single quarter. So, this actually plays out. This could be a very exciting year for the cash business, and not just growth-wise, but also margin-wise.

Okay, okay. And I see that margins have declined by 22%. So, are we seeing some contract loss or how is this going in, sir?

I'll request Devesh to clarify that. I think it's already there in the earnings note, but Devesh, could you please clarify?

Yes, so on a normalized -- the Q4, we had some one-off items. So on a normalized basis, we have a 22.2% quarterly increase in the EBITDA between Q1 and Q4. So, if -- we had reported last time also and we've included this time in the note also that there is a normalizing effect on Q4 FY '22. So, you should read the normalized number and compare it with this.

I think the important thing to note is that somehow SIS is valued on a SOTP basis, but the cash business is not valued at all. So, that's somehow also food for thought, I guess, at some point.

[Operator Instructions] And the next question is from the line of [ Rohan from SIS ].

I just wanted to ask why had SIS not given any investor presentation yet? So that's my question.

Our earnings note is our investor presentation. It is published every quarter.

Sorry, but I could see it in your website, that's why I'm saying.

It's there on the website. In fact for the last 21 quarters, you will find our earnings note. It's there on the website. I request my team to send you a link separately.

[Operator Instructions] The next question is from the line of Alok Deshpande from Edelweiss Securities.

First question on Facility Management, clearly very good traction there with INR 400 crores plus of quarterly number. I just wanted to understand, do you see this momentum continuing throughout the year and what sort of contract wins, et cetera, that we have seen this quarter, what are we looking for, because this is one -- one business, which has come back really, really strongly. So just some color on that?

Alok, if you remember, during COVID, I pointed out very specifically [indiscernible] biggest winner out of COVID is going to be the cash -- is going to be the FM business. And I think that's playing out. The Q1 numbers are before you. I have seen the Q2 forecast. They will be fairly strong. Definitely, all FM businesses are reporting very robust development. And I'm looking forward to possibly the best year of growth for FM in its history in FY '23. I'm just -- I'm hoping that I didn't say that too soon. I'll just wait for H1 results to be out and at that point in time, we'll have a very clear trajectory.

Sure. Rituraj, any monthly exit number that you used to give earlier, is there any such number for this? What the number was in June or something like that?

Yes, sure. Devesh, can you just help with monthly numbers for all business segments?

Yes.

Alok, it's ballpark INR 145 crores for FM for June exit.

Okay, INR 145 crores, okay.

Yes. Well, I mean, so you can basically, they're run rating INR 145 crores, INR 150 crores, and they have a pretty strong pipeline. And for cash, they are operating at roughly INR 43 crores, INR 44 crores. For India Security, it is INR 365 crores of June exit and for SIS International, it is -- I'll come back to you with the SIS International exact number, but ballpark you know, this is India, yes.

Sure, sure. And if I noted down correctly, cash you said INR 43 crores, right? Roughly?

Sorry?

For cash business, you said INR 43 crores, was it, INR 43 crores?

INR 43 crores ballpark, yes.

Okay, okay. Rituraj, I have a similar question for the international business also. So, while it's playing out exactly the way you called out, that you have the ad hoc contracts going out and the sort of pre-COVID contracts coming back, so the run rate that we have seen in quarter 1, is that the sort of run rate we should expect for the remainder of the year in the international business?

Alok, could you come back again, sorry, I missed some part of it.

No, I was just saying that for the international business, while it's playing out the way you had called out regarding the ad hoc contracts going out and the old contracts coming back, from a run rate perspective what we have seen in Q1, is that something that should continue for the remainder of the year or you think it can go down, up, what's your trajectory there?

It's very good that you asked that question. Let me give you for some color on the international business, okay. So what -- the first thing that you must acknowledge is that the temporary high-margin COVID work is going to go back to 0. It's not there. It will go back to 0 this quarter hopefully, right? So, that's going to be out of the system, but that's been duly compensated by the regular business like retail, like aviation, like other such segments coming back. So on one side, the COVID work is declining, on the other side the regular business is coming back. And I think revenue-wise, this will cancel out, okay. But where it will really show up is that the margin of COVID-related work was definitely 2% higher than the regular work. It was priced significantly higher, premium pricing. So, what will happen is that the international security, particularly Australian revenues, will stabilize, but the margins will go back to 4.5% range.

Got it. So this...

Now, the new spin, no, just hang on, there is more here. The new spin is -- the labor government in Australia has come in and they have announced a 4.5% minimum wage hike. Australia generally does 1%, 2%, 2.5% minimum wage hikes, they have done a 4.5% minimum wage hike. Now in the long-term, over 2 quarters, 3 quarters, this is good news because our revenue will go up and our yield per contract will go up because we charge the same percentage, but on a higher revenue base now. But in the immediate term, in Q2, potentially Q3, there will be a catch-up effect because we will have to start paying the higher minimum wage now and go back and get that from customers, hopefully in, give or take, 1 quarter to 2 quarters. So, that's another dimension that is going to start showing up on the margin line in Q2, potentially Q3 for the international business. But when we are able to get the price increase, all of the 4.5% as it has happened every time before, I'm very confident that Q4 international business line will normalize.

This is very helpful.

And just to reconfirm the numbers, yes, right from the top, INR 949 crores of revenue overall in June, including cash. So if you remove cash from that, it's roughly INR 900 odd crores excluding cash, and then you break that down further, it's INR 382 crores for international, ballpark INR 145-ish crores for FM and for India Security, it's INR 365 crores.

[Operator Instructions] The next question is from the line of [ Rohan ], retail investor.

I just have one question. I don't know if it is possible or not, but I just wanted to ask that is SIS in the back-end trying to be in a certain business where they offer premium clients security services like bodyguards and other digital services that they can offer [indiscernible] So, is there any plan for this type of services in future?

No, we actually avoid doing bodyguard services and others such services because we don't find that to be scalable, and the personalization requirement is fairly high there. So, we -- actually on the contrary, we avoid these segments.

Okay. And the second is that, are we scaling or we trying to scale the business via technology? And where are we in terms of technology advancements?

SIS has done a lot of investments in technology, both on the back-end and on the customer-facing side. As you will remember, SIS was the first company to completely automate its back-end with proprietary softwares like ARC for recruitment kiosks, iOPS for operational management, SalesMax for sales productivity, MTrainer for mobile training delivery, and now, we are rolling out MySIS for digital attendance, which is facial recognition-based attendance automation. So on the back-end, there is a lot of proprietary software that we've built, which allows us to scale. On the customer-facing side, we are continuously aspiring for more sophisticated solutioning, whether it is through use of drones in security or it is through use of higher sophisticated technology and equipment in facility management. Very recently, we made an investment in Staqu for video analytics type work, artificial intelligence. So, SIS is investing in the future of security through various means and also looking to enhance value-add to customers through use of technology.

Okay. So do you think that in future manpower will be reduced and we will be more dependent on technology for security purposes?

Now that we are talking casually, I must tell you an interesting story, which I learned through one of my friends. Back in 1948, when the first alarm was developed, it was developed by a company called Siemens. And Securitas and Siemens both come from Scandinavia and the owners of both companies know each other. So, the story goes that the Siemens owner told the Securitas owner, the manpower security company that now I've invented an alarm security guarding is going to go out of vogue very soon in 10 years. That was 1948. We are sitting in 2022 and this is a $250 billion global market with the world's largest security company, AlliedBarton, Allied Universal holding $18 billion in revenue. So yes, technology will be used more and more, but I don't think that manpower element of security will elaborate -- evaporate completely. It doesn't seem to be the trend in the last 70 years.

Okay. So -- okay, yes, I agree with you sir. And, just wanted to ask one more thing, that if you want to scale the business, does it mean that we need to increase the manpower on ground or is there any other way to increase or scale the business in future?

It's both, we'll have to increase manpower required on ground and we will have to also use more technology, it's not either/or.

So it will be going hand in hand, these businesses?

Yes, I think so.

Next question is from the line of Aasim Bharde from DAM Capital Advisors.

So firstly, just a clarification on the international business margins. So, you talked about Australia business normalizing and that would take margin to 4.5-odd percent, at least for the next 2 quarters. Taking Henderson also into account, how would international business margins look like in the near term? Would it still be sub-5%?

Yes. What we mentioned is that, as you remember, the COVID-related contracts were almost completely going off, so we are going to be back to normal levels. As Rituraj said, of course, the next quarter the wage increase is going to kick in. So, you can expect 2, 3 quarters before we come back to that sort of normal levels.

Even because -- even pre-COVID, at least if I look at Q1 FY '20 to Q3 FY '20 international margins, that were easily over 5% and in fact maybe closer to 6% as well. Maybe there is some benefit coming from currency, I'm not sure. But was this business always a sub-5% margin business with Henderson in?

I think the right way to look at it is, if you look at it from FY '18 onwards rolling basis, you will see that this business, international business, was always a sub-5% EBITDA margin business till FY '20, when we made acquisition of Henderson, which, at that point, was reporting higher margins. Subsequently, when we bought in -- subsequently, COVID impacted and then obviously it's been wobbly. But on Henderson alone, the margin has taken a massive haircut because there was a lot of non-compliance in the business that we discovered only after the exiting promoter left the business entirely. And that -- all that happened during COVID. We just bought Henderson just a few quarters before COVID. And then during COVID, we bought out the outgoing promoter, we put in place our people, we figured out that we are non-compliant in a lot of ways. We put all those costs back in the business. We also lost some contracts. Net summary, Henderson is a loss-making business as of today, right? It is under fixing. The good news is that Henderson alone earned more than $30 million by way of grants from Singapore Government. So today, Henderson on its own balance sheet has more than $25 million of surplus cash sitting, and I believe that money is adequate to rebuild the business to a higher revenue in a more profitable way. So the bad news is, it's loss making right now. The good news is that it has $25 million, not just to grow organically, but also do inorganic stuff if it wants, without needing any incremental capital, additional capital, from any of the group entities. So, it has enough ammo to fix itself. And they have a pretty solid team in place now. I was just with them in June. So, I'm pretty happy with the progress they are making.

Sir, at least the 4.5% expectation that you're talking about on the international business, that is taking into account of Henderson pulling margins down, right?

No, no, no, again let me clarify. Please look at it from FY '18 onwards. Before the Henderson acquisition...

Yes, that I understand. I'm just saying that since Henderson this was...

Just hear me out. Before the Henderson acquisition, the EBITDA margin to international portfolio was 4.5%. Henderson came, it went up to 5.5%. We figured out that they were non-compliant in a lot of ways regulation-wise. Henderson's higher margin rate actually came down. You follow? So, if you want to compare apple-to-apple comparison, please do it without Henderson.

Now, see, I'm just -- so my question basic -- rather my follow-up on this was at the current juncture, where are we in Henderson profitability? We are still at a loss -- is basically in fixing mode, right?

Yes, Henderson is a loss, like I said.

So once that comes to, say, maybe like a sustainable 4-odd-percent, 5-odd-percent margin, whatever margin that business is, overall -- and some -- basically the international business margin will still be at a 4.5% to 5% bracket once Henderson comes back to whatever is normal profitability.

Absolutely right. That's exactly what we've guided towards since we got listed 21 quarters back. In the international markets, 6% EBITDA margin is going to be hard to get. 4.5% to 5% in the international markets is what we should consider as a normal EBITDA level, number one. Number 2, please bear in mind that as the share of international business in our overall revenues reduces, overall consolidated margin for the business will look better because larger chunk of the revenue and profits are coming from India and not from international markets.

Sure, that I get. And I'm assuming the India business is ideally a 5% to 6-odd percent margin business on a sustainable basis in the longer run?

Correct. So -- I mean, just to summarize for the benefit of everybody also. International business we should take 4.5% to 5% as the stable margin line and for India business you should consider 5.5% to 6% as the stable margin performance.

Next question is from the line of Keval Shah from Banyan Tree Advisors.

So I had one question. What is the status on SIS Ventures because I think we had invested in one startup, so is there any other investment in the pipeline?

Yes, I think -- this is Bharat. SIS Ventures and I think we communicated earlier, the Board has allocated INR 75 crores to make investments into companies that have adjacencies with our business. The one investment which has been already made is in Staqu. Currently, where we are is, we are in the process of evaluating some other companies. There is nothing yet at an advanced stage that has passed on few stages into diligence. We are in some discussions. But there is no particular time frame as such for that INR 75 crores. It really depends on the type of opportunity that we come across. But certainly the intent is to make a few more acquisitions in the course of the coming year. Not acquisitions, I mean investments, sorry.

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

Just one clarification or data point that I needed. This OneSIS initiative of yours, what would be the revenue contribution currently and where do you see it going up to over the next few years?

Out of INR 950 crores a month that we are doing including cash, OneSIS would not be adding even 1% of that to date, but over time I see it to be adding mid-single digits.

Okay. And this is -- are margins on this significantly better than the 5.5% to 6% that you stated?

As of right now, I would like you to assume that the margin range is broadly the same as the India margin range.

[Operator Instructions] Next question is from the line of Alok Deshpande from Edelweiss Securities.

My question was for Devesh. On the tax bit, I think you did mention that the growth continues, then the tax rate might be lower. But do you think that it will be -- I mean given the growth that you're projecting in security, India Security and the Facility Management business, that will be sufficient to knock off or offset the tax from the international business?

So let me just clarify, I'd mentioned that deferred tax asset creation will be at least if not going forward if the growth continues. And as far the offset is concerned, unfortunately we cannot offset the tax liability, so international will have its tax expense. India will have its tax expense. But because of the offsetting nature of the deferred tax assets, it might be close to a 0 rate overall, but we still have to pay the tax in Australia irrespective of what we -- what benefit we get in India.

Sure. So you're saying at the group level, effective tax rate might be closer to 0, is what you're saying for '23?

Yes, it could be.

[Operator Instructions] Next question is from the line of [ Rohan ], a retail investor.

I have 2 questions more. First is, how SIS is trying to get more and more clients -- more and more big clients? And second is, can you guide us on what will be the revenue growth for next 5 years?

So, SIS is -- SIS has one of the largest sales force in the industry. We have more than 350 sales resources, plus we do a lot of digital marketing work. We also have a back-end call center to cultivate leads. Through all these means, we approximately meet more than 2,000 prospective customers each month. That's our bandwidth for reaching out and getting large customers. Our focus is also segmental. We focus on certain segments more. And we are always trying to chase higher ticket size contracts. Our entire sales incentive program is built on higher volume and higher margins, that's how you get maximum benefit of the incentive plan. The entire sales force management is done through a proprietary software called SalesMax. So, that's how we are planning to build the growth organically. As regards to next 5 years what our growth will be, while it's hard for me to forecast very specifically, the general guidance we have given and maintained since we got listed in FY '18 is that SIS aspires to target 20% growth, 20% return on equity and 50% OCF to EBITDA. These are the 3 benchmarks or markers against which we measure our performance.

It seems great numbers.

As there are no further questions, I would now like to hand the conference over to Mr. Rituraj Sinha for closing comments.

Thank you, everyone. I think great set of questions, and I really appreciated it -- appreciate your time today. It has been a pleasure to interact with you. On behalf of Bharat and Devesh, my colleague [ Harsha ], I once again appreciate your continued interest in SIS. As we had indicated in the past, we have kicked off FY '23 with a pretty solid Q1. Our order pipeline for Q2 is strong. In short, growth is back organically. Margins will take 3 to 4 quarters to normalize. I have already indicated that international will normalize around 4.5%, 5%. India will normalize around 5.5%, 6%. Broadly, that's the trajectory we think will head towards. As regard to cash, as we grow rapidly on an organic basis, the free cash generation in the business will contract. So, please prepare for a lower than 50% OCF to EBITDA this year. If the OCF to EBITDA is higher, that means we didn't grow enough. So that's the way I am looking at it and that's my broad guidance. I hope this is helpful. Thank you once again, and I look forward to catching up with you next quarter.

Thank you very much. On behalf of SIS Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.