SIS Limited (SIS) Earnings Call Transcript & Summary

The next question is from the line of Aditya from Share India Securities.

Great set of numbers across the board. I had a couple of questions. One was regard to the international business. So we've done exceptionally well this quarter in terms of revenue growth. Structurally, can you just guide me into how things will pan out in the next 2 or 3 quarters in terms of strategically. How do we take EBITDA margins from the current level to, say, 100 or 150 basis points higher, what our long-term target is?

This is Murali here. I will answer that question. The last quarter and the quarter before that is the quarter that just ended and the quarter before, we have had some phenomenal wins, which we have reported in our reports as well. There was one win, a customer called Sydney Trains, which is upwards of $30 million, which is a sizable win for us. And we have also expanded our presence in defense segment, which will start kicking in not immediately but maybe a few quarters down the line. So revenue-wise, I think we are fairly well positioned. We have done a lot of groundwork with respect to our business developments and reorganizing our approach to the customers and whatnot. So that is -- which we have done in the last 2 to 3 years, that is starting to pay results, pay dividends right now, and we are seeing them coming every quarter on. So we are positioned very, very well with respect to the revenues. As Rituraj put up a little while ago, our international business, even pre-COVID levels, the margins were about 4.5%. And that's the more realistic number that one should consider as a target that should be accomplished. Now we have -- currently, we are somewhere close to 4% and the change of between here and there is largely due to the labor market conditions, very, very tight labor market conditions that we see in Australia and New Zealand as well and in Singapore, all 3 markets together. So the labor market started to tighten post COVID. We've been reporting that every quarter. And that -- the unemployment rate continues to remain at record low levels, sub 3.5%, and that's what is affecting us at this point in time. So we have expanded our efforts, focused efforts on recruitment and retention and so on. So while we are working towards getting there, again, there is that bit of market thing as well, which we need to look out for. As and when the market eases, we will surely kind of see the way of moving back up that number.

Right, right. And just on the international front, how are we doing in Singapore? How is the Henderson business going? If you could substantiate with some numbers?

Right. If you look at the history of Henderson since COVID, the COVID had severely affected the business. Our immediate attention was to kind of get it to a self-sustainable level, which is -- which I think I'm very confident to say that we have achieved those levels at this point in time. So we are self-sustainable. And from here, there will be a new phase of taking the business to its rightful place, which was pre-COVID, the way it was pre-COVID. But again, in Singapore, there are structural shifts that are happening to the labor market. You could look for what is called as a progressive wage model, which -- where it is the concept of a minimum wage here in India, which is fairly similar but slightly different. The Singapore government publishes those rates fairly in advance. And that there are some structural shifts in those. So we have to maneuver those, and we also have to look at how the competition maneuvers those and so on and so forth. So there is a bit of work to do, to be able to grow from here to its rightful position, but I can confidently say that we have come to a position where we are self-sustainable.

And lastly, I wanted to get some sense on the new tech business, the VProtect business and the likes of that. So there are two schools of thought. One is that eventually, when VProtect and the likes of those tech business grow and they become a sizable scale, obviously, VProtect is very small currently, but over a period of, say, 3 to 5 years, it grows higher. Could that be a cannibalization on your existing business? Or is it more of complement rather than a substitute? Because there are two schools of thought that if your VProtect or the likes of that comes in, obviously, your manpower goes down. So how do we look at it from a strategic perspective, say, 5 years later -- 3 to 5 years later?

Well, that's a great question. And I think at SIS, we don't see technology as a threat. We see technology as an accelerator. So we are doing 2 things. One, convert our services into solutions using tech. So greater use of cameras, greater use of apps, greater use of AI, video analytics, all of that is happening at one stage. The second area, this is what you termed as complementary, moving from service to solutions where you're using technology in a complementary fashion. The second situation is where the manpower is being replaced by tech. You called it cannibalizing. I see it as a part of industry evolution. So there is a lot of services that we offer like VProtect, where we are effectively cannibalizing the static guard or evolving the customer demand as we see it. For example, there was a time, if I take you back 15, 20 years, every telecom tower used to have guards below it. Today, there are none. It's completely done by electronic gadgets. Every ATM in the country had guards. Today, a large number of ATMs don't have guards. So this is market evolution. I believe that security manpower will stay where security is critical to the business operation. In a sugarcane factory, where you have to get buggies to line up for 3 kilometers in the peak winter for crushing season, electronics cannot do that for you. You'll need manpower, in front of a cement kiln, in a large industry, steel output, mine, definitely. But I'm a firm believer that there is no reason why there should be a guard standing outside a restaurant to open the door and close the door. That is not critical to the operation of a restaurant and such use of manpower is and should get eliminated. So if you can do that using tech, if you can -- instead of the guard sleeping outside the bank branch or the ATM at night, if you can remove the guard and use VProtect to solve that problem or when the restaurant closes down in the evening when nobody is supposed to enter or exit, if you can do that with VProtect, why do you put guards in the first place. So we don't see that as cannibalizing. We see that as evolving with the market. And as a market leader, it's our job to help the customer achieve its goals in the lowest cost fashion and the most effective fashion. So you may see it as cannibalizing. We see it as evolution. And if somebody is going to cannibalize the guard, it better be the market leader itself, which is SIS in this case.

[Operator Instructions] Our next question is from the line of Kaustav Bubna from BMSPL Capital.

So I have two questions. The first question is, could you give me some data points to explain the market opportunity in the international markets that SIS is operating in for security solutions?

Kaustav, you have Murali Krishna here. Sorry, could you repeat that question?

I wanted some data points to explain the market opportunity, the total addressable market and the upcoming market opportunity for the next few years in the international markets that SIS is operating in for security solutions.

Rituraj, would you like to take that?

Yes, I think you need to get a macro view of the security industry globally. But I think it's a very good question because people don't want to understand the business at that level generally. So security globally is a $200 billion plus industry. Out of this $200 billion plus industry, 60% continues to be manpower-centric services. All electronics, all tech included, 60% is still manpower-centric. If you look at this 60%, the manpower-centric business, you will see that the 10 largest players in the world, barring 3, 7 of them don't have any significant presence in Asia Pac region. That is so because roughly 65% of the global industry is still in terms of revenue comes from Americas and Western Europe. So 7 of the top 10 players focus on those markets. Asia Pac, which was 20 years back the smallest part of the global security market is now the fastest growing and will become the second largest market for security business globally. At SIS, we believe that India is going to be the big growth engine of that market because of the size of the economy itself. If India is to become a $5 trillion, $7 trillion, $8 trillion economy, the security industry in India also will become a very large and significant market. India also has an advantage in this region, historically, business-wise, export or manpower wise, various ways. So we have, therefore, looked at building an international business that is focused on Asia Pacific region. We operate three markets: Australia, which is the second largest market in Asia Pac. New Zealand, which is an adjacent market. It's like an extension of Australia, and it made no sense to operate Australia and avoid New Zealand. Other than that, Singapore is a strategic market because we wanted even as it's not very large in revenue size or quantum of opportunity, it is the hub for regional contracts, regional tenders. When Amazon does a regional security contract, it originates -- the RFPR originates from Singapore. Same for a lot of other manufacturing companies, a lot of other companies when they do their Asia Pac contracts because the regional headquarters are in Singapore, Singapore becomes a very important market, so we entered this market. We believe that 5 years forward, by 2030, two things are extremely likely to happen. Number one, Asia Pac will be a clear #2 in terms of size of market, and it will also be the fastest-growing part of the global security industry, in geography terms. The second thing that is going to happen is that this market is also advancing more rapidly towards solutioning because of the nature -- proximity to China and the nature of technology, the cost effectiveness of technology. So it is not only growing very rapidly in market growth terms, but it's also growing very rapidly in knowledge terms. It's leapfrogging. So I believe that this market becomes extremely important. If you look at stand-alone, Australia is roughly $1.8 billion to $2.5 billion security market. And our businesses in Australia accounts for almost 20%, 25% of that market. So we have a very strong market position in Australia. We're not just #1. We have greater than 20% market share. Similarly, in New Zealand, we are in the top 5. In Singapore, we are in the top 5. But obviously, the market opportunity is much smaller. So you might get a $50 million to $100 million business in New Zealand and a $50 million to $100 million business in Singapore. But I think there's a lot that we are learning in these markets that gets implemented back home in India. Like, for example, right now, we are -- the new Noida International Airport that is in news in recent weeks, we have been working on pitching to the Noida Airport Authority about our aviation security experience in Australia and the best practices being imported to India should we get the opportunity in Noida International Airport. So there's a lot of transfer of knowledge and technology that happens both ways. The systems we develop in India, for example, our video analytics platform, the machine learning that we have done for facial recognition and ANPR and a lot of those things, they are being commoditized and being sold in international markets for dollar rates. So there's a lot of back and forth, but I believe that Asia Pac is the future of the security industry globally. SIS is amongst the top 10 players in global security industry today, but it is also the largest player in the global security industry in APAC. So APAC is a market that we can clearly say that with roughly more than AUD 1 billion of revenue, Aussie dollar terms, we are very well positioned for this key market.

Excellent. Just one last quick question. specifically the India market, what is -- and for security solutions, what is SIS exposure to the residential space because you have in the MMR region, just as an example, obviously, there are opportunities in each state and city but you have these redevelopment projects coming up, which have already started in the MMR region. So logically, these poor quality housing societies before redevelopment can become a little more structured and organized, so they could opt for better security solutions. So does SIS participate in that market or that's not an opportunity for a company like us?

Residential is not a focus for us. We like to -- our focus is to work with corporates, there's a saying in SIS, there's 2 things that determine stickiness of your contract. One is how critical it is to the business operation. And I already gave that example, whether it's a guard opening a door at a restaurant or it's somebody working at a sugarcane factory. The second thing is who your customer is. If you're working in RWA where there are 300 apartments and 300 customers, there is lack of clarity as to who is the Chairman next year and what his preferences are. And it's a very chaotic situation. The purchasing decision is also not very well organized. It's complicated. There's a lot of other factors that are beyond our control. Vis-a-vis when you work with large corporates, multinationals, there's a proper procurement process. They are picking basis quality, they are picking basis the right factors. So I think we are a better place to work in that space.

Okay. And if you could just let me squeeze in one quickly. What are you exactly doing to create value from your cash logistics business. Why is that -- I mean it may not -- I personally feel like why is that in our portfolio of services anyways?

May I please request you to rejoin the queue as there are several participants waiting...

I can take that quick question, yes, and you can rejoin the queue if you have any more questions.

Okay. That's the last question, if you could answer that.

The cash logistics business started off by the banks asking us to provide cash vans. SIS used to be providing security guards to banks. Then the bank said that, okay, we need some cameras. So we got into the cameras business. Then the bank said that, okay, [Foreign Language] then we got into that business. That's how organically business has evolved. You hold the customer's finger, you follow the customers' demand and you learn how to do things. But way early in 2009, '10, SIS recognized that cash logistics is not a security business. It is a logistics business. So we went and found a partner in Prosegur. Prosegur is a global leader in this space. We have a joint venture running for 15 years. And now because that joint venture company, our ownership is minority, 49% because that asset does not get captured in our books, it's not consolidated. We had a belief that, that value of that business is not being recognized simply because it's not rolled into our books. Stand-alone, that business has INR 135 crores of EBITDA, but that doesn't get rolled into our EBITDA calculation. So we had an IPO or a listing put option with our joint venture agreement, and we are exploring whether we can use that to, a, monetize our value of our shareholding in that business; and number two, maybe even consider bringing back some of the proceeds towards further lowering our debt situation.

We have our next question from the line of Shivam Saxena from ICICI Bank.

I'm just having one question. You said that wage hike...

Sorry to interrupt, sir, may we please request you to speak a little louder?

You said that wage hike held. So any experience in past 6th Pay or 7th pay commission wage hikes were there. So does this help in your business, now [indiscernible] 8th pay commission and then eventually, these salary hikes will pass onto private sector. So will it help your business?

Minimum wage hike always helps our sector. So our pricing is based on minimum wages, statutory components, service charges, administrative charges, profit. So when the base changes everything is linked to the minimum wage. So let's say minimum wage is INR 100. So the PF is charged at the rate of 12.5% of INR 100. ESI is charged as a percentage of that. Bonus is charged as a percentage of that. Our training charges, our supervision charges, admin charges are all a percentage of the minimum wage, which is INR 100 in this case. If the Government decides to increase minimum wage from INR 100 to INR 105, everything gets pro rata computed on INR 105. So there is a direct benefit not in margin terms but in absolute value terms to our EBITDA and our PAT. Obviously, our revenue in the first case.

Had it been in the earlier past 7th pay commission was implemented, was there benefit?

The 7th pay commission is for government employees, sir. It is not for minimum wage of ...

I understand. But actually what happens, generally, the salaries in the private sector also get revised if 7th pay is for government...

Under the Central Labor Ministry and under the state labor ministries, there is a wage board, which determines the minimum wages applicable in the state or in the central circle. That has not been done as yet. Whether the pay commission rise triggers that, I'm not sure. I hope you're right. But we have to wait for the Gazette notification by Central Government Ministry of Labor and the state government's Ministry of Labor.

We have our next question from line of Amit Mehendale from RoboCapital.

I have a couple of questions. The first question is on the broad M&A strategy. In the past, we have been pretty active and we have bought some assets on the M&A side. Now going forward, a couple of things I just wanted to check whether we have any active pipeline for acquisition, number one? And number two, what type of multiples are we looking to any broad range? I understand that you cannot be very specific, but is there a broad range that you can mention that this is the multiple at which we'll do acquisition deals? I'm asking this specifically because in SIS, also, our own multiples have dropped a little bit. So in that context, if you can comment, it will be helpful.

This is Vineet here. We have...

Vineet, let me take that.

Okay.

So SIS's growth is predominantly organic. We don't acquire for growth. So that's the first thing you must understand. In the last 5 years, we haven't acquired anything because we haven't been confident of acquiring anything. Second point is SIS has a track record of successful M&A. We have acquired more than 15 companies in India and overseas. Barring one, Henderson, others have played out more or less to plan. Number three, SIS does not -- we acquired for strategic reasons, maybe a certain geography, like I was giving the example of Singapore. Maybe in India, if you say, Bangalore market is growing very rapidly. So we wanted more footprint there, so we acquired something. Maybe a customer segment like health care, we acquired RARE because of that. So we acquired for strategic reasons. We haven't acquired in the last 4, 5 years because we were waiting for the first full year audited numbers without any COVID impact. '21 and '22 were impacted by COVID. '23, most people said most sellers were of the view that they are still impacted by COVID. FY '24 was the first year where people had a set of numbers where there was no COVID impact, positive or negative. So we have started looking at opportunities. We believe our balance sheet is in good shape now with our net debt-to-EBITDA at barely 1x. But rest assured, SIS is in no rush to acquire anything. We don't see acquisitions as a way of bringing faster growth. If and when we acquire, it will be for strategic reasons. We do not acquire basis multiples. We do not believe that 6x is cheap and 12x is too expensive. Our thesis is very simple. The IRR of that deal in a base case scenario should be greater than 21% and the IRR of the transaction should be better than 15% in a downside case scenario. If there's a transaction that meets that requirement and it's strategically useful, definitely, we'll consider buying. Multiples is not the basic or the metric that we are too hinged upon. I hope that answers your question.

It's pretty useful. So just my second question is on the debtors, just a follow-up on the earlier point. Could you inform what is the size of the debtors pool that is beyond 6 months? And also if any of it is disputed or anything at risk of collection, which is beyond 6 months?

Brajesh?

Sorry, can you repeat your question, please?

Yes. I was just looking to understand what is the amount of debtors that are beyond 6 months -- debtors due beyond 6 months, 180 days, number one. And out of that amount, what will be the amount that is currently disputed with the client or at the risk of collection, et cetera?

Right now, I don't have available figure for this. We'll get back to you. We'll provide you this information separately. Our IR team will provide you this information.

We have our last question for today from the line of Amit Sisodia, an individual investor.

My question is for Rituraj, sir. I am invested in SIS since the IPO, and I have a few things to share. We are the #1 security and #1 facility management company in India, and we have significant overseas operations also. And since our listing, we have almost tripled our revenues, but we have failed to generate any returns for our shareholders. And I guess we must introspect why the investment community has ignored us and our share price is still stagnating below IPO price. During my interactions with several investors, I found that there are a few common reasons for the lack of confidence in SIS as an investment. So do we have the time to listen to those?

Absolutely.

Sir, the first doubt the investors have is why are we having such a huge debt when ours is an asset-light and high cash generating business. The investors say that if the business would have been generating so much of cash, then we would not be carrying this much of debt. This was the first doubt that I commonly encounter. The second is we are having almost INR 1,000 crores of cash, out of which INR 500 crores is in Indian -- is in India and INR 500 crores is outside India. And they want to know what -- in which entity is this cash lying and why are not we using this cash to reduce our debt. The third common doubt that investors have is we are an asset-light company and still we have charged about INR 160 crores in depreciation in the last 12 months, and this figure has been continuously rising over the last few years. This depreciation charge confuses the investors. Can you please explain the calculation of this depreciation in the simpler terms so that even a layman can understand what exactly -- how we are charging this depreciation? And the last one is, sir, we would be generating around INR 600 crores of EBITDA, but INR 160 crores will go in interest payment, INR 160 crores will go in depreciation and the resulting PAT would not be that significant, which will again make our return ratios look poor and PE will optically look high, again, discouraging the new investors. So these are the broadly 4 doubts that I find among the investors. So I want Rituraj sir's, comment on these pointers.

So my dear, sir, firstly, I would like to thank you for being so patient with SIS since you're an IPO investor. Second, my sincere apologies that SIS has not been able to generate the return that you and I both had hoped for despite the fact that since IPO, our revenue has more than doubled. It's more 2.5x. And our profit, our EBITDA, which was INR 200 crores is now INR 600 crores. But the share price remains below the listing price. So I can understand your pain, and I completely empathize with that. Now coming to the points that you raised, as far as the debt situation is concerned, I am aware that a lot of people have this concern. They are constantly comparing SIS to staffing companies. And their view is that why does SIS have working capital in the business. It's an asset-light business. Our belief in this industry is that 300,000 people working for SIS are our employees. Whether or not customer pays should not affect their pay date. They should -- they have to run families and homes. So working for SIS, SIS is accountable to pay their salaries. Staffing industry does not work like this. Their approach is different. Their approach is when I collect from customers, then I will pay you. If the customer does not pay me for 2 months, I will not pay you for 2 months. So that is why there's capital employed in the business. All the debt that you see, barring maybe INR 1,500 crores is working capital debt. If you see the earnings document, the earnings note that we released, we are probably the only company that spends writing 15 pages to explain all this in detail. There is a table that gives you a breakdown of debt and cash entity-wise. If you need any further clarification, I'll give you. But more important, I want to assure you that I also want to see what happens if we are able to pay down the debt majorly. Does that resolve the perception in the market that we have too much debt. But what we cannot do and what I would not want to do is to change the way we operate business. We cannot collect and then pay. We have to pay first our employees and then collect money. That's on the debt piece. But I'm with you, we will try and reduce the debt exposure in the business, allow us some time. We are working on it. The second thing is the return profile of the company. Now that is again because of the capital employed in the business because the working capital employed in the business is high, the return ratios look subdued. Once we address the debt component, hopefully, the return ratios of this asset-light business could be and have been in the past in the range of 15% plus, 20% plus, in fact, we will try and bring the business back to that stage. Number three, the depreciation breakdown, what exactly is the depreciation charge for? That breakdown, I will ask Brajesh to make. And now that you have pointed out, every quarter, Vineet and Shweta, the Investor Relations team will put the depreciation calculation in the earnings report for you to see transparently. We are an asset-light business. The only assets that we buy are either making offices or buying equipment that customers want, cleaning machine, vehicles for patrolling, drones, alarm monitoring equipment, things like that we buy, whatever depreciation we have, we will put a list for you to see where the depreciation charge is coming from. But in summary, I owe you an apology. I hope that you will bear with SIS a little bit longer. Hopefully, we will -- I'm not sure about stock price, that's not in my control, but the points you've raised are very valid, perception issues around debt, around return ratio, around depreciation. I will answer all these 3 through actions, and let's see what the stock market thinks.

Right, right. Sir, I am invested and continue to invest regularly in SIS just because of your passion for the business and the way you answer and you have every single minute detail of the operations that is commendable, and I really respect you for that. Thank you, sir.

Sir, I am also very -- I'm sorry, we're having this personal chat over a conference call, but I did my first round of private equity investment from D. E. Shaw in 2007, and we gave them 7x return. My second round of private equity was CX Partners in 2012, we gave them 3x return. But I'm very sorry that for my IPO investors, I have not been able to generate returns, and it disappoints me greatly as well. And you will see that this is not directly linked to the performance of the business. SIS' revenue and profit say a different story, but let's see, we can only keep trying.

Sir, once this EBITDA translates into PAT, you'll see magic happening with the stock price.

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

Thank you, everyone, for joining this call. I think this has been an exhaustive conversation. I appreciate all the questions that came through. As you can see, Q3 has been a good quarter with all engines firing, security business in India, FM business in India, cash business in India and international business. All 4 segments have delivered. This demonstrates what can happen when all engines fire. I know that for the past few quarters, we've had one or the other engine pulling us down. But I think as we proceed forward, we will try and see that we keep all businesses moving on track. Q4 looks like a good quarter. And I hope that we will also be addressed -- able to address some of your major concerns in FY '25 and '26 about debt, return ratios and the depreciation aspect. Thank you very much. All the best.

Thank you. On behalf of SIS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.