Security and Intelligence Services (India) Limited

In the Concall the management was slightly over confident and the tone lacked experience more particularly of Mr Rituraj Singh.
After coming to know about Political Connection and Panama Papers (after reading in this forum) my sense of discomfort strengthened.

Disclosure: Not invested tracking for knowledge and how the story un folds.

Keep on updating my thesis as get more understanding about business. Not sure if updated latest one here as do not see in thread. May not be new info as shared across posts but this deck is like one consolidated info from record purposesSIS_vp_bangalore.pdf (2.9 MB)

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Some observations from SIS sales representative visiting our site today(New Hotel in tier3 township),
1.Rates are as per min wage rate as per GOV. norms 13,000rs/month for 12 hours including PPF etc which is higher than normal local agency rates by 30% though people are still eager to go with them.
2. ALSO offer CCTV installation service for whole project
3.Sales guy was previously working in banking and finance.(Hiring professionals for first interaction with potential clients)
4.They only hire 22-45 age group people for security and min 12th plus qualification and height health weight etc data are sent via automated to central unit and approved from there.
5. Regional officer do inspection of guards atleast thrice a week and data is sent to owner instantly.
6. One of Good Hotel in city removed SIS due to higher cost and hired local agency and had some really bad experience with local agency and have now gain gone back with sis.

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Very good interview. Interviewer asked some real questions beyond the standard guidance questions n mgmt was forthcoming in discussing long term risks n opportunities without bothering how such statements will be taken by market in short term (saw few brokerage reports already getting in commentary caution mode but liked the openness with which mgmt discussed ). Automation is one of key risks to this business n interview provides some perspectives

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Have been happy holding it for the last 9-10 months. I think his comment about solutioning has been taken well by the market. Most of FMs are uncomfortable holding a stock with an expected linear outcome vs. manpower growth. Only thing that worries me a bit is that the management is particularly pushy in interviews and more eager to tell his side of the story. May be this is a unique story and the market has not fully understood. IMO, he should tone down his willingness to discuss SIS’ greatness every time he is on air. I have no doubt that it could be a long term compounder if it remains focused on execution.

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I have few questions :slight_smile:
1.Why their receivables are growing at such a fast pace?
2. Their have ROE of less than 20% for the last 5 years now and management is claiming to have ROE > 20% as one of their prime goals.
3. How long with it take for other competitors to achieve those “tech” based security solutions? Living in Singapore, I have noticed CCTVs everywhere and nothing on top of that. We need to understand what value add they will provide that will give them a durable competitive advantage.
4. How about a security company tying up with tech firms to provide AI solutions?

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As far as I know their claim regarding remaining ahead in tech deployment is correct. They got contract from one oil psu in pipeline monitoring which has zero manpower deployment and all about remote surveillance and response. They would report this man tech solution revenue separately sometime next year. For me as a shareholder the key is that they are ready and are winning the deals. A live case study is security cost of Manappuram finance which has gone down drastically after tech deployment by SIS from manpower based solution. They will not be alone in offering this as some foreign security company are offering this solution. Nothing stops some smaller ones to become franchise of the same. But SIS has market reputation and goodwill along with platform like offering.

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Concall Summary

Q3FY20 EARNING CONFERENCE CALL
➢ Management expects organic growth of 20% YoY and 20% return matrix (ROE)
for FY21. Australia business is expected to grow by 5-7% organically.
➢ Management is focusing on expanding the market share in domestic as well as
international market with a target to reach around 15%-20% (currently in India the
market share is ~4%).
➢ Solution based offering in 3QFY20 is to BFSI sector (SBI is the current customer)
apart from the oil and gas pipeline security, city gas network started during last
year with the better use of technology. However, the contribution of the same in
revenue is single digit in 3QFY20.
➢ India security business is maintaining an EBITDA margins in the range of 6-6.5%
and the same is expected to maintain going ahead.
➢ The DSOs in Australia came down from 54 in Q2FY20 to 46 days in Q3FY20. This
has been the result of a coordinated effort between the business and finance
teams on accounts receivables. Management expects DSOs to be in the range of
46-49 days going forward.
➢ Changes in the labour reforms over the last 6 months, which 44 labour legislations
changed to 4 regulations and national floor wage will establish soon which help in
detaining good workers.
➢ The debt fund of the company is largely used for the working capital cycle, which
is around 2 months for payment of wages, bonus, PF etc.
➢ Management won’t go for repayment of its debt despite surplus cash available
with the company. The debt repayment will create huge payment of tax liability,
which is stopping to repay its debt (Australian debt).
➢ Tax benefit of 80 JJ in domestic business reduced the tax liability during the
quarter. Company has some MAT credit available, although company opting for
the new tax regime is clear in 4QFY20.
➢ Return matrix of ROCE and RoE are maintained at 20.5% and 23% respectively.

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Decent underlying Income statement if you remove tax credit impact but cash flow stress and big surge in short term debts. No doubt it remains one of the key beneficiary in the post Covid world. Formalisation and consolidation will accelerate making it a worth investment bet.

two things that should be monitorable going forward -
a) Cash flows and receivables and hence debt
b) Growth itself should take back seat to preserve quality of earnings else we will have more writeoffs in future.

Disc: reduced allocation to 5% from 10%

Attached is the presentation i made to a group of VP members in Carolina’s USA on this company. Read this in tandem with what @suru27 has already presented above (as he has covered it in very detail).
I have tried to create my presentation without looking at his presentation before, as i did not want to be biased, the contents are my notes, observations and comments from various sources that i have gathered information from. ( ARs, conf call notes, FICCI EY,BOD & PwC reports…)
VP_SIS_Carolina_July2020.pdf (651.8 KB)
Two main Q for which i am still seeking answers are ( basically to Saurabh’s questions) -

  1. how do we value risk in the company for which the current auditor has not audited the subsidiaries? do we assume that since the subsidiaries are in developed countries the books would be clean ? (but they are not listed players…)…
  2. How to build trust over B/S with intangibles? This is only going to grow from here - as the M&A are going to happen given the migration from Un-organized to Organized and Post Covid barely surviving or cash strapped competitors.
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Segmental Revenues are as follows:
‒ Security Solutions India: Rs. 858 Crs in Q1FY21 vs Rs 808 Crs in Q1 FY20
‒ Security Solutions International: Rs. 1020 Crs in Q1FY21 vs Rs 913 Crs in Q1 FY20
‒ Facilities Management: Rs. 293 Crs in Q1FY21 vs Rs 290 Crs in Q1 FY20

Cash Conversion - The company demonstrated very strong cash conversion with OCF/
EBITDA at 81% in Q1FY21.

Business Updates:

  1. India Security Solutions Business: SIS role as an essential services provider was reinforced during the toughest quarter ever faced, as we ended Q1FY21 at YoY growth of 6.1%. All our branch offices continued to be operational during the lockdown period and we ensured business continuity for all our customers with minimal disruption. Similarly, despite aggressive and cautionary provisions, our EBITDA margin was stable at 5.4%. We continue to be cautiously optimistic for the rest of the year - market share gains will be the focus for the year on the back of cross sales initiatives and launch of new solutions.

  2. International Security Solutions Business: The International business has been the
    standout vertical this quarter with revenues of Rs 1020 Cr which is a YoY increase of 11.7%. The growth in the international markets was aided by strong, proactive economic and medical response to Covid resulting in minimal disruption to the business climate. The EBITDA margin for the international business was 5.9%, despite conservative provisioning and deferring recognition of certain government grants.

  3. Facility Management: The Facility Management segment was impacted to some extent due to the extended lockdowns in big urban cities in India. The revenues for the segment saw a 1% increase YoY. Going forward, the FM segment is likely to see increased operating expenditure, higher quality standards and more intensive cleaning requirements. We believe that this is going to lead to significant changes in industry dynamics and greater formalisation. We have launched new solutions in the areas of disinfection, deep cleaning, sanitisation and production support which will help us greatly in increasing wallet share with customers.

  4. Cash Logistics: The Cash Logistics segment continues on its steady path of portfolio rationalisation and margin improvement. Despite the ATM pricing reset getting delayed due to the pressures on the banking sector, our other segments of retail cash management and cash in transit continued to show strong operating metrics. The segment delivered a 68.4% YoY growth in EBITDA in Q1FY21, despite a 9.8% YoY decline in revenues (on account of closure of unprofitable routes and contracts). We believe that our focussed operations will continue to stand us in good stead in the coming quarters.

Commenting on the performance, Mr. Rituraj Kishore Sinha, Group Managing Director said, “The Covid pandemic and lockdowns have reinforced the essential need for our services, which are a business continuity imperative for a safe workplace and society. The Q1 results establish that our industry is less impacted and will recover quicker than many other sectors. Covid will also accelerate market share consolidation as customer focus is shifting towards expertise, reliability and market leaders. Given near term uncertainties, we continue to remain cautiously optimistic and will undertake prudent provisioning policies to factor for unforeseen surprises.”

Q1FY21 webinar notes Might have missed few points as the line was not clear
I dont think many cos came with kind of results like us
2 factors 1) essential service 2) execution of HR payroll
Our pricing power was highlighted. No negotiations by customers
GM stable. no negotiation. Vendor change / customer attrition at all time low
SG&A saving of 40cr possible. 20cr of it will not be permanent. Some is due to less travel.
International business has balanced volatility of india. For long time people saw it as a drag but COVID showed the importance of having a counter balance part. 40% revenue from Australia, NZ and Singapore. Key driver was that these countries dont use police or para military for lets say COVID facilities. Non-core police functions being outsourced to security services cos. India will also get to such model after a long lag

Understand the difference bw staffing and services. We have 100% revenue from services, zero from staffing. COVID will bring out the diff. Urge to look at results of ISS global, G4 global, Securitas. None reported pressure on revenue/margins. Today you cant run a office without a security guard checking temp, mask compliance. Facility management is a business continuity imperitive. Services are needed more than ever

During Apr-June we secured 1600 new orders. Only marginal drop in revenue
WFH trend- No clue of the impact. But some interesting things- in last 150 yrs railways shut down. Railway as it re-opens they have to ensure sanitation. If and when they re-open, the spend on hygiene and access control will be higher than ever before. Similarly for IT, they are super consious of employee safety. Even for 1/3rd employees the precautions are high. Spends on cleaning of cafeterias etc is 3x. Even if half of IT workforce comes back, the spends would go much higher.
Security and Facility management are needed even more.
Most schools, companies, railway stations etc will have Assembly line setups like boarding flights. One guy does sanitization, one checks bags etc, one checks temperature

In next 6-9 months, which part of business will be most difficult? SIS has survived the impact. Looking fwd for a V shaped recovery. 100 day plan of 1st response to COVID-

  1. keep our offices operational. Our employee reporting during this time was 98.3%

  2. Gross margin impact. In Q1 we had hardly any GM change. EBITDA fell because of prudential provision. Carrying 80JJ credit which gives Tax buffer.

  3. Cash flow management- In 2 of the 3 months, we collected more than normal. OCF/EBITDA high indicates that

  4. Not allowing sales engine to shut down…approached 32k clients in last 100 days.

  5. Digital transformation- new IT platform. Will come out better prepared

Coming 1-2 months can be impacted for our customers. We took very very prudential stand and provided 54cr. NOT at all linked to pressure on collections. We provisioned because we dont know how next 9 months will go. If things go well, this amount can flow back to EBITDA. 38cr is reduction from revenue. 15-16 cr is on account of affiliates, which is in other expenses.

2 big trends that will lead to organic consolidation in this space. Bigger than GST reforms or labor reforms.

  1. When all customers are looking to cut other costs, they want to increase spending towards safety and hygiene. Factory/ movie theater/ schools should not shut down due to safety concerns. How much it translates to us remains to be seen.

  2. Customer procurement focus was cost. Now they want reliability and quality, ready to pay more to market leaders.

Want our revenue to go back to 2% m-o-m growth.

Inorganic as and when it comes in 12-24 months. Net debt/EBITDA excl lease liability is 1.1x. Slower growth as opportunity to get balance sheet even better than 1.1x. Then we will be geared for an acquisition. People are paying us sooner than before because of the essential nature. DSOs slipped 5-6% but WC intensity will reduce. Debt has gone down by 30cr in Q1. We are comfortable. Avg borrowing cost is 7%. Not worried about leverage.

Govt focus on job creation, labor reforms. We have potential to create entry level jobs, which is priority of govt. We are very bullish about labor reforms. Will be looking to hire more.

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Meanwhile the stock is near all time lows of 322.1. If the last lows are not respected, then some more downside will open.

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Thank you Rohit for the above note, more details are provided in their earnings note…

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Proposed Sale Of Equity Shares By The Promoters For Achieving Minimum Public Shareholding ( Small quantities… )

Promoter holding is already below 75% threshold so why do they need to go further and sell additional stake.

Public shareholding is very less which needs to look after by the promoters as FII and DII will not be going to sale their stake
Disc: Invested

AGM 2020 SIS

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Central govt will give subsidy for new employees, for two years. They’ll pay the 12% employee contrib and 12% employer contrib to EPFO. But only those who have 15,000 rs. wages or less. And aadhaar seeded EPFO. And co has less than 1000 employees.
Establishments employing upto 1000 people: Employee’s contributions (12% of wages) & employer’s (12% of wages) totaling 24% of wages.

More than 1000 employees: Only employee’s EPF contributions (12% of EPF wages).

So SIS will be at disadvantage of 12% cost vs other local players?

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Thanks for sharing this @saumya2010.

Recent credit rating report along with AGM discussion can give good insights into where business is heading.

https://www.indiaratings.co.in/PressRelease?pressReleaseID=52940&title=india-ratings-assigns-security-and-intelligence-services-(india)-‘ind-a1%2B’

Disclaimer: Tracking. Only for educational purpose.

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