SIS Limited (SIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SIS Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vineet Toshniwal, President, M&A and Investor Relations from SIS Limited. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to Q1 FY '25 Earnings Call. I hope you had a chance to look at our results, which were uploaded yesterday on the stock exchange and company website, too. Now I'm very happy to report that on a consolidated basis, revenue for SIS Group increased by 5.1% year-on-year basis to INR 3,130 crores. While EBITDA took a small hit of 1.2%, again, on a Y-o-Y basis to INR 137 crores. This is largely due to issues with our SXP business in Australia. Now as a group, we continue to retain our focus on margin improvement. We have focused on margins, both in terms of cleaning up customer contracts as well as rationalizing SG&A costs. The International Security business was impacted in this quarter, largely due to leadership changes and loss of some profitable contracts in the SXP business, which is Australia, and the absence of one-off contractual work at P4G and low unemployment in Australia, which results in labor shortage in Q1 FY '25. We would like to highlight that traditionally April to June quarter, business in Australia and New Zealand is muted compared to Jan to March quarter, which will represents Christmas, New Year, festive seasons and major sporting events. Coming to Singapore business, Henderson continues to remain profitable through a combination of cost rationalization, shedding unprofitable contracts and new business growth. As a result, the top line of International Security business grew 2.7% Y-o-Y, while EBITDA took a hit and down by 14% Y-o-Y basis due to reasons which we explained above. Now let's come to the India business, which reported the highest ever revenue of INR 1,868 crores in this quarter, translating to 6.8% Y-o-Y growth and an EBITDA of INR 94 crores, growing 6.2% Y-o-Y and maintaining a stable margin of 5%. India Security reported a revenue of INR 1,338 crores in this quarter, an 8.8% growth on a year-on-year basis and an EBITDA margin of 5.4% stand-alone. Facility Management reported a revenue of INR 530 crores, 2.2% growth on a Y-o-Y basis and EBITDA margin of 4.2%, which is actually 30 basis points higher than the last quarter. We continue focus on margin improvement initiatives in the FM segment by reading out low profitable contracts. The demand for integrated Facility Management solutions continues to remain strong in India. Now turning coming to our bank outsourcing solutions business. We're very happy to report that the business has achieved its highest ever quarterly revenue of INR 171 crores, which translates to an impressive growth of 12% on a Y-o-Y basis. The cash business expanded its EBITDA by 140 basis points, recording 17% EBITDA margins, and a PAT of INR 14 crores translating to 32% Y-o-Y growth and a PAT margin of 8.1% in this quarter. So overall, the cash business momentum is on track and efforts to unlock value are underway. We are very happy. Now let's talk about the budget, which was yesterday, we're very happy to report that the key provisions related to benefits for professionals entering for the first time in the job market, clear support being given by government to the employers are very positive initiatives, and they are going to have a positive impact on us in the near future. So with this, I conclude my initial commentary, and I hand it over to you guys for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Balaji from IIFL.

I had a couple of questions. So first is on the International Security business. You did mention in your quarterly report that labor shortages in Australia may continue in the medium term. And in light of that, how do you see the margins panning out for the rest of the year? I mean, you have also mentioned that there has been a 3% increase in the minimum wages in Australia and those would be passed down as and when the contracts come up for renewals. So when should one expect the margins to normalize going forward? That is question number one. The second question will be on the India FM piece. So there, one can see that your revenue growth is now a little over 2% Y-o-Y. While I appreciate the sequential EBITDA margin expansion despite shedding unprofitable contracts, margins, [Indiscernible] shrunk by 20 basis points on a Y-o-Y basis. Well, I do understand that some operating leverage benefits are yet to come through. When should one expect the margins here to normalize?

This is Rituraj. So on the first question, International Security, I say that the labor shortage situation compounded by the fact that there will be a significant wage increase of 3%, I think has presented a complex situation before us. And I would say that this is the last management catch-up that I did a few days back, it would take 1 to 2 quarters to [Indiscernible] which means to pass through the higher wage cost as and when they come up for renewal, and also for addressing the labor shortage issue with an aggressive recruitment program that we are undertaking at the moment. So yes, I think there is going to be 2 quarters of turbulence on the International Security, particularly in Australia. On the India FM margins, I'd just say that India FM reported 3.9% EBITDA margin -- 4.2%. The previous quarter was 3.9%. And this quarter is 4.2%. So sequentially, the margin is up. And our actions are underway, as we've said in the past. We are getting out of most of the contracts where we were losing money. There is a bunch of railway contracts, which we are trying to exit. But obviously, being a government tender, there are limitations, and there is only limited flexibility for vendors to step out. So I think that said this is ongoing, but I think the FM margins are going to be pretty much on track and they will be moving towards the 5% mark in the coming quarters.

The next question is from the line of Riya Mehta from Aequitas INV.

Thank you for the opportunity and congratulations on good numbers in India business. My first question pertains to the number of employees added in Security business in India, it is around 2,153. So just I wanted to understand that despite the incremental employees, our revenue has not grown in the similar extent. So what would be the reason for that?

Sorry, I'm not sure where you're picking up your data from. Would you say that again, please?

Yes. So I think what I'm trying to understand is last quarter, we have seen almost decrease in the number of employees. However, this quarter, we are back to around addition of 2,000 employees per quarter, which was -- when do we see ourselves reaching that 5,000, 6,000 mark again? And also the number of branches have reduced significantly. So is this a phenomena we are looking ahead?

No. So look, we track our revenues by branch and not by head count. So I'm sorry, I don't have the numbers [Indiscernible] to tell you in terms of the headcount. But what I can say is that if you look at our branch count, on 1st March '24, we had 152 branches in [FM Security], which as of June is 156. So we've added 4 branches. Branches in other businesses like SLV, Uniq [Indiscernible] remain the same. So security operations we run 180 branches today.

I think last Q4, it was 184 and this quarter, it is 177 as per the presentation.

Where are you picking that data from? I'm not sure. So if there is a typo error, I'm just looking at the...

Q1 FY '25 result updated in the Security Solution India business.

Right. So I think there is a typo. I think coming back to the question, we have not closed any branches. That's the first fact. The second fact is that -- the second fact is that as far as the manpower head count is concerned, we had very modest growth in the India Security manpower this time. And we believe that the exact reason for this under revenue linkage to manpower to billing, I'll have to check the accrued revenue count for you and come back to you.

Okay. No worries. And in terms of the explanation given that we have an annual June revision. So I just wanted to understand the mechanism, how it is passed on and what were conference charges which were there?

So the annual conference charges are close to INR 5 crore, which we incur once a year. So it's a big impact on a single quarter. As regards to the other point you said was...

Wage revision.

The wage revision is basically is our review system for the non-billing staff.

And we were talking about incremental increase in wages for the workers, which will in turn become pass-through. So when do we expect that kind of wage hike coming in?

Wage hike by the central government or state government?

Yes.

Well, that's impossible for me to forecast. I think what we have seen in the recent budget is that the government seems to be referring more jobs versus higher paying jobs or better paid jobs. So there's a push for creating more jobs and incentivizing that. I'm not sure what that does for labor reforms and also to wage, minimum wage increments that generally are passed through. While some of the states in the [Indiscernible] have passed it through. The central government hasn't really come up with anything material.

Got it. And in terms of -- just like Australia, if there is a wage hike in India, we will take 1 or 2 quarters to pass it on?

No. I think there's a big difference. The Australian contracts are such that -- so there is a defined date in the contract when the pass-throughs can happen. With regards to India, the mechanism is straightforward from the date that the pay hike is effective, the minimum wage hike is effective. Even if it is retrospective, we instantly pass through. There is no negotiation. There is no timeline. There is no waiting for a time table.

Got it. And in terms of the Singapore business, how is it doing?

Singapore business, like I said, is back on feet, the business is now clocking close to $40 million in annualized revenue. It's winning new contracts, and I think it is on the angle of earning profitable, reasonably profitable. It seems according to plan.

So we are not anticipating any further write-off in this business, right?

Write-off is a function of the price paid and not really the current performance of business. Write-off happened and let me explain that again. The write-off happened because in 2019, we entered into a transaction where we bought 55%, 60% of our business. And we hope to build that business into a $120 million business and then buy out the remaining shares. So the auditors got us to work out what we would have to pay at the end of the 4, 5 years when the business is worth $120 million as prices for the remaining 40% acquisition. Obviously, that was far inflated from what really happened, which is COVID and then subsequent. So there is a gap between the initial goodwill charge that was taken in 2019 and the current performance of the business as it stands today. And that is what the impairment was done for.

Got it. Got it. And in terms of further strategy in terms of VProtect business?

Well, like I said, VProtect business is tracking very well. It has a good pipeline of contracts. It's run rating close to INR 10 crore for monthly billing, monthly invoices INR 10 crores, close to 20% EBITDA margin. So it's a very small business in our -- SIS Group, we invoiced roughly close to INR 1,100 crores per month. So in that scheme of things, it's a very small business, but it's a business of the future.

Got it. And where are we in terms of timeline for demerging a cash management business?

Well, the DAM Capital has just been appointed to run the process and documentation is more or less ready. Hopefully, in the next quarter, we'll have good clarity around that.

Okay. Got it. And any further acquisitions are we looking at?

Well, I think at this point in time, there is nothing on the acquisition front that I can disclose to you.

The next question is from the line of Gunit Singh from Counter Cyclical PMS.

Sir, are revenues -- our revenues in FY '20 have gone up from about INR 8,500 crores to about INR 12,000 crores currently. But our EBITDA has remained flat from INR 516 crores in FY '20 towards INR 519 crores right now. What's even worse is that conversion to PAT has even worsened. The PAT [Indiscernible] INR 225 crores versus INR 190 crores right now. And so year-on-year, we see that the depreciation is going up from [INR 135 crores to INR 166 crores]. The interest payments have also gone up from INR 115 crores to about INR 150 crores. But I mean, all this is not translating to a significant rise in the runways or profitability and it's only worsening in the profitability. So sir, I just wanted to understand why is this happening? I mean -- and why is it not translating into better profitability? And by when do we expect to move out of this lower translation, I mean, low margin project trajectory?

I don't know whether you've been following us for the last few years, several quarters. We've given a flavor of how the Facility Management business is moving, how the International business is moving, what challenges we're facing over there, how the tax [Indiscernible] works, the investments we are making in the VProtect business, which is actually driving the depreciation in interest. And compared to 2020, the interest rates are much higher today than it was. We see more signs of going down. So we -- actually, every quarter, we've been giving a flavor of what's going on. So it's very difficult for me suddenly to give you a snapshot of what happened between 2020 and 2024. On this kind of a call. So if you have a specific question, I'm happy to take that. But to take you through a journey of 4 years in this short call is going to be very difficult.

So just a brief -- I mean, in 2020, interest payments were even higher than today, but profitability -- but anyway. So to put the question brief, I want to understand, I mean, how -- what kind of margin improvement or steady set margins do we expect going forward? And by when do we expect to, I mean, move out of this EBITDA range of INR 520 CR according to you? What steps the company taking? And when will the -- I mean, the investments that you have been making and further initiatives taken by the company, when will they fructify into actual profitability growth for the company? So this is the main question.

Okay. Let me take 3 questions in a different order. So I think last year, we broke out of the 520 EBITDA scenario. EBITDA was close to 600 last year. So that's one thing. I think we've broken out of that for good. So I agree, for 3 years, it was flat in the 500-520 range. On profit improvement, just a few minutes back, Rituraj recounted the challenges which we are having in the International business on the labor front, on certain challenges we're facing in the Southern Cross Protection business. So as I said, it's going to take 2, 3 quarters for us to break out of that. On FM also, we just mentioned that we hope to reach the 5% range by the -- by the end of the year in around 2 quarters. So there are several actions underway. And I think in Q3 or so, we should have -- you should start seeing breaking out of this particular range. And as far as the VProtect investments are concerned, yes, these are non- distinction businesses, they require investment. But returns are in high double-digit range, which is much better than the rest of the business. And today, we are [Indiscernible] installations and rapidly growing there. So the investment over there is required for us to gain the business and install the customer [Indiscernible], and that's the return we get over a period of time.

All right, sir. Sir, by when does the company expect I mean to reach historical margins of about 6%?

Well, like I said, we are committed to the 6% margin range that we have demonstrated in the past. But unfortunately, it's taking more time than we had initially envisaged. If you see the security business, it's far closer to the 6% performance range that we had maintained pre-COVID. FM business has just broken up from the 4% barrier, and I think it should trade well, again, towards its pre-COVID normal. As far as the international business is concerned, pre-COVID international business was operating between 4%, 4.5%. It is broadly -- has been in that broad range for the last few quarters. And I think it will remain there. As far as the cash business is concerned, it is roughly operating at 18% EBITDA margin.

Next question is from the line of Chirag Fialoke RatnaTraya Capital.

This is Sanjana, I'm his colleague. So I have 3 questions. One is on the International business. You mentioned 3 factors which had led to a lower margin in this quarter. So one is the loss on -- loss of some profitable contracts in Australia and some leadership changes and then some job work, which was there in the last quarter. So would it be possible to quantify these 3 factors for us? Like if you can give some sense what impact did it have on the margins?

I think I don't have it handy immediately to give you the micro details, but we try to cite a general blend of reasons why we are facing the situation we are facing. What I say, if you were to see what is the mother of all issues. It's actually the short staffing because of the labor market situation in Australia. Everything else is momentary. This is a continued trend, which over the past many quarters has been affecting us.

Understood. And on a steady-state basis, at least for this year for the International business, what do we foresee in terms of margins?

I think you should work with the 4%, 4.5% range. That's the reason which International business is being performing generally. And I think broadly that's where I see it.

Understood. Second question is on the India security business. So we define the market price to be of about INR 150,000 crores if I'm right. And we also mentioned that we are not particularly targeting the stand-alone building security services. So ex of that, what could be the size of the market and what is that market growing at?

Well, it's very hard for me to answer that question for you because there is no third-party independent reliable source which I can quote here. So it's basically guess work. The way we see it is that the security industry in India is today roughly 40% organized, this is what the industry estimates are. And in that 40%, we basically count fully compliant operators who are basically paying all social security and most of the large corporates, most of the listed corporates to work with these compliant companies itself. We have also seen in the past, I think these are just generic rule of thumb. In the last 20 years that I have been in this industry, I have always seen this industry to be growing at 1.5 to 2x GDP development in India. So these are the 2 rules of thumb we use in this industry, there isn't any data source that I find reliable enough to comment on the addressable market itself.

Understood. Understood. Just one last bookkeeping question. Our depreciation sequentially has come down. So what was the reason because -- like what was the reason for that? If you can highlight. I'm comparing ex of the impairment, which is there in the last quarter. So 48% was the number last quarter, I think, 48%, 49%. This quarter is 42%, marginal reduction. But if you can help us...

Okay. So generally, we have a policy of doing depreciation on a [Indiscernible] basis, not a straight line basis. So this could be the effect of that.

The next question is from the line of Shiv who is an individual investor.

Good afternoon, everyone. So my question is around -- can you give some kind of a quantification around how many -- I'm would not say bad contracts or I will say, contracts which are not optimum, which have not been converted into -- or they are pending, like as you said, railway is one. As you said, I don't know -- are there any like top 3 contracts, the bigger ones, which we intend to close and -- close or convert them into good contracts and which kind of quantification we can have. Can we have some kind of a percentage? Because I think the sort of what I see is that SIS is trying to convert these so-called as bad contracts into at least good contract percentage, right? And that's what I see one of the major things in SIS. So is there any kind of quantification you can get in terms of percentage or numbers?

Well, I think contract level commentary is very hard for me to provide. What I can tell you is that we do something called the ABCD analysis of our contract portfolio. A category contracts, B, category contracts, C and D category contracts, which are emerging, either loss-making or they are back paymasters or operationally and viable to execute, et cetera, et cetera. So this is an ongoing process. At no point in time, D category contracts constitute more than 10%, 12% of the entire portfolio. But even 10%, 12% of the entire portfolio not doing well is actually a big drag in a business like ours. I told you, like, for example, railways, 3 years back or pre-COVID, it was one of the biggest segments we were actually going [indiscernible]. They were spending a hell lot of money on their cleaning efforts. They were trying to -- the big mantras clean railways, better railways. And then suddenly during COVID, when the railways stopped to operate, railways incurred huge losses in that period. They have simply flipped back, changed contracts unilaterally, changed payment and bill approval systems in a way that we -- what seems to be paradise pre-COVID became complete nightmare. These are 3 or 4-year contracts. These are not contracts you can step out of. These are a lot of contracts that we bid pre-COVID, but were awarded post. So that's why I called railways out. Now in business, as in life, things like this happen. I'm not saying that railways overall is a bucket of bad contracts, for example, of [Indiscernible]. There are some contracts which are sticky and not delivering for us. We have moved out from a large number of these contracts in Security. That's why even if the slow -- growth has been slow, the margin has gone from 4% a few quarters back to 5.5% range. Similarly, in Facility Management, we were at 3.9% last quarter, we are at 4.2%, and had it not been for the pay reviews that happened in June, this would have been a tad higher. So I think we are doing what it takes to fix it. It's taking longer than most would like, and I completely understand that, but there are no shortcuts. We can only get out of contracts when we can get out of contracts without getting blacklisted forever or without losing [Indiscernible] with a particular client or in the industry for long term.