Detailed Rationale

CRISIL Ratings has assigned ‘CRISIL AA-/Stable’ rating to Rs 190 crore non-convertible debentures (NCDs) of SIS Ltd (a part of SIS group) while reaffirming its ratings on the existing NCD and bank facilities at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

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

 

Revenue (including cash logistics business) has grown 8% year-on-year (y-o-y) to reach Rs 12,895 crore in fiscal 2024, driven by new orders bagged across sectors and escalation clauses built into the contracts. Operating income is expected to grow 8-10% over the medium term due to rise in minimum wages and new order wins. Operating margin improved to 5.3% in fiscal 2024, from 4.9% the previous fiscal, due to closure of lower profitable contracts entered during the Covid pandemic. Overall operating margin should be 4.5-5.5% in the medium term.

 

The financial risk profile is aided by healthy operating performance and steady debt. Gross debt to earnings before interest, tax, depreciation and amortisation (EBITDA) improved to 2.5 times. Interest coverage metric was above 4.2 times and likely to improve further. The company plans to incur moderate capital expenditure (capex) of Rs 50-100 crore over the medium term. It has made acquisitions in the past and will continue to do so going forward. However, the same will be funded via internal accrual. Any major debt-funded capex/acquisition will remain a key rating sensitivity factor.

Analytical Approach

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

 

To arrive at adjusted financials, CRISIL Ratings has amortised the goodwill on acquired businesses over 10 years.

 

Please refer Annexure - List of Entities 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, with the Indian market accounting for 39% of revenue. The group is the second largest cash management player in India, in terms of market share. It is also the largest security services provider in Australia and over the years, has increased its foothold in the country with a market share of around 21%. Backed by its established market position, consolidated revenue of the group increased to Rs 12,895 crore in fiscal 2024, from around Rs 6,154 crore in fiscal 2018, recording a compound annual growth rate (CAGR) of around 16%, and projected to reach Rs 13,000 crore in fiscal 2025. In the first half of fiscal 2025, operating income of the company has been Rs 6399 crore. The promoters have been associated with the security services industry for over three decades and have maintained longstanding relationship with clients. The group has diverse offerings, including security services (79% of consolidated revenue), facility management (16%) and cash logistics (5%). Strong growth in facility management services and cash logistics segments should help in diversifying the revenue base further.

 

Security services operations in India witnessed healthy revenue growth of 12% in fiscal 2024, to Rs 5,159 crore. Closure of lower-margin or fixed-charges contracts entered during the Covid-19 phase, led to improvement in margin to 5.7% in fiscal 2024, from 4.9% the previous fiscal.

 

The group’s facility and cash management services segments have recorded strong growth in revenue in fiscal 2024, improving to Rs 2,092 crore (growth of 10%) and Rs 634 crore (17%), respectively. Operating margin in the facility management business was 4.1-4.7% in the past two years. Margin in the cash management services segment improved to 16.7% in fiscal 2024, from 15.8% in fiscal 2023, and 13.5% in fiscal 2022.

 

The product offerings including security, facility management and cash 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 and sanitization of facilities along with security personnel post pandemic.

 

The security services segment is largely dominated by the unorganised sector in India and is also very fragmented. Within the organised 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 unorganised 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 revenue and strengthen its market position in its key segments.

 

• Steady operating efficiency: Operating margin has consistently remained in line with the industry average, at 4-6% over fiscals 2015 to 2024, driven by strong operating leverage and branch performance, better productivity through deployment of technology for effective real-time monitoring, improved client mix and sale of solutions. The SIS group can recruit, train and deploy around 50% of its manpower requirement, through its 29 in-house training academies. Return on capital employed (RoCE) ratio has also been over 10% in the five fiscals through March 2024. Further, despite a high client base, receivables have been 40-60 days over the five fiscals through March 2024 and are likely to be rangebound going forward too.

 

Operating margin improved to 5.3% in fiscal 2024, from 4.9% the previous fiscal, due to closure of low-margin contracts entered during Covid-19 pandemic. Overall margin is expected to remain steady at 5-6% in the medium term. In the first half of fiscal 2025 the company recorded operating profit before depreciation, interest and taxes (OPBDIT) of ~Rs 295 crore at a margin of 4.61%.

 

Benefits from premium positioning due to the 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 impetus to profitability in the medium term.

 

• Healthy financial risk profile: The SIS group reported a sizeable adjusted networth of above Rs 1700 crore as on March 31, 2024, and it is likely to improve further in fiscal 2025, aided by steady profitability and cash accrual of over Rs 450 crore. Strong turnaround of acquisitions, along with efficient working capital management have helped the group maintain a healthy financial risk profile over the last few years.

 

Gross debt/EBITDA improved to around 2.5 times as on March 31, 2024, from 3.0 times as on March 31, 2023, aided by better margin and no significant increase in debt. With improvement in scale and operating margin, the ratio is expected to be 2.5-3.0 times over the medium term.

 

Further, the group has strong liquidity with unencumbered cash balance of Rs 817 crore as on March 31, 2024, and undrawn bank limits of Rs 224 crore (SIS Ltd-standalone) as on June 30, 2024. The expected healthy cash accruals, undrawn working capital limits and cash balances will be sufficient to meet the debt obligations, incremental working capital requirements, capex and acquisition, if undertaken. Any large debt funded capex/acquisition will remain key monitorable.

 

Weaknesses:

• Moderate working capital requirement: The security services industry in India is working capital intensive. However, SIS Ltd had receivables of around 56 days as on March 31, 2024. Gross current assets have been 90-110 days over the past few years, owing to build up of cash in the business; they are likely to remain stable over the medium term. Receivables should be 40-60 days, as the group has tightened its collection efforts across business segments. Any sustained increase in receivables and hence, working capital requirement is a key monitorable.

 

• Exposure to intense competition and limited revenue diversity: The security services industry comprises around 20,000 small to mid-sized unorganised players and only 8-10 players operating pan-India. Intense competition continues to constrain scalability, pricing power and profitability. Unorganised players hold around 65% of the domestic market and organised players may see their share increase over the medium term, with additional focus on compliance after the implementation of the Goods and Services Tax (GST) Act, stricter enforcement of minimum wage bill, and the Private Security Agency Regulation Act and the recently passed Labour Reform bills.

 

• Weak but improving performance of group companies: Many group entities such as SIS Alarms and Monitoring and Tech SIS are in early stage of operations and may need funding support via equity, loans or guarantees, till they scale up and become independent.

Liquidity: Strong

The group has strong liquidity with unencumbered cash and bank balance of Rs 817 crore as on March 31, 2024.  The average bank utilisation remained around ~75% in the last 12 months. Further, the company had undrawn bank limits of Rs 223 crore (SIS Ltd-standalone) as on August 31, 2024. Annual cash accrual of ~ Rs 450 crore, undrawn working capital limits and existing cash balances will be sufficient to meet the debt obligations of Rs 150-200 crore per annum, incremental working capital requirements and capex over the medium term.

 

Environment, Social, and Governance (ESG) profile

CRISIL Ratings believes SIS Ltd’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 its core operations as well as product offerings. The sector has a social impact because of its large workforce. SIS Ltd has continuously focused on mitigating its environmental and social impact.

 

Key highlights:

• Scope 1 and 2 emissions intensity have reduced by around 18% year-on-year (y-o-y) to around 13 kg CO2E per permanent employee in fiscal 2024.
• The company reduced its e-waste generation by around 33% y-o-y to 0.50 million tonne (MT) in fiscal 2024.
• On a standalone basis, women formed 7.2% of the workforce in fiscal 2024, (6.7% in fiscal 2023). However, its attrition rate remained high around 39% in fiscal 2024 (36%) and is an area of improvement.
• Governance structure is characterised by 55% of the board comprising independent directors, 27% women directors, split in chairperson and managing director positions, nil investor complaints (received during fiscal 2024), and extensive financial disclosures.
• There is growing importance of ESG among investors and lenders. SIS Ltd’s commitment to these principles will play a key role in enhancing stakeholder confidence, given its access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes SIS Ltd will continue to benefit from its established market position, efficient operating efficiency and healthy financial risk profile.

Rating sensitivity factors

Upward factors

• A substantial increase in revenue supported by improvement in diversity and expansion in market share, also benefitting operating profitability (over 6.5%) on a sustained basis
• Sustained improvement in the credit metrics, supported by better-than-anticipated cash generation resulting in improvement in credit metrics; for instance gross debt/EBITDA at 1.0-1.2 times and total outside liabilities to tangible networth (TOLTNW) ratio below 1.5 times

 

Downward factors

• Substantial decline in operating performance, including due to intense competition, or loss of large customers
• Deterioration in the credit metrics led by large capex/acquisitions or elongation of working capital cycle; for instance, gross debt/EBITDA increasing beyond 2.6-2.8 times and TOLTNW beyond 2.5 times on a sustained basis
• Liquid surplus declining substantially, due to additional acquisitions or dividend payout

About the Company

Established in 1974, by Mr Ravindra Kishore Sinha, SIS Ltd 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 293 branch offices, 50 regional offices and 29 training academies. It has a trained workforce of 2,84,776 employees.

 

Besides security solutions, the group also provides facility management and cash logistics services. SMC Integrated Facility Management Solutions Ltd (previously known as Service Master Clean Ltd) ('CRISIL A/Stable/CRISIL A1'), wholly owned subsidiary of SIS India provides cleaning services. Some of the other companies in the segment rated by CRISIL Ratings 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/Positive/CRISIL A1') and its subsidiary SIS Prosegur Holdings Pvt Ltd ('CRISIL A/Stable/CRISIL A2+'). The company got listed on the National Stock Exchange and Bombay Stock Exchange effective August 10, 2017.

 

As on March 31, 2024, the promoters and promoter group had a shareholding of 71.48%, while balance 28.52% was held by public.

Key Financial Indicators*

for the period ended March 31		2024	2023
Operating income	Rs crore	12,895	11,889
Earnings before interest, tax, depreciation and amortisation (EBITDA)	Rs crore	687	580
Profit after tax (PAT)	Rs crore	186	265
PAT margin	%	1.4	2.2
Adjusted debt/Adjusted networth	Times	0.96	1.10
Adjusted interest coverage	Times	4.35	4.47

*CRISIL Ratings adjusted numbers

Any other information: Not Applicable