Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank loan facilities and NCD program to the of SIS Limited.  

 

CRISIL Ratings has withdrawn its rating on the NCD programme of Rs.190 crore of SIS Limited at the company’s request and on receipt of 'no dues certificates' from the lenders, confirming that NCD has been fully repaid. (see ‘Annexure- Details of Rating Withdrawn' for details)  The withdrawal is in line with the policy of CRISIL Ratings' regarding withdrawal of NCD ratings.

 

The rating reflects the healthy business risk profile of SIS Ltd and its subsidiaries (collectively called as the SIS group), marked by established market position in the Indian and overseas security services markets, diversified service offerings, end-user, and customer base. The rating also benefits from the healthy operating efficiency supported by strong manpower sourcing capabilities, stable operating profitability, and longstanding experience of promoters in the security services sector

 

The ratings also factor in the group's comfortable financial risk profile, backed by healthy debt protection metrics and capital structure despite debt-funded acquisitions undertaken. These strengths are partially offset by exposure to intense competition in a fragmented industry and working capital intensive operations.

 

Consolidated revenues (including cash logistics business) have increased by 14% y-o-y in fiscal 2023, increased to Rs 11,889 crore in FY23 from Rs 10,454 crore last year driven by y-o-y escalation in contracts for security services, minimum wage revisions, in addition to new order wins across sectors. The consolidated operating margins have slightly declined y-o-y in fiscal 2023 chiefly because of discontinuation of higher margin Covid-19 contracts and increase in minimum wages in Security Solutions – International business (primarily in Australia), which remained top revenue contributing segment; The margins, however, expected to recover in fiscal 2024 with the built-in escalation clauses in contracts and wage hikes being passed on to customers with some lag. Also, the margins have witnessed improving trend over the past few quarters of fiscal 2023. Overall operating margins are expected to remain at around 5-5.5% in the medium term.

 

M&A activities are expected to be funded through internal accruals and debt in the medium term. SIS Australia Group Pty Limited (“SIS Australia Group”), a subsidiary of the Company has acquired 85% shareholding of Safety Direct Solutions Pty Ltd. In Australia with investment of Rs 27.05 Crore. Further SIS Ltd. has also made an investment in Staqu Technologies Pvt. Ltd. By acquiring 9.83% shareholding with total investment of around Rs.  6.35 crore in Fiscal year 2023.

 

Debt of the company has increased in fiscal 2023, primarily due to increase in working capital requirement (to support the business growth). However, it is estimated to come down over the medium in the absence of major debt funded acquisition.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of SIS Limited with its subsidiaries, joint ventures (JVs) and SIS Cash Services Pvt Ltd because of strong financial, business linkages and common management. SIS Cash Services (49% JV, consolidated under equity method by company) has been fully consolidated due to as an additional 2% shares are held by Indian residents to effectively give control to SIS Limited.

 

For arriving at the adjusted financials, CRISIL Ratings has amortized goodwill on acquired businesses over 10 years.

 

Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established market position and strong promoter experience

The SIS group is the largest provider of security services (39% revenue contribution) and facility management services (16%), and the second largest cash management (5%) player in terms of market share in India. SIS Group is also the largest security services provider in Australia and over the years, has also increased its foothold in the country with market share of ~21%. Backed by the established market position, consolidated revenue of the group increased to Rs 11,889 crore in fiscal 2023 from around Rs 6,154 crore in fiscal 2018, at a CAGR of around 16%, and is estimated to reach to over Rs 13,000 crore in fiscal 2024. The promoters are associated with the security services industry for over three decades and have established longstanding relationship with clients. The group has a diversified mix of service offerings including security services (80% of fiscal 2023 consolidated revenue), facility management (16%) and cash logistics (5%). The diversity is expected to further improve given the strong growth in facility management services and cash logistics segments.

 

Security services – India business segment witnessed healthy revenue growth of 20% in fiscal 2023, increased to Rs 4626 crore from Rs 3857 crore last year. The operating margins in this segment also witnessed improvement in fiscal 2023, improved to 4.6% from 4.3%, chiefly attributable to new order wins and minimum wage hike.

 

The group’s facility management business and cash management services segment have recorded strong growth in revenue in fiscal 2023, improved to 1900 crore (growth of 36%) and Rs 543 crore (38%), respectively. The operating margin in facility management business remained rangebound within 4.2%-4.7% over the past two years. The operating margin in cash management services segment improved to 15.8% in fiscal 2023 from 13.5% in fiscal 2022 and 8.6% in fiscal 2021.

The product offerings including security and facility management services are classified as essential in nature and their demand is expected to be bolstered over the medium term as clients are expected to increase focus on cleaning, sanitization facilities along with security personnel post pandemic.

 

The security services segment is largely dominated by the unorganized sector in India and is also very fragmented. Within the organized sector which accounts for 35% of the overall market, the SIS group has strengthened its dominance over time, through organic and inorganic expansion, as well as by weaning away share from the unorganized players. Given the group's strong market position in all key segments and established sourcing capabilities along with prudent expansion strategies, the group is expected to report steady revenues and strengthen its market position in its key segments.

 

Steady operating efficiency

The operating margin has consistently remained in line with industry average at 4-6% during fiscals 2015 to 2023, driven by strong operating leverage and branch performance, improved productivity through deployment of technology for effective real-time monitoring, better client mix and solution selling. The SIS Group can recruit, train and deploy around 50% of its manpower requirements through its 29 in-house training academies. This is also reflected in a reasonable return on capital employed ratio of over 10% over the past fiscals through 2023. Further, despite a high client base, debtor days have remained in the range of 40-60 days over the last five fiscals through 2023 and the same is likely to remain rangebound in fiscal 2024 and over the medium term.

 

The consolidated operating margins have improved over the past two quarters specially in India security business and cash logistics business. The consolidated operating margins have slightly moderated y-o-y in fiscal 2023 (from fiscal 2022 levels) chiefly because of discontinuation of higher margin Covid-19 contracts and increase in minimum wages in Security Solutions – International business (primarily in Australia), which remained top revenue contributing segment. The margins are expected to improve in fiscal 2024 with the built-in escalation clauses in contracts, wage hikes being passed on to customers with some lag and continued improvement in cash logistics business.

 

Benefits from premium positioning due to integrated nature of services, slow and steady shift towards technology-based security solutions and continued productivity gains from operating leverage are likely to sustain and give an impetus to margins in the medium term.

 

Healthy financial risk profile

Financial risk profile is healthy and likely to improve over the medium term, supported by steady profitability and cash accruals of over Rs 550 crore. The group has sizeable adjusted net worth as on March 31, 2023 and is estimated to further improve in fiscal 2024. Strong turnaround of acquisitions along with efficient working capital management helped in maintaining healthy financial risk profile over the last few years.

 

Due to slight moderation in margins in fiscal 2023 and increased debt level (primarily working capital loans to support business growth), Gross Debt/EBITDA level is elevated at around 3.0 times as on March 31, 2023 as against 2.8 times as on March 31, 2022. However, with expected improvement in scale and operating margins, the same is expected to be below 2.5 times over the medium term.

 

Further, the group has strong liquidity, supported by a conservative policy towards funding of external debt. It has unencumbered: Rs 822.5 crore) and undrawn bank limit of Rs 254 crore (SIS Limited-standalone) as on March 31, 2023. The expected healthy cash accruals will be sufficient to meet the expected debt obligations of around Rs 300 crore per annum in fiscals 2024 and 2025. Any large debt funded acquisition will remain key monitorable.

 

Weakness:

Moderate working capital requirement

The security services industry in India is working capital intensive. However, SIS Ltd has receivables of around 54 days as on March 31, 2023, which is relatively better compared to peers. Gross current assets have been 90-110 days owing to build up of cash in the business over the past few years; they are likely to remain stable over the medium term. The receivables days is expected to remain in the range of 40-60 days in medium term as the group has tightened its collection efforts across business segments Any sustained increase in debtors and hence working capital requirement with the increasing scale will be a key monitorable.

 

Exposure to intense competition and limited revenue diversity

The security services industry comprises around 20,000 small to medium, unorganised players and only 8-10 national players. The consequent intense competition continues to constrain scalability, pricing power and profitability. Unorganised players hold around 65% of the domestic market and the share of organised players may increase over the medium term with more focus on compliance after the implementation of the Goods and Services Tax, stricter enforcement of minimum wage bill, and the Private Security Agency Regulation Act and the recently passed Labour Reforms bills which are likely to benefit SIS India over the medium term.

 

Weak performance of group companies

Many group entities such as SIS Alarms and Monitoring and Tech SIS etc. are at an early stage of operations and may need funding support per annum in form of equity, loans or guarantees, till they scale up and can manage on their own. Though cash management business has seen improvement in operating margins in fiscal 2023, its sustenance and turnaround in other investments will remain a key monitorable.

Liquidity: Strong

The group has strong liquidity, supported by a conservative policy towards funding of external debt and unencumbered cash and bank balance of Rs 822.5 crore as of March 2023. The expected healthy collections will be sufficient to meet the expected external debt obligations over the medium term. Bank limits of Rs 675 crore (SIS Limited-standalone) were moderately utilised at around 68% during the past 12 months ending April 2023.

 

ESG Profile

CRISIL Ratings believes that SIS Limited’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The security services sector has a low impact on the environment because of the inherent nature of security services, core operations as well as product offerings. The sector has a social impact because of its large workforce. SIS Limited has continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights:

• SIS Limited has commenced an environmental audit to identify improvement areas for energy and water consumption.
• SIS Limited is a security services organization and does not manufacture physical products and therefore does not use any hazardous or toxic chemicals in any of its processes. However, they segregate the waste at offices based on directions of local municipal offices and engage with certified e-waste handlers for disposal of e-waste.
• The company has 6.74% women in the workforce. The Company is dedicated to providing a safe and healthy work environment. It is also recognized as Great Place to Work.
• Company’s governance structure is characterized with 55% of board comprising independent directors and extensive financial disclosures.

 

There is growing importance of ESG among investors and lenders. SIS Limited’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its access to both domestic and foreign capital markets.

Outlook: Stable

SIS Limited should continue to perform better than the overall industry owing to resilient business model, strong market position, efficient operating capabilities, and healthy financial risk profile.

Rating Sensitivity Factors

Upward Factors

• Substantial increase in scale of operations supported by improvement in diversity and increase in market share, also benefitting operating profitability (over 6.5%)
• Sustained improvement in credit metrics, supported by better than anticipated cash generation resulting in improvement in credit metrics; for instance gross debt/EBITDA below 1.0-1.2 times and TOL/TNW below 1.5 times

 

Downward Factors

• Substantial decline in operating performance, including due to intense competition, or loss of large customers
• Deterioration in credit metrics led by large capital expenditure/acquisitions or elongation of working capital cycle; for instance, gross debt/EBITDA increasing beyond 2.6-2.8 times and TOL/TNW beyond 2.5 times
• Liquid surpluses declining materially, due to additional acquisitions or dividend payout.

About the Company

Established in 1974 by Mr Ravindra Kishore Sinha, SIS India has been providing security services since inception, mainly manned guarding. It has grown over the years through organic as well as inorganic routes and operates in Australia (through MSS after acquisition of Chubbs Security in 2008), New Zealand (through P4G) and Singapore (through Henderson) apart from India. The SIS group has a pan India presence through its 374 branch offices, 20 regional offices and 22 training academies. It has a trained workforce of 2,83,000 employees.

 

Besides security solutions, the group also provides facility management and cash logistics services. Service Master Clean Ltd ('CRISIL A/Stable/CRISIL A1'), a 59% subsidiary of SIS India, provides cleaning services under a technical collaboration with Services Master Clean, the US-based industry leader. Few other companies in the segment rated by CRISIL are Dusters Total Solutions Services Pvt Ltd ('CRISIL A/Stable/CRISIL A1') and Tech SIS Ltd ('CRISIL BBB+/Stable'). The SIS group also offers cash management services through its joint venture, SIS Cash Services Pvt Ltd ('CRISIL A/Stable/CRISIL A1') and its subsidiary SIS Prosegur Holdings Pvt Ltd ('CRISIL BBB+/Stable/CRISIL A2'). The company got listed on National Stock Exchange and Bombay Stock Exchange effective August 10, 2017.

 

As on March 31, 2023, promoters & promoter group had a shareholding of 71.59% while balance 28.41% was held by public.

Key Financial Indicators*

for the period ended March 31		2023	2022
Operating Revenue	Rs.Crore	11,889	10,454
Profit After Tax (PAT)	Rs.Crore	265	218
PAT margins	%	2.2	2.1
Adjusted debt/adjusted networth	Times	1.10	1.16
Adjusted Interest coverage	Times	4.47	4.94

*CRISIL Ratings adjusted numbers

Any other information: Not applicable