Sis (NSE:SIS) Q1 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to SIS Limited Q1 FY 'twenty seven Earnings Call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. I now hand the conference over to Mr. Meenit Toshnivall, President, M and A and Investor Relations from SIS Limited. Thank you, and over to you, sir. Okay. Thank you. Good afternoon, everyone, and we welcome you to the Q1 FY 'twenty seven earnings call to have uploaded last evening on the exchanges. Hope you had a good look at it. So let me start saying we ended FY 'twenty six, you saw on a very strong financial trajectory. In fact, it was a record revenue of close to INR 16,000 crores, which was a 21% year on year jump and an EBITDA of over INR 700 crores, which was 18.7% year on year. And we exited the year with an EBITDA run rate of INR $20.07 crores on a quarter, which was also a record.

1:18 So further to FY 'twenty six. Now FY 'twenty seven, I'm pleased to report, is also off to a very solid start. It's reflecting strong execution across all our business lines and with a continued momentum in both growth and profitability as well. Now Labour Court has been the top of town, as you know, for the last almost seven, eight months, and it's building up during this quarter, May eight, nine, the rules were finally notified, which we have been eagerly waiting. And now the implementation is underway. We have always maintained that labor codes is a very strong tailwind for SIS. And we were very much prepared for years and that time has come. Our readiness for the change in regulation has ensured that we are at the forefront to benefit from this.

2:12 Labor codes, as we have always maintained, will ensure level playing field for all service providers. And it is expected, which will you will see the impact over the coming three, four quarters that will be accretive both at the EBITDA and PAT levels as efforts are underway at multiple fronts in terms of contract negotiations, etcetera. Now as part two, as you all know, we are a very strong growth generative, very strong FCF. And over the last six, seven years, we have clearly established a track record of returning capital in some form or the other, either it is dividend or buyback or ideally both in some mix. And thus, we have established a consistent yield track record for all the investors.

3:02 So during this quarter, continuing from our past track record, we have the Board has approved fifth buyback this time. Now what's unique about this buyback, as you know, so far, we've been only going through the tender route. But as you all know that SEBI for the again, after a very, very long gap has actually reopened the open market window. So SIS is probably the first one of the first few companies to tap into this opportunity, the window that has opened. We are going ahead with an open market program, and the buyback is approved for INR 106 crore and maximum price that has been sanctioned is INR 478.50, implying a decent premium on the current running price.

3:49 Somewhere next week, scheduled to open. So once this program concludes, we would have cumulatively returned over INR 700 crores to the shareholders, thus keeping up with our track record of consistent capital return. Now coming to the quarter highlights. We recorded a revenue of 4,604 crores, which is a robust 29.7% year on year growth and 2.5% Q o Q growth. EBITDA continues to remain above INR 200 crores milestone. Now it is although quarter on quarter, is flat, it is INR207 crore EBITDA, but it is 36.2% jump on a year on year basis. This shows our strength, resilience and scalability of our operating model.

4:42 Now coming to the details. On a consolidated level, monthly revenue run rate is now INR $15.78 crores across all segments. The quarter revenue is INR 4,604 crores, increase of 29.7%, as I said. India Security has now crossed a quarterly revenue milestone for the first time at INR 2,000 crores, with Q1 FY 'twenty seven revenue at INR 2,004 crores, a 37.3% growth on a year on year basis. In FM, we have reported a revenue of INR $6.42 crores, which is a growth of 8% year on year. International security has seen a very strong bounce back as you've seen since last year. It is reported the highest ever quarterly run rate of revenue of $19.82 crores, nearly touching to INR 2,000 crores, which is a growth of a whopping 31% year on year and 7% on a constant currency basis. Of course, rupee has also contributed into this.

5:49 Now coming to the EBITDA. It's a constant endeavor to improve margin profiles across all segments. So we have focused on margin, both in terms of customer contracts as well as rationalizing SG and A costs. So on a consolidated EBITDA level, we grew 36.2% year on year to INR $20.07 crores and a margin of 4.5%. India Security reported a stable margin of 5.1% at INR103 crores EBITDA. Facility Management reported an EBITDA margin of 5.5%, which is now normalized to a new zone. We have been constantly guiding that FM margins will be on an upward trajectory. And International Security, the EBITDA margin for Q1 was 3.5%.

6:37 EBITDA improved to 69.6%, which is a 52% jump year on year. The decline from Q4 to Q1 is always on the expected line because for Australia, Q4 has historically been the highest due to high margin events, etcetera, which paid out during the Q1 year. So it's as per the previous pattern. Coming to PAT, it was INR101 crore, INR101.7 crores for the quarter, which is a margin of 2.2%. On ROCE front, we've been continuously guiding that we will be consistently pursuing incremental higher ROCE. So now the ROCE stands at 16.7%, which is actually an improvement of 14% from year ago.

7:28 On capital efficiency, the DSO stand at sixty six days. These are up by three days, but that's not at all surprising because Q4 is always the best in terms of DSO historically and Q1 obviously dips. So with that, I conclude the opening remarks. On the call, I have Iturat Sina, GMD and Mr. Badish Kumar, he is the CFO Mr. Murali Krishna, CEO, SIS International. And we are open now for Q and A. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question.

8:16 The first question is from the line of Abhinav Mandovura from Equitex Investments. Hi. Thanks for the opportunity. My first question was regarding AP Securities. What is the revenue and EBITDA number for the quarter? Okay. Just pulling it up. For this quarter, the revenue of basic required was $3.21 crore and the EBITDA, they have reported INR 12.2 crore. INR $3.31 crores, sorry. It's not INR $3.21 crores, it's INR $3.31 crores.

9:05 $3.31 crores in revenue and INR 12.2 crores. INR 12.2 crores in EBITDA. And my next question was regarding the labor shortage. So we have been reading a lot about labor shortage across. So did we face it? And what is the outlook around that? Did it impact our margin? And going forward, how do we see it? This is Nitura Agaveena. Nothing exceptional. I think first quarter is generally every year, April through to June before rain set in is every year a period where you witnessed shortages.

9:51 And by about July, when the farm labor returns back to their blue collar jobs, this subsides. So there is nothing exceptional to report. So you didn't find it labor shortage and anything any outlook around that? No. I don't see any exceptional labor shortage and nothing which is unique compared to previous year trends. Okay. My next question was regarding the wage hike that has happened across various states. We have seen taking minimum wage hike. So how have you been able to guide that? Or has there been some lag? So important question. I think labor codes model rules were notified finally by the government on May 8, which triggered all state governments to notify implementation dates for labor courts in their respective states.

11:06 Across the country, state governments have already floated draft model rules. Once the drafts are settled, then these laws become or the new codes become fully operational. In that background, few states have also taken this opportunity to pass through minimum wage hikes that had been held back awaiting labor code implementation. States like Haryana, Uttar Pradesh, Karnataka, Telangana, Uttarakhand, some examples which have passed through minimum wage hikes ranging from 20% to 47%.

12:19 The average wage hike for the last ten years, the annual minimum wage hike trend for the last ten years in India or more recently post COVID has been sub-five percent actually. So pre COVID, if you take a ten year below 2016 to 2026, it will be close to nine percent and year on year. And if you factor in COVID and what's happened since COVID, it will be barely five percent. So the states that I cited have clearly done exceptional minimum wage hikes. Now let me call out that this is, in essence, great news for SIS.

13:14 Our contracts are set up such that every and all minimum wage hikes are passed through directly to client. So a minimum wage hike like this means a revenue boost. For the same volume, your price goes up. So you witness a revenue boost. Number two, because it is a pass through, mostly it is a non event on the gross margin line. And it is a EBITDA accretive result.

14:07 So to bring conclusion my longest answer to a straightforward question, please don't see these minimum wage hikes as exceptions. This should be largely the pattern across most major states in the country. Minimum wages were held back by most states because they were awaiting labor code notifications. Over the course of the next six to nine months, as the labor codes model rules get notified at different states, they will also come through with some meaningful level of minimum wage hikes.

14:57 It may not be to the extent of 45% or 47%, but it will certainly not be as feeble as the 5% annual increase average that we have witnessed. So this is a story in the making. But like Vaneet called out, overall tailwind for SIS, we are very well prepared to pass these through. Actions are underway. Impact in Q1 is less evident because this whole thing started only on May 8. As you see Q2 and Q3, the impact should become more evident.

15:46 Okay. The next question was regarding the cash business IQ. Is it like what is the status of it? And do you have can you just share us with the latest revenue and PAT number? Well, I cannot share because the DRHP is filed, and we still have an active card. I can't share the financial performance details of the company. I can only say that as of right now, we are waiting for a good time window. And in the IPO rush that we are witnessing right now, also given the fact that the peer comparables, their de rating and significant de rating has happened, we are waiting on a more opportune time to take this company to market.

16:50 Thank you. The next question is from the line of Umaksha from Banyan Free Advisors, BMS. Please go ahead. Sir. Thank you for taking my question, and thank you for the opportunity. Congrats on a good set of results. I had one question on the am I audible? Yes. Okay, sure. So one question I had was on the minimum wage hike announced by the Australian government of 4.75%. We had signed a lot of contracts in Australia last year in Q2 from Q2 to Q4. Now we understand that these hikes will not be automatically passed on, but they will be reset when the contracts are renegotiated.

17:36 So in the meantime, what is the margin impact that you see for SIS for the entire year? Any rough idea? No. Just one second. I think there's a big misunderstanding. When the minimum wage happens, our contracts are having inbuilt rise and fall clauses, which basically means that we are contractually having the right to pass through the higher wage cost to employees of employees to the customer immediately. However, this has a time lag.

18:26 This has a time lag. You raise an invoice, the customer studies it, he processes the bill, sometimes he pays on the current rate till the matter is settled and then he pays in arrears. So there is a timing mismatch between the date on which the higher wages become effective and when we are able to fully claim and pass through. So it is not let me underline, this is not dependent on contract expiry date or contract renewal date. This is a routine operation. It happens every year. I will request Murali Krishna, who is our CEO, is on call as well. So Murali, if you would want to add more specifics to what's happening in Australia.

19:36 Murali, can you hear me? I think Mulli is on a connection. He is connected. He is connected. Yes, Mulli, please go ahead. Am I audible? Yes, yes. Yes. Okay. So as was just said, all our contracts have a natural price and fall close. So therefore, the Sorry to interrupt, sir. There's a disturbance in your voice. I'm in a calm location. Not sure what's happening. It better or not? There is static, Murali. There is static. Maybe your phone is close to the speaker phone or something now? Not really. Is it better or not? No, sir. Okay. Nehemiah, Murali, I've more or less answered the question. So if there's any follow-up, please e mail to us, Murali to respond separately.

20:29 No, sir. I think this is very clear. That was it. That was the only question. You. Billy, if you can mute from your side. Thank you. Reminder, anyone who wishes to ask a question, may press star and one on the touch tone telephone. Ladies and gentlemen, anyone who wishes to ask a question may press star and one on the touch tone telephone. Reminder, anyone who wishes to ask a question may press star and one on the touch tone telephone. The next question is from the line of from Knightstone Capital Management. Please go ahead.

21:20 Hi. Could you throw some light on the share purchase of UDS that you are doing and please don't say this is treasury operation? It is a treasury operation. That's a single stock that you're buying. Is there any That is there something more to is the single stock we have bought till now. That would be a more correct statement. Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press star and one on the touch tone telephone.

22:15 Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder, anyone who wishes to ask a question may press star and one on the touch tone telephone. The next question is from the line of from GENEVALIMITED. Please go ahead. My question is regarding how could this metro services are to our business? So for example, if we take the Hyderabad business, how many employer?

23:05 I'm sorry, I don't think I have contract level details handy to respond to that question. In any case, SIS handles in India more than 16,000 different contracts. No single contract contributes more than 1% of revenue. So I don't know what the intent of your question is. But if the question is around the significance of a contract or materiality of a contract, let me assure you that we have a very diversified portfolio of contracts, and there is no risk to that count.

24:01 Will not provide significant upside to our business? That is what I wanted to understand. Hello? Sorry. I couldn't get Yes, sir. Your voice is not audible. Hello, mister Manood. Your voice was not audible. Can you please say the question again? Yes. That's what you have to build that relative SIS. Since the line since the line of Manoj is ready... Yes, sir. Since the line of Manoj is Yeah.

24:48 Promote the others on the question so you can see. The next question is from the line of Abhinav Mandobra from Equities Investments. Please go ahead. Hi. This is Liya from Akuta. Just had a couple of questions. In terms of the India business, since we are expecting the new labor board to be implemented and you said the pass on will be happening after some time. So what is the... There are two questions to it. One is what is the minimum price hike which we would be expecting in terms of government, etcetera? And is there any conversation around it on the policy level? And second is in terms of India business, if you could help me with the kind of are these the current margins sustainable going forward?

25:41 So India business margins, if you just look at the Indian side of the business, the margins are more like 5.1% for security and 5.5% for FM. So if you do a blended average India business, probably we will be 5.3%, 5.4% ballpark range. Are these margins sustainable? I would think so. And I have, in the past, also said that our objective is to move from this range to 5.5%, five or 6% ballpark range in India. So that's the answer to your second question.

26:27 The first question is around minimum wage hikes. That's a great although I say it's a great debate, Ria, what the wage hike will be and when the wage hike will come through. My guess would be as good or as bad as yours. Got it. But the India, labor is a concurrent subject. Minimum wages are defined by state governments. There we are talking about more than 30 state governments. When they will decide what level of wage hikes they will pass through is very hard for anybody to predict with any degree of accuracy.

27:17 What I can tell you is that the states that are so far Karnataka has probably witnessed one of the highest percentage hikes in excess of 20 odd percent. Haryana, again, has been exceptional at 40% plus. UP came through at 23%, 24%, if I remember correctly. So these are normal. They are not in line with the 5% on annual minimum wage hikes that have been coming through since COVID. But whether all states will follow similar pattern is very hard for me to say.

28:09 Right. But to say, well, we have seen this implementation already being done. You mentioned that you were able to pass on even prices which were higher than 10%, 12% and up to almost 20% to 30% also in few states. So how are these contracts laid down, the nature of the contract involves complete pass through? Or is it a one on one negotiation which you do with the consumer? There is no negotiation. Our contracts are structured on open book costing where we define the minimum wage basis on which surprise of a product category is built. So let's say, for example, the minimum wages in a state is INR 140.

29:08 Now if the government changes the minimum wages from INR 100 to INR 110, we simply reprice the contract basis that change. Got it. Riya, one more sorry. Yes, go ahead, Riya. No, no, we need to wait. Okay. What I was saying is when you asked about the margin, see, ever since we've been interacting, this SIS flagship security business, that operates at consistent 5.5% type of margins, right? What you're seeing change is post acquisition And that asset was acquired, and obviously, it had lower margin given the lower scale, where they are 20% of our size. And then there is a clear path to integration and upping their margin profile also as a result of the synergies and the cost savings that will come. So you will see on a blended basis coming to the original margins that we used to operate over a period of the next four to eight quarters. So that's why they are sustainable.

30:22 It's only because of the acquisition effect you are seeing lower. And then FM, we have always been guiding ever since we interacting that started for the margins improvement started from 4%, and it's as high as 5.5%. As I've always said, aspirationally, we should be operating near 6%, but it will happen when it will happen, but we are at 5.5% consistent. So there is no margin rate as of now. Got it. Got it. And in terms of the entire payment for acquisition has been done? No. No. We only have acquired 51% stake in the company, and we still have to acquire 49% subsequently over the next couple of years. The anniversary for that is '28. Got it. Thank you so much.

31:10 Thank you. The next question is from the line of Umang Shah from Banyan Triadvisors PMS. Please go ahead. Hello, Manksha. Please go ahead. Hello, Manksha. Please go ahead. Hi. Sorry, I was on mute. I wanted to ask a question with labor code getting implemented. There will be a level playing field between us and the smaller players who are not very organized. Can you tell us roughly what is the cost discount at which they were operating at because of not applying or not following the rules properly? And with the labor code implementation, how much is that delta increase? Any rough idea would be great.

32:09 Well, it's impossible for me to say what is the degree of noncompliance a smaller operator might be opting to. So it can be anything. I mean, could be noncompliant to you could be noncompliant to ESI and bonus. You could be noncompliant to minimum wage as well. You could be noncompliant to almost everything and reduce your cost. I think the important thing I would like to register for everybody who's following SIS in particular and labor code impact in general, the most significant if somebody was to ask me what is the one most significant change in labor codes, I would point to the definition of the term employer.

33:11 The definition of the term employer in the four labor codes clearly states, and if I can quote for you, that an employer is a person who on whose payroll an individual works, but is also the person on whose premises or whose establishment the individual works. Why this matters is because in the past, a customer who wanted to circumvent the laws to cut cost could have easily given a contract to a noncompliant vendor and assumed that the owners of all compliances has now shifted from the customer on whose site the guard may be working to the contractor who has given noncompliant rates.

34:19 So outsourcing had become a method to circumvent compliance costs. The government has now plugged that gap. The government new definition says that if I have a guard working on my premises and he is not getting or he is not getting the applicable minimum wages or he is not getting bonus or all three, I am under obligation as the principal employer to ensure that all his dues are paid whether or not the contractor is able to fulfill compliances.

35:08 This is a tectonic shift. This basically means that the arbitrage discussion, which was always there in this industry, there's a cost arbitrage operating with a non or the lesser compliant players. That conversation has completely shifted now to the customer's doorstep. Whether a customer hires a fully compliant agency or he hires a less compliant agency, The owners of all compliances rest with the customer as well, number one. And number two, not just in theory, the customer has to disclose under his LIM number.

36:06 There is an equivalent of a GST number now called LIM number, labor identification number. And all filings have to happen on SRAM's with our portal, just like you file for GST on GST in network. So as a customer has to under his LIM number show that he is outsourced security to SIS and facility management to DTSS and what he is paying these agencies and what these agencies are paying to their respective employees. If there is a default by SIS or DTSS, the principal employer still remains under obligation to discharge all such dues to employees because they are working at his establishment on his premises, so he is ultimately the principal employer.

37:07 This is a tectonic shift. It has not happened before in this industry. I am pretty confident that once this is fully implemented in letter and spirit across the country, This will result in a fundamental shift in the organized versus unorganized share of the market. This is the reason why in Australia, 90% of customers use only compliant providers. In India, maybe 30% or 40% of the customers use compliant operators. It is just the difference in regulation between Australia and India.

37:57 So that clarity that the labor code has brought in will certainly create a more level playing field in the times to come. Got it. Very useful, sir. It is wonderful to understand this from your point of view and makes a lot of sense. Thank you so much. Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press star and one on the touch tone telephone. A reminder, anyone who wishes to ask a question may press star and one on the touch telephone. The next question is from the line of Anant Mundra from MyTemple Capital.

38:49 Hello. Thank you for the opportunity. So just had one question. What is the latest update on the ELI scheme? Is it active? Or is there some implementation issues still? No. It is active. The scheme is implemented. Anything in particular you want to know? Hi, Anna. Is there anything else you want to know? The scheme is actually my friend. Okay. Okay. So have we worked out any benefits that could accrue to us?

39:37 Well, a large chunk of the benefits actually go to the employee himself, right? So the scheme is designed so that if anybody joins a company and he continues to work for twelve months, then the government will pay him INR 15,000 directly to his personal account. And then there is a small frugal benefit that the job creator gets. But the employment linked incentive is predominantly aimed at benefiting the individual employee more than the employer per se. As there are no further we with with that SIS the has got off to a solid start in the first quarter.

40:53 Number two, that finally, labor court implementation has started, and we see it as a tailwind. Number three, we are very happy to be one of the first few to use the open market route to buyback, and our buyback should be opening next week. So it is completely designed for our minority shareholders, promoters are not participating. I would encourage everybody to take the maximum benefit. We have left a handsome premium on the table up to INR $4.78 crores. And I hope that we are able to allocate capital back.

41:39 Like Vineet mentioned, this is our ninth action to return capital to employees, five buybacks and four dividends. So shareholders, this is the ninth occasion where we are returning capital back. We're very happy that as a profitable cash generating business, we have given back INR 700 odd crores to our shareholders since IPO. I would draw your attention to the last but probably a very important aspect, which is that our return ratios, they bottomed out at 11.8% ROCE in Q1 of FY 'twenty five.

42:30 And in Q1 FY 'twenty five, our return on equity was down to only 9.4%. Today, two years later, our ROCE is at 16.7% and our return on equity is at 15.8 We hope to execute with discipline. Our objectives are very clear. India has roughly 5,000 listed companies. If you filter with significant businesses, let's say, 500 crores impact that would leave less than 500 odd companies, maybe 10%.

43:23 Amongst those 500 companies, if you filter how many deliver of 15% annualized growth consistently with a 15% plus return profile consistently. That brings the count to less than 100 companies. We want to drive SIS into that box of 100 companies in this country, which deliver 500 crore plus impact and our material businesses with consistent year after year 15% growth in profits and 15% or greater return profile.

44:16 So that's what we are shooting for. FY 'twenty six was the year of rebound. We delivered 1515%. And FY 'twenty seven, I hope, will be an inflection year or the second year where we will be in that zone, hopefully. So thank you very much for your support and your conviction in SIS through the thick and thin. I wish you all the very best. I hope to see you next quarter. Bye bye. Thank you. On behalf of SIS LIMITED, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.