Growth opportunity key trigger for SIS

Representational image: A security personnel stands guard in front of the gate of the State Bank of India (SBI) regional office in Kolkata
Security and Intelligence Services (India), a private security services player, has taken the inorganic route to fuel growth, including its acquisition in Australia in 2008. In addition to the core security services segment, which accounts for 87 per cent of revenue, the company has also forayed into other segments of cash logistics and facility management. 

The Australian acquisition was a key driving factor of the security services business and contributes about 60 per cent to the segment revenue. While Australia has steady growth prospects, the Indian security services market is three times larger, and is growing at 20 per cent annually, which is where the company is focusing. It is already the second largest player by revenue in India, with strengths such as pan-India presence compared to competitors who have limited presence. This allows SIS to grow faster and helps it to leverage existing branches and infrastructure to drive growth and profitability. Other strengths are a strong network, long standing relationships with ex-army men, training and processes where each branch is considered a profit centre. 

The opportunities in the securities segment remain strong given increasing crime rate and an under-staffed police force. Cash logistics where it is ranked second by market share and facility management where it is fourth have immense scope for growth on a low base.

The company’s revenue growth at 14.6 per cent annually (FY13-17) with consistent margin profile of more than 4.5 per cent coupled with with strong return on average capital employed of 28 per cent over the past five years is impressive. Looking at the available growth prospects this momentum can sustain while on margins the higher utilisation or leverage of existing branches and infrastructure offers upside. 

Among listed peers though there is no direct comparison the closest remains Quess Corp. On valuations analysts at Ambit Capital say that the price band implies 25-26 times enterprise vaue to earnings before interest, tax and depreciation for FY17 versus 40 times for Quess Corp and they continue to like SIS for its good capital allocation, disciplined operations and strong brand name.

Analysts at Motilal Oswal Securities, who have recommended subscribe for long-term investment say at the higher end of price band, the issue is available at price to earnings ratio of 65.3 times post issue capital for FY17, and believe the premium valuation is justified in the context of leadership positioning in industry and robust business model. Nikhil Khandelwal, managing director at Systematix Shares, too, recommends the offer for long term investors looking at company’s steady growth prospects and return ratios.


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