by Suhani Adilabadkar
People in cities are surrounded by strangers whose intentions are unknowable, and this drives a need for security. Crime reports regularly appearing in news headlines don't help. “I am not protected enough”, people and businesses respond, driving investments in security solutions.
Based out of New Delhi, Security and Intelligence Services (SIS) is a market leader security solutions company which made its stock market debut in 2017. Catering to security, facility management and cash logistics services, SIS operates in India, Australia, Singapore and New Zealand.
Quick Takes:
- SIS reported revenue growth of 24% YoY at Rs. 2089 cr in Q2FY20 and operating profit rising 58% YoY.
- Operating margin stood at 5.92% in Q2FY20 with PAT at Rs. 76 cr rising 72% YoY.
- In FY19, SIS has closed five acquisitions during the year across India and APAC.
- SIS ended September quarter with a monthly run rate of Rs.748 cr as compared to Rs.700 cr in March 2019.
- SIS is the market leader in the industry, and has consistently grown at 1.5x the industry growth with a market share of just 4% signifying headroom available for long term growth.
The SIS group provides services in manned guarding, training, physical security, paramedic and emergency response services, facility management services, and cash logistics services that is primarily moving cash around under high security - cash-in-transit, doorstep banking, ATM cash replenishment, secure transportation of precious items and bullion.
In FY19, SIS closed five acquisitions across India and APAC. The first acquisition waswith SLV group which provides security solutions and electronic surveillance giving SIS, market-leading position in Delhi-NCR region, the second acquisition, Uniq gave strong headway in Bangalore providing industrial security solutions and facility management services, followed by the acquisition of RARE Hospitality providing facility management services in the healthcare sector the next acquisition of Henderson Security which is the third largest security company in Singapore and lastly Platform 4 Group giving a foothold in New Zealand.
Rise in operating margins, profits jump
Amidst a challenging macro environment, SIS reported strong numbers in its September quarter with revenue, operating profit and PAT in double digits. Revenue stood at Rs. 2,089 crore in Q2FY20 compared to Rs. 1,690 crore in the same period last year, rising 24% YoY and 4% sequentially. Operating profit was flat, reported at Rs. 124 crore due to an annual salary increment for back office staff in India and federal minimum wage hikes in Australia, while on YoY basis growth was strong rising 58% in the September quarter FY20. Operating margin stood at 5.92% in Q2FY20 against 4.62% corresponding September quarter FY19. PBT for the quarter stood at Rs. 51 cr against Rs. 44 cr same period previous year growing 16% YoY while PAT stood at Rs. 76 crore rising 72% YoY as deferred tax was reported in Q2FY20. The stock dipped 7% after Q2 results as the company said that some of its Australian aviation business might be at risk as Qantas discontinued its contract with SIS group.
An urbanizing india, with rising crime
India’s security solutions market has been growing readily over the past few years driven by stable economic growth, rise in crime, terrorism and urbanisation. SIS, the market leader in the industry, has consistently grown at 1.5x the industry growth and has a market share of just 4% signifying enormous headroom available for long term growth.
The Indian security business reported solid revenue growth of 40% YoY at Rs. 879 cr in Q2FY20 and 8% sequentially making up 42% of total revenues. International security business observed sequential decline of 1% with YoY growth of 7% at Rs. 903 cr constituting revenue chunk of 43% in Q2FY20.
Facility management, the third segment comprising DTSS, SMC, Rare Hospitality and Terminix SIS reported robust revenue growth of 42% YoY at Rs. 314 crore constituting 15% of total revenue mix and lastly just 4% of the revenue basket, cash logistics solutions reported at Rs. 89 cr growing 31% YoY.
SIS reported robust Q2FY20 numbers completely unaffected from slowdown. Mr Rituraj Sinha, group MD, SIS, clarified that the company witnessed its strongest H1 in the last two years and with a strong Q3FY20 pipeline, growth momentum will be maintained. Downplaying slowdown fears, Mr Sinha said, “Though telecom and banking might be in problem, sectors such as hospitality, healthcare, IT, BPO, hospitals are completely unaffected by the slowdown”.
Management insists that customers view security and facility management services as necessities and thus such services are arguably unaffected in a slowdown scenario. As per the management, though SIS is sector agnostic there might be pressure on collection cycles due to a slowing economy. SIS ended the September quarter with a monthly run rate of Rs.748 crore as compared to Rs.700 crore in March 2019. Over the last 10 quarters revenues have grown at a quarterly CAGR of 5.9% and EBITDA witnessed quarterly CAGR of 7.1% indicating robust and scalable business model even in tough economic scenario. With respect to return ratio framework followed by the company, Mr Sinha said, “Though, this is not a strict framework, we will strive to maintain these return ratios, revenue growth of 20% plus YoY, ROE between 25-30% and operating cash/EBITDA of 50%”.
Qantas Deal
Qantas is a government appointed screening authority for a number of terminals in Australia. The September press release of SIS indicated that some part of Australia’s aviation business might be at risk as Qantas is discontinuing its screening task at some of the terminals, and transferring the security requirements back to the airport owner which already has a supplier for its own terminals.
In this respect, SIS management has clarified that related revenue number is around Rs. 200 crore and roughly half of it might be affected by the timing, which could be anytime between Q3FY20 and Q3 Y21. Mr Sinha added, “There would be an impact of about 1-1.5% on revenues in case, the whole contract goes off”. Investors would have to wait for the next few quarters for further clarity on this.
Suhani Adilabadkar is a Research Analyst registered with SEBI ((INH200003240)) She has done PGDBA (Finance), MS (Finance) and a Fellowship from Insurance Institute of India.