SIS Limited (SIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to SIS Limited Q2 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 very much. Good afternoon, everyone, and I welcome you to the Q2 FY '25 earnings call. Yesterday was our results. I hope you've all taken a look at our results and the earnings note which was released to the stock exchanges thereafter. So let me just summarize a few salient points out of our earnings call -- out of our earnings note. First, let me talk about growth. We are very happy to report that we have witnessed growth across all 3 segments of our business. On a consol basis, revenue for SIS Group increased by 6.4% on a year-on-year basis to INR 3,269 crores. India Security reported again a 6.3% year-on-year growth to INR 1,384 crores for this particular quarter. FM reported 4.8% year-on-year growth, which resulted in the highest-ever quarterly revenue of INR 553 crores for the FM segment. International Security reported even higher growth, 7% on a year-on-year basis, resulting in highest-ever quarterly run rate of INR 1,347 crores for Q2. Now coming to the margins. It's been our constant endeavor to improve the margin profile across all business segments. Our focus on margin improvement initiatives is resulting in gradual improvement. We have focused on margins, both in terms of cleaning up customer contracts as well as focusing on rationalizing the SG&A costs. So on a consol basis, the EBITDA was stable with a very marginal increase of 0.2% to INR 137 crores. India Security reported an EBITDA of 5.5%. Facility Management reported an EBITDA of 4.3%, which is a 30 basis points higher on a year-on-year basis. Additionally, the segment reported its highest-ever quarterly EBITDA of INR 23.8 crores, which is a 13.6% year-on-year growth. For the International Security business, the EBITDA for Q2 FY '25 was 3.3% compared to 3.4% in Q1 FY '25. EBITDA for Q2 FY '25 was INR 44 crores -- INR 44.4 crores, a 2.6% Q-o-Q growth. EBITDA was marginally impacted because of 3.75% minimum grade revision by Fair Works, Australia, which has gone effective 1st of July. So generally, all price increases are implemented by Q3 with the full quarter effect which will be visible in the quarter 4 onwards. Now coming to the operational efficiency of the business, which is the net debt and the DSO. Overall, we're very happy to report that net debt is down by INR 166 crores. Now net debt is INR 857 crores, which used to be INR 1,223 crores the last quarter. This brings the net debt-to-EBITDA ratio down to 1.47%, which was 1.76% in the last quarter. OCF to EBITDA has also increased consequently, which is 166%. We've been focused on better collections, as you know, so which has resulted in DSOs improving by 4 days. Earlier quarter, it was 74 days. Now we are down to 70 days, which results in better working capital management. Now let me come to the Cash Logistics bank outsourcing business. We're very happy to report that the business achieved highest-ever quarterly revenue of INR 177 crores, which translates to a growth of 13% on a year-on-year basis. The cash business expanded its EBITDA by 20.6%, recording 17.2% EBITDA margins. PAT was INR 12 crores. It's down year-on-year due to a loss of benefit associated with carryforward losses available in quarter 2 2024. Quarter 2 FY '25 PAT was also impacted by lower 80JJAA benefit. So overall, cash business momentum is on track with our noncore ATM business, which contributes now 83% of our top line, which earlier last year was 80%, thereby reducing -- further reducing our dependence on the ATMs. As you know, we have no managed services business. So our effort -- and our efforts to unlock shareholders' value in this business are underway. With this, I would like to take this opportunity to wish you all a very healthy and happy prosperous Dhanteras and Diwali in advance. I wish you all of you best health. Now on this call today, we have Rituraj Sinha as the Group Managing Director; Mr. Brajesh Kumar, who's the Chief Financial Officer of SIS India; Mr. R. S. Murli Krishna, who's President of SIS International. Let me turn over this call for further Q&A from all of you. Thank you very much.

[Operator Instructions] The first question is from the line of [ Gopinath Reddy from PNR Investments ].

Sir, this is regarding the Australia business. My question is, if -- after these 3 quarters that we are going to have this problem of margin compression, would we be comfortably able to retain all our existing customers and improve our margins? Or do you think that we may have to lose some customers? How will it go?

Well, thank you for the question. This is Rituraj. I think if you have been tracking this business for the last 8 years since listing, you will recognize that every year in July month, Fair Work Australia, which is the government body declares the annual wage hike. And immediately, we have to pass through the hiking wages. Subsequently, we go back to the customers for pro rata increase in our pricing. This takes anywhere between 3 to 6 months. And mostly by the month of December, all the price changes come through, which is the end of Q3. So this is not an unusual event. This is a routine practice. This has no bearing on long-term profitability or margin profile or continuity of clients. Long story short, we do not expect to lose any customers as a result of this wage increase. And you can expect better margins in Q3 towards the end and definitely Q4.

Okay. The second question is regarding Indian situation, sir. Is there any slowdown that you are noticing in any areas where we are into? Or how is it going? Can you just give color on it?

So, I think we are very happy with the growth in second quarter in India. If you look at our monthly revenues or monthly billing, in just the security solutions part of India, compared to April to June period in Q2, 3.5% increase. In Facility Management also compared to previous quarter, 4.3% increase in monthly revenue. So I think we are looking at a mid-double-digit type organic growth from the Indian businesses basis this current trajectory.

[Operator Instructions] The next question is from the line of Gopinath Reddy from PNR Investments.

Sir, my last question. What is your guidance towards the ROE that we are expecting in the next couple of years or maybe after this Australia issue is gone, where will it normalize, at what levels?

So it's actually a very relevant question, and thank you for asking. The return profile of this business model is generally very attractive. Pre-COVID, we were maintaining a 20% EBITDA -- sorry, return ratio. It has gone down to 11% range -- 11%, 12% range now, largely because of capital employed in business going up on 2 counts: number one, goodwill charges; and number two, the higher working capital involved in the business in the last few years. However, this year, we are working on a plan to not only free up working capital to reduce overall capital employed in the business, but also take action on the goodwill charges as you have seen in the past. When we do creeping acquisitions, our goodwill charge is accounted for basis the maximum price that we may need to pay for an acquisition. However, in most of these cases, what has happened is that we have ended up paying significantly lesser than what we initially envisaged to be paid for Henderson, for even SLV and Uniq in India. So net summary, we believe that we will be looking to reduce our capital employed, and our return on equity and return on capital employed will move ahead of 15%, hopefully, at the end of this financial year. Our objective will be to take it back to the pre-COVID level of 20% over the next 2 financial years.

Okay, sir. Sir, when our company being the most -- one of the most efficient companies in this sector and being a market leader when we are having such low returns, the other smaller companies must be in stress kind of a situation. Are there any opportunities that we are actively looking at acquiring right now?

Not in the immediate month or so. I think M&A is a part of our growth strategy. If you look at SIS's performance over the last 8 years of listing, you will see that we have always been very organic growth-oriented company. M&A is limited. And even when it happens, it may be contributing 10% of the overall growth. So we do not buy for growth. We buy for any strategic reason. And at this point in time, I don't have any M&A on the table that I would want to discuss, nothing has reached that advanced stage. So for now, I think we are very focused on the basics. Organic revenue growth, which is happening in Security, Facility Management and International. Margin improvement. India Security margin has improved in Q2. FM margin has improved slightly in Q2. International margin is same as Q1, but it will improve in the coming quarter and better collections, reducing DSO. So you will see that overall, almost 4 to 5 days of DSO has been reduced and INR 165 crores, INR 170 crores of debt has been reduced overall. So on growth or profit margin or working capital, on all these 3 parameters, we are focusing and delivering good results, and that will continue to be our focus in the second half of the year.

Okay. Can you talk about the Singapore acquisition that we have done, sir? How is it going? Any comments on it?

Singapore acquisition is performing better than ever before. The business is growing. The annualized revenue is moving from $30 million a year range to close to $50 million a year range over the last one year. Profitability also is stable now. It's a breakeven business. In terms of cash in the bank, it has more than $20 million of cash reserves in the bank, so it is self-sufficient. But mind you, a $30 million or a $50 million business on a USD 1.5 billion business is not going to move the needle either way. So it's a very small part of our ecosystem, and I just wanted you to be mindful of that.

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

I think there's 1 or 2 more questions. Let's take them on. And I know it's Dhanteras day and there are 50 more analyst calls happening on the same day, so I can understand both pressures. But let's take the questions that are in queue and then I will do a few closing comments, and we'll wrap this up.

The next question is from the line of Yash Darak from RSPN Ventures.

Can you hear me?

Yes, loud and clear. Go ahead.

Yes. So as far as FM business is concerned, do we get the 80JJAA benefits on the FM business as well?

Yes, absolutely. We get 80JJAA benefits on all Indian SBUs.

Understood. Understood. And secondly, if you could guide on to the FY '25 estimated revenue on FY '24 revenue, any growth trajectory if you could guide on?

I think SIS has never done guidance. We don't do that as a matter of policy. But I'll tell you what, if you look at the earnings note, since our listing, we do a revenue CAGR report and EBITDA CAGR report. So since our listing in Q2 of FY '18, we have maintained a 15.8% revenue CAGR and EBITDA growth CAGR of the last 8 years, quarter-on-quarter is 15%. And even this year, it seems that we are moving towards a similar line. So I think the predictability of the SIS business model is tested, and you have records of the last 30-odd quarters to take reliance on.

Okay, sir. The last question with regards to effective tax rate, if you could guide on the full year effective tax rate including all the businesses.

So the effective tax rate for Indian business is 0.

And for International businesses including Australia, Singapore, New Zealand?

So the effective tax rate for Australia is the Aussie tax rate.

Sorry?

There is no -- 30%, that's the Australian tax rate. There is no equivalent of a 80JJAA provision in Australian taxation. So Australian business pays taxes at 30%. Indian business, which is now 60%, 65% of profits and revenues, pays 0 effective tax.

The next question is from the line of [ Amit Kumar from Determined Investments ].

My first question relates to industry growth. So relative to specifically the India Security growth of 6% and the Facility Management growth that it is. I mean, how is the industry growth sort of shaping up? Because this seems to be significantly below. I mean, if you look at nominal GDP itself, right, and we have -- as an industry, we have a lot of unorganized to organized shift opportunity available. So I presume that is also sort of playing out in the background. But the nominal GDP growth of 7% plus 5%, just about 11-odd, 12-odd percent. So relative to that 6%, 7% kind of India growth seems fairly muted. And if this is an industry sort of issue, can you just highlight, I mean any sort of specific pressure points that the industry is going through presently?

I think, firstly, I'd like to correct you. I'm not sure how you got your 6% annualized growth number from. What are you referring?

For the quarter, the India Security has grown by 6%, right? 6.4% -- 6.3%, sorry.