SIS IPO - Why should you subscribe?

Security and Intelligence Services Ltd (SIS) is planning an IPO for 96,20,619 shares with a price band of Rs 805-815 per share. The main aim of the company is to reduce its high cost debt and strengthen its balance sheet so that it can invest in technology at the right stage. With this, it plans to raise funds to be tune of Rs 780 crore, while its debt as of FY17 was ~Rs 685 crore. It plans to use 80% of funds for repayment of debt.

The issue will open on July 31 and will close on Aug 2, 2017. Retail investors can bid for minimum size of 1 lot, with each lot containing 18 shares. This means investor would need minimum investment of ~Rs 14,670 to subscribe to the IPO.

About the company
SIS is a leading private security and facility management services provider in India. Its primary segment in India are –

A. Private security services (contributes ~90% to FY16 revenues)

1)  Security services in India – The company provides security services as it plays key role in urban design and planning. The growth in this segment is directly dependent on the growth of the economy and the resulting urbanisation. The industry is largely dominated by regional players contributing 80% to the market. However, with awareness of the end-users, the national players are gaining importance. However, this is working capital intensive business due to 2-3 months credit cycle and the higher cost of manpower.
It also operates in Australia through its wholly-owned subsidiary MSS Security Pty Limited.
 
Its revenue has increased at a CAGR of 28.7% over FY12-16 in this segment. In Australia, the growth has been ~6.2% during the same period.
 
2) Cash logistics in India (contributes 7% to FY16 revenue) - The company provides cash replenishment services for ATM and the revenue is earned on the basis of monthly ATMs serviced. The cash logistics market in India is expected to grow at CAGR of 17.8% over FY15-18. Also, the demand is expected to increase, driven by increased financial inclusion of rural areas and reach in unbanked areas.
The company has JV with Prosegur Compañía de Seguridad, S.A for cash management services to leverage its global expertise in cash management and alarm monitoring.
 
3) Electronic security – Electronic security services industry is ruled by bigger companies and also by OEM manufacturers..However, the market is growing at a rapid pace due to increasing need felt by the end-users for electronic tracking and review.
 
B. Facility management (contributed ~2% prior to acquisition of Duster) – Facility management includes all services for management and upkeep of industrial building, offices or residential spaces.
 
The company acquired ~78.7% stake in Dusters Total Solutions Services Private Limited (“Dusters”), with the agreement to increase our shareholding to 100% over the next three years. Dusters is rated as the fourth largest facility management services provider in India in terms of revenues by Frost & Sullivan. With this acquisition, the revenue from this segment will contribute ~10% to the revenues.
 
The company also has JV with Terminix International Company for pest control and The Service Master for cleaning services.
 
Debt position
 
We see that the company has been expanding operations aggressively from FY15 due to which its short-term working capital requirement had shot up. The company's D/E as of FY16 was 0.8x, which has deteriorated to 1.26x, and its interest coverage ratio of ~4x deteriorated to 3.1x in FY17. We see that the company has net profit margin of 2% in FY17. Debt repayment though can lead to 160bps improvement in the net profit. Also, it can help the company to target inorganic growth.
 
The company has also been generating positive cash flows from operations which provides comfort.
 
Our view
We see that the company has steadily been growing its presence and has grown at ~12% CAGR historically. With focus on cash logistics and acquisition in growing facility management segment, we see revenue growth of ~18% CAGR over FY17-20. However, we expect margins to be pressurized due to higher employee cost and expansion in different cities.
 
The company also enjoys leading position in field of private security and is consolidating its position in facility management. We see margins are thin, but with high margin facility management forming larger part of the revenue, the scope of improvement in margins remains. However, being capital-intensive, any changes in wage or labour policy can have far reaching impact on the company.
 
We see good growth prospects for the company in the niche cash management services and facility management. Given its scale of operations, we believe the company will be able to achieve the same.
 
Valuation
 
Looking at valuation, we see that the company is trading at P/E of 61x on the higher band of Rs 815. The performance parameters are comparable with Quess Corp., in addition to the strategy of growing through acquisitions. We, however, note that SIS plans to pay off debt with IPO proceeds and its NP margins can improve to 3.6% post the debt repayment, which will improve ROE going forward.



Hence, we believe investors can SUBSCRIBE to the IPO.