Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- SIS Ltd (BOM:540673, Financial) reported a consolidated revenue increase of 5.1% year-on-year to 3,130 crores.
- India business achieved its highest ever revenue of 1,868 crores, translating to a 6.8% year-on-year growth.
- The bank outsourcing solutions business achieved its highest ever quarterly revenue of 171 crores, with a 12% year-on-year growth.
- The cash business expanded its EBITDA by 130 basis points, recording 17% EBITDA margins and a PAT of 14 crores, translating to 32% year-on-year growth.
- The company is focused on margin improvement initiatives, including rationalizing SG&A costs and weeding out low profitable contracts.
Negative Points
- EBITDA took a small hit of 1.2% year-on-year to 137 crores, largely due to issues in the Australian business.
- The international security business was impacted by leadership changes and loss of profitable contracts, resulting in a 14% year-on-year decline in EBITDA.
- Labor shortages and a 3% increase in minimum wages in Australia are expected to continue affecting margins in the medium term.
- The facility management business in India reported only a 2.2% year-on-year revenue growth, with margins shrinking by 20 basis points.
- The company faces challenges in exiting unprofitable government contracts, particularly in the railway segment, which impacts overall profitability.
Q & A Highlights
Q: You mentioned labor shortages in Australia may continue in the medium term. How do you see the margins panning out for the rest of the year? And when should one expect the margins to normalize?
A: The labor shortage situation, compounded by a 3% wage increase, presents a complex situation. It will take one to two quarters to pass through the higher wage costs and address the labor shortage with an aggressive recruitment program. Expect turbulence for two quarters in the international security segment, particularly in Australia.
Q: Despite shedding unprofitable contracts, the margins in the India FM business seem to have shrunk by 20 basis points year-on-year. When should one expect the margins to normalize?
A: Sequentially, the margin is up from 3.9% to 4.2%. We are exiting most loss-making contracts, including some railway contracts. The FM margins are expected to move towards the 5% mark in the coming quarters.
Q: Can you explain the decrease in the number of employees and the addition of 2000 employees this quarter? When do we see ourselves reaching the 5,000-6,000 mark again?
A: We track revenues by branch, not headcount. We had 152 branches in SaaS security as of March 31, 2024, and 156 as of June. The modest growth in India security manpower is expected to continue, and we will check the accrued revenue count for further details.
Q: What is the impact of the annual June revision on our costs, and how is it passed on?
A: The annual conference charges are around five crore rupees, impacting a single quarter significantly. Wage hikes in India are passed through immediately from the effective date, unlike in Australia, where it takes one or two quarters.
Q: What is the outlook for the Singapore business? Are we anticipating any further write-offs?
A: The Singapore business is now clocking close to $40 million in annualized revenue and is on the verge of turning profitable. No further write-offs are anticipated as the previous impairment was due to the gap between initial goodwill and current performance.
Q: Why has the EBITDA remained flat despite revenue growth from FY20 to FY25?
A: Several factors, including challenges in the international business and investments in the Protect business, have impacted profitability. We expect to break out of the current EBITDA range in two to three quarters, with actions underway to improve margins.
Q: Can you quantify the impact of leadership changes and loss of profitable contracts on the international business margins?
A: The primary issue is short staffing due to the labor market situation in Australia. The international business is expected to perform in the 4.5% margin range for this year.
Q: What is the size of the addressable market for the India security business, excluding stand-alone buildings?
A: The security industry in India is estimated to be 40% organized, growing at 1.5 to 2 times GDP. There is no reliable third-party data source for the exact addressable market size.
Q: Why did we not take the entire impairment at the time of acquisition for the Henderson business?
A: The initial goodwill charge was based on the estimated value of the business pre-COVID. The actual payment during COVID was significantly lower, leading to subsequent impairments. The business is now in better shape, and further impairments will be based on auditor advice.
Q: What is the impact of the recent budget provisions on SIS Ltd?
A: The budget provisions related to job creation and employer incentives are positive. We are awaiting detailed circulars to understand the exact impact, but the overall intent is encouraging for job creation and blue-collar employment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
