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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the SIS Limited Q4 and FY '24 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Vineet Toshniwal, President, M&A and IR from SIS Limited. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone. Welcome to SIS Q4 earnings call. I hope you've all gone through the results as they were uploaded here on the stock exchange.
So let me start by reporting this quarter. As a group, our initiative has been to repair our margins and continue to focus on growth, the initiative we took in FY '24. So both in terms of customer contracts as well as focus on the SG&A cost throughout here.
So for Q4 FY '24, revenue is up 4.7% on a year-on-year basis, while EBITDA is up 11% on a year-on-year basis. We've reported now highest ever annual revenue of INR 12,261 crores and an EBITDA of INR 584.5 crores for FY '24. Consolidated EBITDA margins have now improved from 4.5% same quarter of last year to 4.8% this quarter. Leading this improvement, the margins was our India Security business where margins have improved substantially from 5% in the same quarter last year to 5.5% in this quarter, a change of over 50 basis points.
In the international security business, we crossed the milestone revenue of INR 5,000 crores for FY '24. Additionally, happy to report that our Singapore Henderson business continues its journey of profitability for Q4 FY '24 through a combination of management's focus on cost rationalization, shedding unprofitable contracts and new business growth.
As you can see in this quarter, we've also recognized an impairment of INR 65.6 crores. We continue to be the largest player in facility management space in India, and we've crossed a milestone revenue of INR 2,000 crores in FY '24. We are continuing to witness tailwinds in the sector with demand increasing for integrated service providers.
Now talking about cash business. It's done very well. Cash business surges ahead with superior profitability metric with an EBITDA margin of 18.2%, a growth of 200 basis points year-on-year and a PAT margin of 7.7% this quarter. So overall, we are very happy with the business momentum and also particularly the increase in margins.
We continue to focus on innovative solutions for customers through SIS Ventures platform. As an extension to that, we've made a minority investment in Agarsha Senior Care device known as Emoha, an elder care platform by acquiring 4% through a combination of primary and secondary investments. This adds synergistic adjacencies for our facility and security businesses.
So with this, I would like to hand over the call to Rituraj for his opening comments, and then we will take Q&A after that.
Thank you, Vineet. Very good afternoon to everybody, and welcome to this call today. Thank you for taking the time. FY '24, like Vineet has already summarized has been a year of margin improvement for us. We have come very close to a 5% margin target for this year. It's almost 0.5% improvement over last year, 4.3% to close to 4.8%.
If you look at the quarterly EBITDA in rupee terms, it's also hovering around the INR 150 crores per quarter mark. In terms of growth, if you remove the 5% growth that came from our international operations, the Indian operations, security and FM grew at 11%, certainly not our best year, but this is still 1.5x GDP growth.
We believe that this result of significant improvement in margins with 11% growth in India is with only one engine firing, which is security services in India. As we see over the next 12 months, the other 3 engines, FM, SIS International and M&A. All 3 are looking in good shape. And we are very excited by the prospects of the coming quarters.
Having said that, I must also mention that our is to demerge and list our cassette operations are well on track. We have appointed our advisers and bankers, the demerger scheme is almost ready. And in a matter of a few weeks, 4 to 6 weeks, we will get into the SEBI and NCLT processes. So overall, I think we are looking at an exciting year ahead and a solid year behind us. Thank you.
[Operator Instructions] The first question is from the line of Balaji from IIFL .
I actually had 3 questions. So in the opening remarks, you did mention that the India business did somewhere around 10% to 12% revenue growth in FY '24. So if we have to lift these 2 high teens, what do you think will be the key factors? That is number one.
The second question is on the FM segment where you have mentioned planned event of certain low-margin contracts. But if I look at the margins, I can see that at 3.9%, they are at a multi-quarter low. So what explains this divergence? And going forward, how do you see the revenue growth and margin in the business? So those would be my 2 questions. Third question I will come back.
Thanks, Balaji. This is Rituraj. So around growth. So the growth in our business is a function of basically like in any industry, it's price and volume and our price is determined by minimum wage inflation. What you see this year is growth of 11% to 12% is largely volume growth. There hasn't been any significant minimum driven price increase which we hope will come through. There's a lot of talk about living wages in the country today, and that could be a significant trigger.
But as of right now, the growth of 11%, 12% is basically largely volume and to lift our growth to high teens, we need volume plus price. And I think something around the price and minimum wage or living wage seems to be on the horizon. So I will only draw your attention to a fact that in previous years and since listing, if you go back to FY '17 to now, all slowdown periods, all COVID periods included, all the quarters, if you take a quarter-on-quarter view on SIS's growth, we have put out and we put out every quarter a chart which shows the change in revenue from Q1 of FY '18 to latest quarter.
That stands at a CAGR of 15.8%. So I think there is enough evidence that SIS is a high-teens growth business, and we have every reason to believe that that's what we will do in the coming quarters and years.
FM segment margin is a bigger question. I think FM segment margin has been struggling primarily on account of the fact that we had taken on contracts on fixed INR charges on low-margin charges, which we are trying to shed, some contracts have been shed this year also. That's why the FM business has only grown ballpark 10-odd percent.
I believe that a large part of the work is done, and I'm quite hopeful that FM will start to improve its margin profile starting the first quarter.
So if I may follow up, while the revenue slowdown is because of shedding of low-margin contracts. The margins also seem to be at a low. So is it because of operating leverage what explains the dip in margins?
Well, I mean, it's exactly what you said. Every time you're shedding revenue, you're losing operating leverage. So you not only have to shed the bad contract, you have to also get the new contract at better margins so that the optimal size of each branch is maintained for the plants to be able to generate adequate margins for the overall company level EBITDA.
So what is being gained through shedding a bad contract in a lot of cases has been lost in operating leverage loss. But I think these are things that are routine in our industry, it happens. Security was in the same shape last year. And I think people were very concerned about what's going to happen in the security margins.
Security was at 4% around margin, it went up to 6%. This quarter, security showing up at 5.5% because we are only taking the opportunity to provision an additional INR 10 crores on account of outstanding on the auditors are wide. This is despite the fact that security has significantly improved its collection in Q4 versus Q3.
But despite a much better DSO number, based on our return wise, we have taken additional provisioning, and that's why security is looking like 5.5%. Otherwise, it's in the same 5.86% range. So if this can happen in security it can happen and it will happen.
So answered my third question on the security business Q-o-Q EBITDA margin compression. So that answers all my questions and all the best.
The next question is from the line of Garima from Kotak. .
First question is on the India Security business. If I look at the billed employee count, right, this growth was very small in FY '24. And this is after a year where there have been a lot of back to office occurrences as well as public facilities all operating fully. So how should we think about this growth going forward in FY '25, '26, what are some of the steps being taken to really revive this growth?
So Garima, I think since SIS got listed, I think you have been asking the same question around the headcount and headcount change increase. I've said this multiple times in the past, SIS wants to delink revenue growth and headcount growth as much as possible. And we want higher prices for every head count. We want more solution-oriented sales, which are non-manpower oriented. And if you're going to measure SIS growth like a staffing company, basis headcount, it will always end up misleading.
So long story short, don't follow headcount. This year, for example, we have invoiced more than INR 100 crores out of our alarm business which has 0 manpower. We have billed INR 100 crores, generated 20% EBITDA from our VProtect business, which is rolled into our security operations, where there is no manpower. We haven't deployed a single guard.
So I think you have to see that from a margin perspective and a growth perspective, SIS is looking more towards solutions.
Understood, Rituraj. But even if I look at overall revenue growth, right, of the India Security business, are you happy with the 11% growth posted?
Absolutely not happy. That I can say loud and clear. SIS has maintained an annual growth rate of 15.8% like I was just saying since our listing. So this is certainly not our best year. This is not going to be how SIS is going to be operated. This is a reflection of 2 factors. Number one, price and volume, price can come through. That's one big reason.
And the second big reason is that we've been extremely margin-focused. We implemented a 3D policy where we have walked away from a lot of contracts, a lot of negotiations on account of lower margins. We are very keen on improving our gross margin now as high as gross margin is over 12%. And we are very focused that we don't want to see a dip in our margins and that's the way it's going to continue.
We are going to -- we believe that we are a premium brand. We have to have pricing power. It's a little difficult, but -- my view is that do I want 25% growth at the cost of lower margins? My answer is no. I'd rather take 15% growth and good operating margins and EBITDA.
Okay. Understood. And from just a modeling standpoint, the effective tax rate, how should we look at this number going forward? Because, again, to the point of headcount addition, headcount does feed into the tax benefit that you get a lot. And hence, it's important for us to get a handle on both head count addition as well as the tax rate?
Well, more or less, I think Devesh is the right guy to answer this question, but my view on it is that 80JJ, obviously, is a big aspect of our effective tax rate. But having said that, SIS as a business since listing, has pretty much been nil tax because of 80JJ. And in these years, we've had super growth years, and we've had 11% growth years. . So I think last 7 years of listed track record and how 80JJ impacts is evidence enough. But anyways, I ask Devesh to give you a more technically correct answer.
I think what you should do when you're modeling the tax or the tax rate is just very simple, split it into 2. For India, please model a 0 tax because almost all businesses are getting the benefit of 80JJ. And so pretty much model it a current tax -- on a current tax basis, model it as 0 tax. For international business, you can model 30% because both Australia and New Zealand on 30%; and Singapore, I think, is on 18% or 22%. So that's on the current tax.
What happens is based on the growth, based on the growth rate, the quantum of growth for employees is what drives also the deferred tax number. That is sometimes difficult to predict. So as you've seen this year, where the growth was lower than last previous years. We've had this issue on the deferred tax and the deferred asset created coming down, and that is sort of in 1 has distorted the pack. I think this is how you should do the modeling. If you want, I'm happy to like have one-on-one of our discussion and I'll take you through it in more detail.
This is helpful.
The next question is from the line of Heet from Guardian Capital Partners.
Am I audible? .
Yes, you're audible loud and clear.
Yes. So my question was on Henderson, given we've seen the profitability improvement Henderson, why would this impairment done in Henderson, if you could give some light on that?
So basically, what happened is that Henderson was acquired pre-COVID. And it was a $50 million business at that point in time. And we had done a standard stage-wise transaction with them. We acquired 60%, and we were to acquire the remaining 40% over a 5-year period. The promoter was to drive the business, himself for 5 years. And he had a sort of a lead to -- but what happened after COVID, he wanted to tap out in 2021. Because the business was going south.
Now the complexity was that because at the time of transaction, taking into account the 5-year business plan and what we could have had to pay, we took a goodwill charge. But the transaction had to conclude in 2021 itself when he sold is 40%. Obviously, we bought it for significantly lesser price, but there is a mismatch between the goodwill charged during initial transaction as well as -- as against the actual amount paid.
So that mismatch plus the real fact that it is no longer a $50 million business, it's a $30 million business. The auditors have asked for impairment, and we believe that it's only fair and reasonable that the impairment we taken, and that's what's been done.
But from what I want the investor community to know is that Henderson today is $30 million, it is a profitable business, and it is likely to grow this year. They have booked orders worth $3 million to $4 million -- on a $30 million base. $3 million to $4 million of business, new orders received in Q1 means that they will have pretty decent growth from an international markets perspective.
The second thing, what you must understand as Henderson has $220 million of its own cash in the zone, so it's not a sort of either an underperforming business or low in any way on cash flows of international operations or on India. So it's a well-funded business and it's going well. This impairment is more bookkeeping and hygiene action. It's a noncash charge.
Just 1 more question. So sir, we had said that in the growth that we have seen now, it is largely volume growth and quite little of wage growth. Now assuming that with the new financial year starting, we would have to one extent done our new arrangement with the the plan. So are we seeing that wage growth? Or how is that working?
Wage growth in our sector is not agreed between client and service provider. It is leading to the minimum wage has not agreed. Generally, governments notify minimum wages, state government and central government on 2 occasions, 1 April and 1 October. Even now on 1 April, most of the state governments have opted not to revise as yet, they will probably take their decision after elections.
And second, that there is also a lot of chatter, as you have seen in the newspapers around living wages and the implementation of living wages. Now you must understand for those who have not sort of delved into labor and wage setting in much detail, there are 3 types of wages.
One is called the minimum wage, which is more a sustaining level. The second is called fair wage, which is higher than minimum wage and third is called living speed, which is keep higher than fair wage. Now Government of India seems to be going with the idea of living wages.
I'm not sure what exactly will happen, but it is almost certain that post this election, if the same government comes back to power, they will look to implement 4 labor codes and something substantial around the wages, which have not been given due attention since after COVID because the general chatter in the corridors has been that the economy is just about recovering. They don't want to load the manufacturing and the service sector with wage increase -- with a significant wage increase.
But let me tell you one important thing that as and when this wage increase happens, it is going to increase for most businesses, most listed entities, barring for companies like SIS for which this is going to be a direct revenue driver, and our margin bump up, not a margin bump up, but an absolute value profit bump up. Margin may remain the same, but we will get a higher rupee value because the revenue will inflate. So I think it will be interesting to watch what happens in the next 100 days that the government is talking so aggressively about.
[Operator Instructions] The next question is from the line of Viraj Sangwan, an individual investor.
My question is regarding the recent investment that has been done in Emoha. So I understand that it's an upcoming space and I see a good future in that. But the investment seems to be very small. I think it's just 4%. So I just wanted to get your view, the management's view, what's the plan regarding it? Because what I see like in 4% I doubt, if you can get hold of any technological aspect just your view on that investment.
Well, great question. I think the way SIS is looking to build these businesses in the future, we keep looking at niches that will emerge as big opportunities in our security, cash and FM segments. For example, in cash, we have looked at segments like fintech for customer acquisition who can outsource. It's not directly related to our cash logistics business for now, but I believe that as far as bank outsourcing is concerned, it would be interesting.
Similarly, in security, we sell CCTV cameras, but we made an investment in Statue, which is the video analytics company, which uses CCTV footage to analyze people count, productivity, fire, all kinds of other AI applications.
Similarly, in FM segment, we are very bullish on health care. We manage over 400 hospitals across India. And we've always believed that health care in India has a massive opportunity. Emoha for us is basically an extension of the health care -- FM health care play. While we are a part of the hospitals and health care and hospitals, there's also a large, health care FM services outside of hospitals, which is where Emoha comes in. The elder care segment where people have to be taken care of at elder homes or in all old age homes, community living.
So that's where Emoha comes up. It's an interesting brand. We think there's a huge amount of synergy in terms of manpower, training, other such things. And I believe that they have access into homes, which actually elder -- for elders just as health care is a big requirement so is their security, and that's where we protect our alarm monitoring response business steps in. So I think there's not just -- it's a very interesting extension of health care FM. It's also a very synergistic opportunity for us [indiscernible] with a small net of INR 10, which did us only 4%. But Emoha, this year is doing roughly INR 84 crores of revenue already. And they have aggressive plans, and we have 4%, but we are already the second largest owner in Emoha. And we believe that if the business performs on track, we will follow up with further tranches of investment. So that's our thinking around Emoha. I hope it helps.
The next question is from the line of Mehul Mehta from Nuvama.
Correct me if I'm wrong, but Mr. Rituraj, you said that since listing, our India Security business has come to 15.8%. Is that correct?
SIS Group has compounded at a '24 at 15.8%, group, not SIS security. Security will be higher. .
Okay. So in that, like, how would have been industry grown? So in the sense like we have gained market share, so I wanted to have some idea like in terms of like, what would have been industry growth of security during the same period? And how would have weak grown? Is that possible to share?
There is no third-party official data that I could lean on. But I mean, the closest idea I could give you is that wage inflation in the same period year-on-year has been between 5% to 6%. So everybody in this industry would have had at least 5% to 6% growth because of wage inflation. More opportunity in the economy has been doing well after COVID, so I think I'd say that people would have certainly grown 5% plus, whether they have grown as an industry has grown 8% or 10% or 12% or it's hard for me to sort of take a guess in that direction. But yes, that's the broad range.
But I could tell you more specifically the competitors that we track between the top 10 security companies in India are 10 closest competitors. We have maintained the highest growth rate on a CAGR basis for the last 3 years back to back. So that's how we picked up market share.
Right. And in terms of -- is there like -- I mean, like there would definitely contribution from inorganic growth also like when you are mentioning this growth rate?
We haven't acquired anything after 2019. .
Okay. So prior to that, if you are looking at, like, say, last decade, then it would have been like. So just wanted to share maybe if I can have one-on-one interaction like a post with you like then maybe if you can share some sort of numbers, so give some idea that how we are going and going forward, like when we are like I think you have given like a 5-year projection also like that how you want to grow like in terms of security as well as facility management regard.
No, no, I have not given any projection my friend. What I'm telling you is that -- we have been listed for 7 years, last acquisition was made 6 years back or 5 years back.
I'm not talking about -- sorry to interrupt, but I'm not talking about like past historic growth. What I'm saying is that like I think like in last year presentation, you have given guidance something like where you want to grow like that in the business.
I'm not what you're referring to, but please take it off-line. You're more than welcome. We sit down and we can talk. But as I've said even today on the call that I believe at a segmental level, security can maintain high teens growth. .
Sure, sure. I'll come back. Yes. I mean, I'll have one-on-one interaction will come.
[Operator Instructions] The next question is from the line of Saket Kapoor from Kapoor & Company.
What explains is other expenses declined year-on-year, sir, on a consolidated basis?
Just give me a minute.
And also, sir, on the debt to EBITDA, I missed your -- in your opening remarks, what are we eyeing for the current year? What should be the ballpark number which we are really comfortable with?
I've always said that for us, 2x net debt to EBITDA is sort of a red light. We want to stay below that. We also believe that under 1x gearing, net debt-to-EBITDA is under utilizing the balance sheet and a high cash flow generating business like us. So our reality lies between 1x to 2x, and we keep fluctuating between these 2 thresholds. And if you see the track record the last 7 years, you will see that that's been the trend also. .
Okay. And sir, in your opening remarks, you did mention about one of the mandate, which is due in the NCLT, I missed that opening remarks for the sake of reputation. Can you indulge once again? What were you referring to?
SIS, as if you've been following SIS, SIS has taken a decision to demerge its cash shareholding. The cash joint venture that we run, we want to list it via a demerger. And I was just informing everybody that the demerger scheme is now almost ready and we'll be filing in the next few weeks. .
Okay. So the ratios and other modalities are not yet been in public domain, I'm not...
Very premature for that. We are just filing for demerger and other details will follow. .
Okay. It is only the intention -- with the intent we are doing, but we will be coming with the ratios also when we will be filing the same.
Absolutely. .
Okay. So when will that be the reality when you start be knowing it, what ratio and what is the time line?
I think it's more second half of the year. And remember, it will be a mirror demerger. So if you have 1 share of SIS, you will get 1 share of -- explain Devesh please.
SIS, because at this point, owns 49% share in the JV. So every shareholder of SIS will get a proportionate share in the JV to the extent of that 49%. So that's how the milder at work. There's no real ratio, which is actually going to end up taking place though for statutory purposes, we will have to create -- so you'll have to get independent valuation report. But typically is going to be this way. It's a mirror demerger. So if there are 49 shareholders in SIS having 1 share each, they'll all get 1/1 proportionate share in the cash business to the extent of the front. That's how the scheme is going to work. . On the first question you had on the expenses, why the expenses are reduced. I think we should all be pleased if expenses are getting reduced. That shows an SG&A control. But this partly in SG&A control and partly, it could be that the subcontracting expenses in Australia may have also come down. But if you want, I can give you a more detailed answer separately.
Sir, your mirror part of the story is not yet understood. Once you're getting mirror lease, am I holding...
So let me extend again. Let's say you have 20% share in SIS.
No, I hold 100 shares in SIS. Now you explain me what will be my entitlement?
Put it as a percentage. If you look at it as a number of shares, it's going to be difficult for me to explain. So let me explain it as a percentage. A shareholder holding 10% shares in SIS will get 4.9% shares in the resulting JV company because 10% into 49% is 4.9%. So if you look at it on a percentage basis, that's how we get your number.
Okay. So then the ratios will be very different. It is only the margin of the same that you are explaining that since SIS hold 49% in the JV, that gets expected out to a separate entity. That's how you are explain. But the ratio will be...
Proportionate share to make it a total of 49%.
Right, sir. And what are the -- this annual year revenue and the profitability from the JV?
So from the JV, if you look at the page, what of the earnings growth page. We'll just give the annual numbers. So for Q4 it was INR 162 crores, for the full year INR 634 crores. If you look at [indiscernible] the earnings note, the numbers are there given up.
Okay. I'll go through that same site. The profitability number, also you can mention it is a revenue, I think that you mentioned. .
INR 634 crores and the EBITDA is INR 106 crores.
INR 106 crores. And if there's anything left, I'll take it offline from madam.
The next question is from the line of Aditya Singh from Robo Capital.
This might be a repeated question. I joined the call a bit late. Can you please explain the dip in margins in this quarter?
So yes, this has been asked and also responded. I'll be very brief on this. So as far as India security business is concerned, overall margins were actually similar, but on auditors advise in spite of having a better strong correction quarter on auditors advise, we've taken an extra provision for doubtful debts and that is what has reduced the -- it's a one-off thing, which has reduced the margin in this quarter.
But otherwise, we are overall on a 5.8% to 6% steady margin state in India security. International business has been more or less steady. In FM, also as explained, the rationalization of contracts continue. And because we are shedding low-margin contracts, we are losing that bit of operating leverage on a -- for a temporary period of time, which with the compensating factor of new contract coming in and new gross margin coming in. We expect this to come back on stream over the next 1 or 2 quarters.
Ladies and gentlemen, it was the last question for today. I would now like to hand the conference over to Mr. Rituraj Sinha for closing comments. Over to you, sir.
Rituraj has just left the room. So this is Vineet here. So I would like to thank all of you for participating. I hope all the questions put up, we could answer them. And very happy to take them off-line as the IR team is always available. Thank you. With this, we would like to close the call, and have a good day.
Thank you. On behalf of SIS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.