SIS Limited (SIS) Earnings Call Transcript & Summary

I don't think there is any significant case. There is maybe some 10 businesses that have gone off. There isn't any permanent contracts that have moved out really. Yes, the new contract starts have been delayed. And hopefully, that will correct in Q2.

Okay. One of the previous participants, you had mentioned that problem that occurred in FY '22 and '23 were elevated MCA and the cost which impacted the margin. So what were the elevated costs and are we doing the undertone?

So in FY '22, obviously, the key focus was to bring growth back. And the first thing that happened is that -- we topped up in force and our branch costs because we wanted to push growth. At the same time, a lot of other expenses related to travel, increment backlogs, et cetera, which were subdued during COVID also came back very drastically. All of these things put together bloated the SG&A line. As FY '23 demonstrated growth, some of that higher cost on SG&A side, obviously got justified because the revenue moved up correspondingly. And some places that we have made excesses, we had trimmed down subsequently. So that's why you see the overall percentage margin coming back in the recent quarters.

Got it. And one final question from my end. So if we look at our projections, what tax rate you paid them?

So if you -- this is Devesh. If you want to look at the tax rate, I think we'll take guidance from the full year last year and you that as guidance rate than using a quarter-to-quarter, which gets started a bit due to the impact of ATJ accounting and benefit. It's a typical accounting and benefit competition with take this. If you look at it on a year-to-year basis, I think you'll get a bit of idea of the effective tax rate.

Okay. So around 22% is fair, right?

22% is not the effective tax rate.

Area? This the last year, right?

So if you look -- if you look on a stand-alone basis, on a stand-alone basis, if you look at the table in the earnings note, it's 60. And if you discount the deferred tax impact, it's a 22% increase over the previous quarter and a 44% increase over the period year. But I'm happy to take this to separately and help to figure out how to look at the effective tax rate.

We have the next question from the line of Rahul Yadav an Individual Investor.

First of all, per additional set of numbers. As for the earning release, what we can see is the rapid ramp-up happening in VProtect business, and also probably that involves some CapEx, as mentioned in the CapEx note. I just wanted to understand what kind of margins and retention on that business.

The Protect alarm monitoring business has demonstrated capability to deliver double -- double-digit EBITDA margin. And most of the contracts that they've secured are in double-digit EBITDA margin.

We have the next question from the line of Keval Shah from Banyan Tree Advisor.

Thanks for taking question. My first question is on the facility management margin. First, the margin trajectory, like we have been growing at 20% plus, but if you see the margins, they have been close to more or less flat. So what is causing the delay in reverting to Pre-COVID levels as we saw in the security services in India? But we are not seeing in the FM segment. So like... Any color on what is happening to the FM segments?

I think -- so first thing that you must recognize is that in our line of business, basically revenue is nothing about the basket of contracts, right? So there may be 5,000 contracts in the security basket, for example. And then you have to go clean that up contract for contract, which contracts you need to lose these contracts, you need to operate, which contracts you need to reprice, which contracts you need to -- and then you also need to top up some 100, 200, 500 contracts in that basket of 5,000 contracts as new additional contracts, which are improving the margin profile. This is not a 1 month or a 1 quarter exercise. This becomes an extremely protracted exercise because you are bound by contracts. We cannot go back to customer and exit contracts that will the repricing discussions or solutioning discussions where we replace manpower with more automation or technology. These are also not instant decisions. So actions that are showing results in security, very similar actions are being taken in FM as well. Just as in security, 2 or 3 quarters for the numbers to start showing up. In FM also, it will take a bit of time. But what I wanted to outline clearly is that it is the same set of actions that happened in security that yielded results that are being undertaken an also. It is a long-protracted exercise. And I guess we'll have to be in patients with it.

Okay, thanks. And on the international margin, apart from the discontinuation of COVID contracts, were there any other impact in the current quarter?

No.

The next question is from the line of Bhumi Shah from Kantilal Chhaganlal Securities.

Thank you for the opportunity. Congratulations on good numbers. I just had one question related to the cash logistics segment. It has evolved a lot with the highest quarterly revenue in Q1 FY '24. So could you share more details about the new technology solutions offered to customize and the potential for further expansion in this segment?

Well, our cash business is clearly an outperformer. If you see the last 2 years, including COVID years. The cash business has reported revenue growth of close to 30%. And the margin profile has also changed completely. The cash business now reports 15% ballpark EBITDA margin and close to 7%, 8% PAT margin. This is largely because our business has transitioned from a traditional cash logistics company where a lot of ATM work is done or bank outsourcing services. Yes, you would need to recognize that as a as cash logistics company gets less than 20% of its total revenue from ATM services. 80% of our business comes from other outsourcing services that we do from banks. It could range from dose banking services to bullion movement to cash processing for banks and various other such activities that are outsourced by banks currently. So we are a bank outsourcing business. We used to be a cash outsourcing business maybe 5 years back. But today, we do large part of bank outsourcing work. We are, therefore, seeing a drastic change in our margin profile. And I believe that looking at the order book, I think the cash business has significant upside ahead of it.

Sir, are there any plans and further expansion to this business?

Well, we are constantly evaluating all options ranging from not just organic growth, boosting but also M&A in this space and in fact, also potential unlocking of value for shareholders. So various actions are constantly at hand and being evaluated. We will talk more about it if and when is materialize.

[Operator Instructions] We have the next question from the line of Yashvardhan Bansal, an Individual Investor.

So I just wanted to add a follow-up question to the cash business. Firstly, with that, of course, you have a lot of coming from the dose at banking. I wanted to get an insight as to what is the management's perspective when it comes to UPI services coming into the picture?

Sorry, say that again.

So I actually wanted to insight from the management of the SIS is that how is SIS planning to tackle the problem of UPI versus cash, which is more or less a very hot topic when it comes to cash logistics companies, particularly?

Well, I think you're absolutely right that digital transactions have picked up drastically in the last few years. But I think if you look at a more composite picture, you will see that the currency in circulation in this country is also going up year-on-year. Last year, [indiscernible] currency in circulation went up more than 10%. 13% of GDP is in circulation. And I think despite digital transaction growth, the currency is out there to be managed. Usage of ATMs has declined, it crores for sure. But if you look at government has pumped more than INR 2 lakh crores through direct benefit transfers to the deployed section of our society. Large part of this money is transacted via ATMs and frugal belt and then also increases currency in circulation generally. So I believe that, number one, you need to look at the currency in circulation metric to understand the impact of UPI versus cash. Number two, more importantly, what you need to see is that whatever currency is there in the economy, there may be 50 banks or more if you include NBFC and financial services companies, there would be hundreds. But ultimately, currency managing companies are not even 5. So clearly, there used to be 10-odd companies doing currency handling in the country. We are down to like 5 or less than 5 now. And I believe that what's happening is that the service providers are consolidating. So even if there is a lesser amount of cash in the economy in the future years, there will also be fewer operators to handle and run that, which basically results in 2, 3 things. Number one, more sensible pricing. Number two, greater density and higher productivity on part of operating companies; and number three, greater pricing power in the hands of the service providers because there are only few. So all these things put together, I think the outlook on cash in the immediate future looks pretty stable, rather encouraging.

All right. I just wanted to ask a couple of more questions. So the first question was that you have a fleet of approximately 3,000 banks. I just wanted to make sure as to what is your route network coverage, like what kind of locations you're primarily serving? Secondly, what is your expansion into the country? And my second question was that right now, I think the previous question, you said that you are mainly a banking service provider -- service or to the banking outsourcing needs -- so apart from that, what is SIS aim and agenda in the coming future as to increasing their audience market? So maybe as to whether how are you planning to include, say, NBFCs or insurance companies forming something like that.

So SIS cash services operates across the length and breadth of the country. So from Jammu to Kerala and from Gujarat to Arunachal Pradesh our cash operations operates. I think what we did, which is paying dividends today is the fact that we picked certain niche markets where the larger competitors are not very keen to expand. So for example, we picked up maybe 10 years back, we decided to focus a lot on Northeast because other competitors were focusing more on Delhi, Mumbai, Bangalore, type metros. We picked up Northeast. We picked up the hinterland in UP, Bihar, Jharkhand, Bengal, Odisha, which is relatively -- at that point in time, I talk about 2012, 2013 was not the most attractive market. At the same time, we competed in the metros, focused more a lot. We acquired a company called SBV Cisco in 2014, which is predominantly a South and West India operator in cash segment. So that boosted our presence in South and West markets. So all these blended basically meant that we have, on one hand, a pan-India delivery capability. So any part of the country, we have the capacity to take on contracts. But at the same time, we have certain pockets of substantially higher route density. So while most cash companies are still counting number of ATMs per route or things like that. We started because our ATM exposure is relatively lower, we started doing what we call mixed roots, where of the same route we do a few ATMs, we do [indiscernible] banking, we do other services all blended into a route usage of a lot of technology that we got from Prosegur, our global partner, tremendously helped. And today, our cash business may be the only cash business that is actually accounting route efficiency by stops per route. It's not number of ATMs per group, but it's number of stops per route and the revenue we make per stop. Today, we have the capability to actually derive margin per stock. What is the cost of that stoppage of 20, 30 minutes? And what is the margin that we make on that stop? So the amount of investment in technology and planning your network establishes as high as Prosegur joint venture quite differently. And I think one other important aspect you must read in to your thinking if you are evaluating our cash business. It is that in the competitive landscape today, there is no strategic operator -- strategic long-term operator is not there. There are other businesses that are largely private equity owned or owned by individuals. But SIS Prosegur offers a very stable long-term view on cash logistics and global experience. And I think our customers fully appreciate and recognize that. And that has given us an edge in the bank outsourcing or the new services that we introduced. So sorry for this long answer, but I hope I've given you some color.

Yes, sir, definitely. I just had the second part of the question, which was what is your future outlook for NBFCs including other players or other customers into your portfolio? That will be my final question.

Like I said, for us, right from cooperative banks to the regional rural banks, all of them are in our customer portfolio, and we work with a very diverse set of customers. And I think there is a tremendous set of opportunities, not just with the large banks, but also with the smaller banking operations. In fact, there are some microfinance companies that we have started working with now. There is opportunities on the CSP side, customer service point side of things, which are actually banking correspondent CSP side. So there is a whole lot and maybe at some point in time in the future when we are discussing just cash, I can give you far more tests. But I would encourage you to have a look at -- we did SIS confluence a few months back where we got our business heads to talk about each individual segment. So there would be on the as website, a recording of the discussion in cash. If you look at that, that would address a lot of your queries.

[Operator Instructions] The next question is from the line of Grant Ketan from KC Securities.

I wanted to ask, so the cash files segment of our business has grown like similar to the security solution seen. So is the cash addition segment or to grow far past the quality solution teeing would you use more and focus more towards the castrate segment?

Well, I don't think in SIS Group, we look at the segments one versus the other. If you look at the 10-year history or at least a 5-, 6-year listed history of SIS -- all our 4 segments, whether it is security in India or security internationally, facility management or cash. All these segments have more than doubled in the last 5 years since unlisting profit has grown more than twice. So it's not an either/or scenario. Having said that, cash has great prospects, as I was just explaining, so does security, so does SM. And I think we are looking to build all these businesses. When you look at SIS, you must look at it as a platform because today, there is a lot of peer set which are pure-play in FM or pure play in only -- only in cash logistics, either they don't do all services or they don't have a meaningful market position in all. Look at SIS as a platform, our endeavor in the last 20 years has been to create a platform. And today, we are proud that we are not just the largest security company in India by revenue. We are also the largest facility management company in India by revenue, and we are the second largest gas logistics company in India by revenue. We don't intend to focus on one segment at the cost of the others. These are all independent businesses, the separate CEOs and CXOs who are running these companies, you must look at SIS as a platform.

[Operator Instructions] I would now like to hand the conference over to Mr. Rituraj Sinha for closing comments. Over to you, sir.

Thank you once again, everyone, for joining this call. It's always a pleasure to talk to you. And I have enjoyed a very diverse set of questions that came through today. I hope we have answered satisfactorily and giving you some insights. Having said that, as I conclude, I would like to say that the first quarter of FY '24 has signaled a solid start for SIS -- not just on the security side, where there has been reasonable growth and substantial margin improvement. Even on the FM side, there has been growth. Cash side, there has been growth. And I believe that the concerns around margins of facility management, particularly and the international business are well acknowledged. And I believe that there is actions underway, and they will be hopefully a substantial uptick in the coming quarters. Like I have said, our desire and endeavor is to go back to pre-COVID level of margins for all businesses. And I see no reason why we should not be able to get there, along with substantial growth and market share uptick in the post-COVID world. So thank you once again for your time. I wish you all the best and hope to see you sometime soon.

Thank you, sir. Thank you, members of the management. Ladies and gentlemen, on behalf of SIS Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.