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SECURITY AND INTELLIGENCE SERVICES (INDIA) BUY

MIDCAPS Target Price: Rs 620

Organic growth intact, OCF:EBITDA improves

Q3 revenue growth was strong at ~19% YoY (tad below our est. of CMP : Rs 538
~23%) on organic growth of 19%/ 29% YoY in India Security/FM Potential Upside : 15%
business. Key highlights were (1) all round improvement in margin
~20 bps / 120 bps / 70 bps YoY in India Security/ International
Security/ India FM and (2) improvement in OCF:EBITDA at 80% MARKET DATA
(75% in Q2 and 50% in FY19). No. of Shares : 147 mn
Free Float : 26%
We expect margin trajectory to improve (6.2% in FY22) on (1) company Market Cap : Rs 79 bn
transitioning to a solutions-based offering driving growth and margin, 52-week High / Low : Rs 556 / Rs 351
(2) operating leverage benefits, (3) mix change – high margin FM Avg. Daily vol. (6mth) : 35,945 shares
business growing faster and (4) integration of acquisitions into SIS Bloomberg Code : SECIS IB Equity
Promoters Holding : 74%
ethos. As SIS walks this path, we expect ~28% earnings CAGR over
FII / DII : 11% / 7%
FY19-22, cash conversion over 50% and ROCE improving to ~20%
(17% in FY19). Maintain BUY with TP of Rs 620 (SoTP; FY22E).

Q3FY20 results highlights

♦ Growth trajectory: Revenue at ~Rs 21.8 bn grew 19% YoY aided by strong performance in India Security (up 25%
YoY) and Facility Management (up 33% YoY); International Security (up 9% YoY) continued high single-digit run
rate. Organic growth remained strong with India Security/Facility Management business clocking 19%/29% YoY
organic growth. In Q3, SIS crossed monthly revenue run rate of USD 100 mn.
♦ Margin profile: Headline EBITDA grew robust ~37% YoY (21% organic) with EBITDA margin at 6.1% (up 80 bps
YoY). Margin expansion was led by strong cost controls and operating leverage benefits. Across segments, India
Security/International Security/Facility margin improved 20 bps/120 bps/70 bps YoY.
♦ Earnings: PBT grew ~17% YoY on higher depreciation and interest costs; lower tax rates enabled PAT of ~Rs 783
mn (up ~33% YoY). Profitability metrics improved – RoCE/RoE expanded ~700 bps/ 190 bps YoY to ~23%/21%.
♦ Debt and cash conversion: Net debt largely flat sequentially at ~Rs 7.2 bn with net debt/EBITDA of 1.2x.
OCF:EBITDA improved to 80% (vs. 75%/50% in Q2/FY19).

Financial summary (Consolidated) Key drivers

Y/E March FY19 FY20E FY21E FY22E (%) FY19 FY20E FY21E FY22E
Sales (Rs mn) 70,933 86,728 100,262 116,263 Sales Growth 21.6% 22.3% 15.6% 16.0%
Adj PAT (Rs mn) 2,147 3,142 3,253 4,456 EBITDA margin 5.1% 6.1% 6.1% 6.2%
Con. EPS* (Rs) - 17.0 20.5 28.4
EPS (Rs) 14.7 21.5 22.2 30.4
Change YOY (%) (34.2) 46.4 3.5 37.0 Price performance
P/E (x) 36.7 25.0 24.2 17.7 160
Sensex SIS
RoE (%) 18.8 22.3 18.8 21.1 140
RoCE (%) 16.7 17.1 18.3 19.3 120
EV/E (x) 22.8 15.5 13.2 11.1 100
DPS (Rs) - - - -
80
Source: *Consensus broker estimates, Company, Axis Capital Jan-19 Apr-19 Jul-19 Oct-19 Jan-20

*FM= Facility management

Aditya Bagul, CFA VP – Midcaps Kashyap Pujara Managing Director – Head of Research Anshuman Singh Senior Executive - Midcaps
aditya.bagul@axiscap.in 9122 4325 1130 kashyap.pujara@axiscap.in 91 22 4325 1107 Anshuman.Singh@axiscap.in 91 22 4325 1128

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FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, REFER TO THE END OF THIS MATERIAL
 30 JAN 2020 Quarterly Update
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Exhibit 1: Result highlights

Particulars Quarter ended Year ended
(Rs mn) Dec-19 Dec-18 % Chg Sep-19 % Chg FY20E FY19 % Chg
Net sales 21,782 18,368 19 20,889 4 86,728 70,933 22
EBITDA 1,335 978 37 1,237 8 5,256 3,652 44
Other income 47 40 - (21) - 120 177 -
PBIDT 1,382 1,018 36 1,215 14 5,376 3,828 40
Depreciation 333 177 89 326 2 1,300 660 97
Interest 382 229 67 378 1 1,438 938 53
Share of profit from associates 4 (40) - 0 - (45) (135) -
PBT 670 573 17 513 31 2,592 2,095 24
Tax (112) (18) - (249) (55) (550) (52) 967
Reported PAT 783 591 33 762 3 3,142 2,147 46
No. of shares (mn) 146 146 - 146 - 146 146 -
EBITDA margin (%) 6.1% 5.3% 81 5.9% 21 6.1% 5.1% 91
PBIDT margin (%) 6.3% 5.5% 81 5.8% 53 6.2% 5.4% 80
EPS - annualized (Rs) 21.4 16.1 33 20.8 3 21.5 14.7 46
Source: Company, Axis Capital

View and valuation: SIS has met the milestone of being #1 India Security player.
Now, it aims to be #1 player in Indian FM market. With a slew of new acquisitions
{RareHospitality (FM), SLV (India sec - north), Uniq (India security – Bangalore)
Henderson (Singapore security) and P4G & Triton (New Zealand security), SIS is
plugging portfolio gaps in key geographies. While its growth trajectory is in place;
SIS has taken several initiatives (Man Tech solutions, Alarm monitoring, Integrated
FM) to move from a product/service offering to a solution-based offering. Initiatives
like ONE SIS, OYC (own your customer) will enable better and more granular client
mining. It maintains its guidance of 18-20% organic revenue growth (India security
+ facility management); 25%+ ROCE and 50% + CFO/EBITDA ; in essence
balancing growth, margin and profitability.

Given the stark differences in growth, opportunity size and margin of the 3 business
segments, we value SIS on SoTP basis. We value the fast-growing and high-margin
India segments (Security and FM) at 15x FY22E EBITDA and International segment
at 10x as it is in typically matured markets hence has a lower growth profile (details
on page 5).

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Exhibit 2: Segmental highlights

Particulars Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
Segment revenue (Rs mn)
India Security 5,650 6,299 7,252 7,787 8,084 8,759 9,089
International Security 8,497 8,439 8,626 9,019 9,134 9,034 9,397
Facility Management 1,998 2,213 2,507 2,774 2,897 3,139 3,326
Segmental Revenue growth
India Security 15% 20% 29% 36% 43% 39% 25%
International Security 42% 9% 7% 7% 7% 7% 9%
Facility Management 30% 33% 46% 52% 45% 42% 33%
Segmental EBITDA margin
India Security 4.9% 5.0% 5.8% 6.3% 6.6% 6.1% 6.0%
International Security 4.0% 3.7% 4.6% 5.2% 5.9% 5.4% 5.8%
Facility Management 6.3% 7.0% 6.6% 7.0% 6.2% 6.7% 7.2%

Source: Company, Axis Capital

Exhibit 3: Overview of organic growth – revenue/EBITDA/PAT

Particulars Revenue growth EBITDA growth PAT growth
Q3 9M Q3 9M Q3 9M
Overall growth 19% 22% 37% 53% 33% 61%
India security 26% 36% 30% 58% 13% 92%
International security 9% 8% 37% 50% 5% 28%
Facility management 33% 40% 34% 37% 25% 31%
Organic growth 11% 14% 21% 38% 40% 41%
India security 19% 28% 24% 52% 8% 84%
International security 2% 3% 16% 32% 3% 20%
Facility management 29% 36% 30% 34% 21% 25%

Source: Company, Axis Capital

Conference call takeaways

♦ India Security (#1 player)
 Revenue growth was led by strong client additions and lower client attrition.
Monthly run rate maintained at ~Rs 3 bn (flat sequentially).
 Organically, revenue/branch per month increased from ~Rs 14.5 mn in
Q3FY19 to ~Rs 17.5 mn in Q3FY20 (~Rs 18 mn including acquisitions).
 Segment profitability was maintained sequentially at ~6%. Management
highlighted staff costs declined ~10% YoY despite increase in revenue per
month of ~21% YoY.
 DSOs inched up marginally due to the stress in the economy and poor
working capital availability for many clients. DSO as of Dec-19 stood at 69
days vs. 67 days in Sept-19.
 On steady state, segment EBITDA margin to be 6-6.5%.
 SIS closed the quarter with 157K security guards deployed across India.

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♦ International Security (#1 in Australia and among top 3 in Singapore)

 High single-digit growth momentum continued with strong margin
improvement. Management highlighted Australia had an excellent quarter
for working capital with collections hitting a historic high. DSO in Australia
came down from 54 days in Q2FY20 to 46 days in Q3FY20.
 Margin improvement initiatives helped Singapore subsidiary – Henderson
(Q3 revenue at ~SGD 15 mn) – clock over 10% EBITDA margin.
Acquisitions in New Zealand are scaling up well and have attained
leadership position in alarm solutions and monitoring business.
 On a steady state, international business EBITDA margin to be 5-5.5%.
 SIS closed the quarter with ~9K security guards deployed across
international markets.

♦ Facility Management (#2 player)

 Despite economic slowdown, strong organic growth continued across SBUs
as SIS inched closer towards becoming market leader in India FM sector.
 Focus on specialized verticals like hospitality, railways and healthcare,
through creation of an in-house knowledge base and customized
productivity tools helped SIS notch impressive client wins.
 Rare Hospitality continued strong performance aided by order wins during
the quarter. Monthly revenue run rate increased by 20% YoY to ~Rs 90 mn.
 On a steady state, segment EBITDA margin to be 6-6.5%.
 DSO remained flat YoY.

♦ Cash logistics (accounted as associate): Revenue (~Rs 885 mn vs. ~Rs 728 mn
in Q3FY19) and profitability (segment EBITDA of ~Rs 51 mn vs. -ve ~Rs 10 mn
in Q3FY19) improving on (1) increased focus on non-ATM business and
(2) exiting unprofitable contracts.

SoTP valuation
Given the stark differences in growth, opportunity size and margin in the 3 business
segments, we value SIS on SOTP basis.

India security business: SIS, with the acquisition of SLV and UNIQ, has become the
#1 player in the Indian Security industry and is growing organically by 18-20%.
Margin trajectory is set to improve with strong focus on solutions-based offering
(Man-tech solutions, Alarm Monitoring etc.), efficiency gains and operating
leverage benefits. We value India Security business at 15x FY22 EBITDA.

FM business remains the growth engine for SIS; from a revenue base of
~Rs 500 mn in FY13, this has become a ~Rs 6.8 bn (FY19) revenue pool through
strong organic growth and synergistic acquisitions. This segment clocked the highest
margin (6.7% in 9MFY20) and the management guided that the margin going
forward will be in similar range (6.5%+). Also, some of its sub-segments like
Terminix (pest control) achieved breakeven in FY19 and are now profitable.
Initiatives like One-SIS will enable client mining which will drive improvement in
overall growth and sustainable margin. We value this strong growth and margin
business at 15x FY22 EBITDA.

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International security business: Australia is the largest geography with MSS + SXP
being the market leader in a matured market. Other markets include New Zealand
and Singapore. Overall organic growth in these matured markets is expected to be
4-5%. However, international segment for SIS has been growing at 2x that growth
rate and we expect it to grow 8-10% during FY19-22. Margin trajectory is
expected to improve through synergistic acquisitions like Henderson (~12% margin
in FY19) and scale benefits. We value this segment at 10x EBITDA (in line with
global peers like G4S, Securitas etc.).

Exhibit 4: SoTP valuation (based on FY22)

Particulars EBITDA FY22 Multiple Value Per Share
(Rs mn) Rs mn (Rs)
India Security 3,289 15 49,341 340
Facility Management 1,463 15 21,943 150
International Security 2,493 10 24,933 170
Total 96,217 660
Net Debt 6,000 41
Equity value 90,217 620
CMP 538
Upside 15%

Source: Company, Axis Capital

Exhibit 5: P/E trend Exhibit 6: EV/ EBITDA trend

22 PE (x) +1SD Avg -1SD EV-E (x) +1SD Avg -1SD

14
21
20 13
19
12
18
17
11
16
15 10
Jul-19
May-19

Sep-19

Oct-19

Jan-20
Dec-19
Jun-19

Nov-19
Apr-19

Aug-19
May-19

Jul-19

Sep-19

Oct-19

Dec-19

Jan-20
Jun-19

Nov-19
Apr-19

Aug-19

Source: Bloomberg, Axis Capital Source: Bloomberg, Axis Capital

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Financial summary (Consolidated)

Profit & loss (Rs mn) Cash flow (Rs mn)
Y/E March FY19 FY20E FY21E FY22E Y/E March FY19 FY20E FY21E FY22E
Net sales 70,933 86,728 100,262 116,263 Profit before tax 2,231 2,637 3,469 4,996
Other operating income - - - - Depreciation & Amortisation 660 1,300 1,350 1,400
Total operating income 70,933 86,728 100,262 116,263 Chg in working capital (742) (2,154) (1,609) (1,940)
Cost of goods sold (57,571) (69,928) (80,418) (92,480) Cash flow from operations 2,048 3,606 4,319 4,741
Gross profit 13,362 16,800 19,844 23,783 Capital expenditure (4,903) (500) (500) (500)
Gross margin (%) 18.8 19.4 19.8 20.5 Cash flow from investing (5,224) (500) (3,000) (3,000)
Total operating expenses (9,710) (11,544) (13,700) (16,562) Equity raised/ (repaid) - - - -
EBITDA 3,652 5,256 6,144 7,221 Debt raised/ (repaid) 2,740 - - -
EBITDA margin (%) 5.1 6.1 6.1 6.2 Dividend paid (109) - - -
Depreciation (660) (1,300) (1,350) (1,400) Cash flow from financing 1,910 (1,318) (1,325) (825)
EBIT 2,992 3,956 4,794 5,821 Net chg in cash (1,266) 1,788 (6) 916
Net interest (938) (1,438) (1,475) (975)
Other income 177 120 150 150 Key ratios
Profit before tax 2,231 2,637 3,469 4,996 Y/E March FY19 FY20E FY21E FY22E
Total taxation 52 550 (171) (495) OPERATIONAL
Tax rate (%) (2.3) (20.9) 4.9 9.9 FDEPS (Rs) 14.7 21.5 22.2 30.4
Profit after tax 2,282 3,187 3,298 4,501 CEPS (Rs) 19.2 30.3 31.4 40.0
Minorities - - - - DPS (Rs) - - - -
Profit/ Loss associate co(s) (135) (45) (45) (45) Dividend payout ratio (%) - - - -
Adjusted net profit 2,147 3,142 3,253 4,456 GROWTH
Adj. PAT margin (%) 3.0 3.6 3.2 3.8 Net sales (%) 21.6 22.3 15.6 16.0
Net non-recurring items - - - - EBITDA (%) 17.1 43.9 16.9 17.5
Reported net profit 2,147 3,142 3,253 4,456 Adj net profit (%) 31.7 46.4 3.5 37.0
FDEPS (%) (34.2) 46.4 3.5 37.0
Balance sheet (Rs mn) PERFORMANCE
Y/E March FY19 FY20E FY21E FY22E RoE (%) 18.8 22.3 18.8 21.1
Paid-up capital 733 733 733 733 RoCE (%) 16.7 17.1 18.3 19.3
Reserves & surplus 11,766 14,908 18,161 22,617 EFFICIENCY
Net worth 12,499 15,641 18,894 23,350 Asset turnover (x) 5.2 5.0 5.1 5.0
Borrowing 9,748 9,748 9,748 9,748 Sales/ total assets (x) 2.1 2.0 2.2 2.3
Other non-current liabilities 7,255 7,255 4,755 2,255 Working capital/ sales (x) 0.1 0.1 0.1 0.1
Total liabilities 29,505 32,648 33,401 35,356 Receivable days 49.0 50.0 50.0 50.0
Net fixed assets 15,745 15,030 14,180 13,280 Inventory days 1.4 1.1 1.1 1.1
Add: Capital WIP 85 85 85 85 Payable days 3.6 3.6 3.6 3.6
Total fixed assets 15,830 15,115 14,265 13,365 FINANCIAL STABILITY
Total Investment 1,851 1,851 1,851 1,851 Total debt/ equity (x) 0.9 0.7 0.6 0.5
Inventory 254 238 275 319 Net debt/ equity (x) 0.4 0.2 0.1 0.1
Debtors 9,530 11,881 13,734 15,926 Current ratio (x) 2.1 2.3 2.2 2.3
Cash & bank 5,429 7,217 7,211 8,127 Interest cover (x) 3.2 2.8 3.3 6.0
Loans & advances 6,396 7,820 9,040 10,483 VALUATION
Current liabilities 10,688 12,495 14,170 16,113 PE (x) 36.7 25.0 24.2 17.7
Net current assets 11,824 15,766 17,370 20,225 EV/ EBITDA (x) 22.8 15.5 13.2 11.1
Other non-current assets - - - - EV/ Net sales (x) 1.2 0.9 0.8 0.7
Total assets 29,505 32,648 33,401 35,356 PB (x) 6.3 5.0 4.2 3.4
Source: Company, Axis Capital Dividend yield (%) - - - -
Free cash flow yield (%) (3.6) 3.9 4.8 5.4
Source: Company, Axis Capital

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Axis Capital Limited is registered with the Securities & Exchange Board of India (SEBI) as “Research Analyst” with SEBI-registration
number INH000002434 and which registration is valid till it is suspended or cancelled by the SEBI.

DISCLAIMERS / DISCLOSURES
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

1. Axis Capital Limited (ACL), the Research Entity (RE) as defined in the Regulations, is also engaged in the business of Investment banking, Stock broking and
Distribution of Mutual Fund products.

2. ACL is also registered with the Securities & Exchange Board of India (SEBI) for its investment banking and stockbroking business activities and with the
Association of Mutual Funds of India (AMFI) for distribution of financial products.

3. ACL has no material adverse disciplinary history as on the date of publication of this report

4. ACL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of
this report should be aware that ACL may have a conflict of interest that may affect the objectivity of this report. Investors should not consider this report as the
only factor in making their investment decision.

5. The RE and /or the research analyst or any of his / her family members or relatives may have financial interest or any other material conflict of interest in the
subject company of this research report.

6. The research analyst has not served as director / officer, etc. in the subject company in the last 12-month period ending on the last day of the month
immediately preceding the date of publication of this research report.

7. The RE and / or the research analyst or any of his / her family members or relatives may have actual / beneficial ownership exceeding 1% or more, of the
securities of the subject company as at the end of the month immediately preceding the date of publication of this research report.

8. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report ACL or any of its
associates may have:

i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this
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ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or;

iii. Received compensation for products or services other than investment banking, merchant banking or stockbroking services from the subject company of
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viii. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as
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xi. This document is being supplied to the recipient solely for information and may not be reproduced, redistributed or passed on, directly or indirectly, to any
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Research Disclosure - NOTICE TO US INVESTORS:

This report was prepared, approved, published and distributed by Axis Capital Limited, a company located outside of the United States (a “non-US Company”). This
report is distributed in the U.S. by Axis Capital USA LLC, a U.S. registered broker dealer, which assumes responsibility for the research report’s content, and is meant
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Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc.
(“FINRA”) or other regulatory requirements pertaining to research reports or research analysts. The non-US Company is not registered as a broker-dealer under the
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The non-US Company will refrain from initiating follow-up contacts with any recipient of this research report that does not qualify as a Major Institutional Investor, or
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ANALYST DISCLOSURES
1. The analyst(s) declares that neither he/ his relatives have a Beneficial or Actual ownership of > 1% of equity of subject company/ companies;
2. The analyst(s) declares that he has no material conflict of interest with the subject company/ companies of this report;
3. The research analyst (or analysts) certifies that the views expressed in the research report accurately reflect such research analyst's personal views
about the subject securities and issuers; and
4. The research analyst (or analysts) certifies that no part of his or her compensation was, is, or will be directly or indirectly related to the specific
recommendations or views contained in the research report.

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Axis Capital Limited

Axis House, C2, Wadia International Centre, P.B Marg, Worli, Mumbai 400 025, India.
Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
Fax:- Research +91-22 4325 1100; Dealing +91-22 4325 3500

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 15%
ADD Between 5% to 15%
REDUCE Between 5% to -10 %
SELL More than -10%

Security and Intelligence Services (India) (SECIS IN) Price and Recommendation History

Source: Axis Capital

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