SIS (NSE:SIS) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to Q2 FY 'twenty seven Earnings Conference Call hosted by SIS LIMITED. 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Dheeraj Singh, CEO from SIS LIMITED. Thank you. And over to you, Mr. Singh. Thank you. Good afternoon, everyone, and welcome to the Q2 FY 'twenty seven earnings call.

0:48 Before we begin, it is a deep sadness that I shared the passing of our Founder Chairman, Sri Ravin Krishnadhi on the October 30. He was the visionary who built this company and his leadership values and guidance have shaped everything we are today. His loss is deeply felt by all of us at SIS. On behalf of the Board, the management team and all our employees, I extend our heartfelt condolences to his family. We will carry forward the legacy he leaves behind and remain committed to the values he stood for. It is with that spirit and commitment that we continue our journey, and I would now like to take you through our performance for the quarter. I hope you have had a chance to look at our results and the earnings note, which was uploaded on the stock exchanges and the company's website yesterday.

1:38 In Q1, we had called FY 'twenty seven an inflection year. Q2 establishes the trend. This was a milestone quarter for SIS on every measure that matters, record revenue, record EBITDA, record profit and margin expansion across all three of our business segments. Consolidated revenue for the quarter was a record INR 4,816 crores, up 28.1% year on year basis and 4.6% sequentially. Even excluding APS, on an organic basis, the growth has been 18.6% year on year and 4.4% quarter on quarter.

2:24 Please note, this is our ninth consecutive quarter of sequential revenue growth. At the same time, EBITDA was a record INR $2.22 crores also, up 32.7% year on year and 7.8% sequentially. This is the fifth record EBITDA quarter in a row. Even without EPS, this has been a growth in EBITDA of 23.8% year on year and 6.8% quarter on quarter basis. Margins also expanded and came in at 4.6%, which is up 16 basis points year on year and up best in the past six quarters. Profit after tax was INR 111 crores, up 37.1% year on year and the highest in the company's history.

3:12 I want to draw your attention to one point in particular. Both EBITDA has growth of 32.7% and PAT growth of 37 ran ahead of revenue growth of 28.1%. So it means we are not simply getting bigger, we are getting better also as we get bigger. This is the operating leverage we have been building forward. On scale, trailing twelve month revenues now stands at INR 18,094 crores. And our annualized run rate is now nearing the INR 20,000 crore mark, and we are at INR 19,300 crores. For the half year, revenue was up to INR 9,420 crores, which is up almost 29%.

4:00 And it is already 59% of our entire FY 'twenty six revenue. H1 EBITDA was at INR $4.30 crores, up 34.4% with margins up 19 basis points and H1 profit was INR $2.12 crores, which is up 22.3. Let me now spend a moment on the labor quotes because this is central to our outlook. The quotes are a clear positive for SIS and our early readiness is now visible in the numbers, too. We began our internal compliance program on the June 1 and India EBITDA has grown 13.8% over the six months since the codes were introduced. With the India margins improving from 5.2% in Q4 FY 'twenty six to 5.4% this quarter.

4:53 Higher wage and statutory costs are being fully passed through to customers, lifting both the revenue and the margin. Enforcement though is state by state and still early. Karnataka, Haryana, Uttar Pradesh and Uttarakhand have revised the minimum wages. Others are expected to follow as state model rules are notified. The major part of the repricing benefit is therefore still ahead of us. Over time, the court will also create a level playing field between organized and unorganized providers, which we expect to be accretive at both the EBITDA and PAT levels. Now turning to the various business segments. Security Solutions India delivered a record revenue of 2,144 crores, which is up 38.9% year on year and 7% sequentially.

5:44 This is the tenth consecutive quarter of sequential growth. Even without APS, the organic growth for Security Solutions India was 15.7% year on year and 6.8 quarter on quarter. EBITDA was a record INR 113 crores, which is up 37.2% year on year and 10.4% sequentially. Without EPS, it is 18.9% year on year and 8.6% quarter on quarter basis. Also the fifth record quarter in a row now. Margins improved 16 basis points in the segment sequentially to 5.3% now and are broadly flat year on year basis. On the International Finance Security Solutions, International recorded its highest ever revenue at $20.20 crores, up 25.7% year on year and 6.3% on a constant currency basis.

6:40 EBITDA was INR 72 crores, which is up 35%, with the margins improving 23 basis points year on year to 3.6%. Following the Fair Work Commission's 4.7% minimum wage increase in Australia, Price revisions under a number of client contracts are tied to contract anniversaries, which create a temporary lag between cost and price pass through, but will happen in due course. Facility management solutions posted a record revenue of INR $6.77 crores and a record EBITDA of INR 38 crores, its ninth consecutive record EBITDA quarter. The margin expansion continues. It is now at 5.7% and is the highest in the past six years, up almost 50 basis points year on year.

7:31 On our return ratios, the return on capital employed stands at 16.5%, up from 14.3% a year ago, and the return on equity is also at 16%. During this quarter, we also completed our fifth buyback. SIS was among the first in the market to announce an open market buyback, and we completed it in 45 trading sessions, acquiring approximately 25 lakh shares for 106 crores. With this, the total capital return to shareholders since listing now stands at a little over INR 700 crores. Let me address also the working capital, which was the one soft spot in this quarter. Operating cash flow was negative INR 99 crores on a working capital outflow of INR $2.73 crores.

8:21 Of which $2.16 crores sat in our international business due to delayed collections from one of the largest clients, the defense segment. This is a timing issue, not a credit issue. And the payments, in fact, have already been received in October. Net debt to EBITDA moved to 1.24x from 1.05x at the end of Q1, primarily due to the working capital outflow in Security Solutions International and a bit because of the buyback payouts of INR 92 crores. However, gross debt was broadly flat at about INR 2,047 crores. On the DSO front, India security actually improved in spite of all the labor reforms happening at the same time. It improved to seventy three days, which is better both sequentially and also on year on year basis.

9:14 FM was stable at the ninety three days. The increase was largely concentrated international, as I mentioned, which is caused due to a temporary timing difference and will be normalized through this quarter. To summarize, this has been a quarter of record revenue, record EBITDA, our highest ever quarterly profit, profit growing faster than revenue, margin expansion in every segment, both ROCE and ROE above 16% and a structural tailwind from the labor courts where most of the benefit is still to come. We remain focused on margin expansion and on bringing working capital back in line. As I end, I would like to mention that Group Managing Director, Mr. Rudraj Sena has not been able to join the investor call due to the certain demise of his father, and I'm sure you will understand this. However, on the call, we have with us Mr. Brajesh Kumar, Chief Financial Officer Mr. Murali Krishna, CEO, SIS International to address any of your queries.

10:13 We will now turn it over for question and answer. Thank you so much. Thank you. 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. The first question comes from the line of Amit Satsena, who is an individual investor. So my first question was on the social security write off that we did few quarters back, which was close to $2.50 crore number.

11:07 So I wanted to understand how much of it we have recovered and... So it's Prajesh. Do you want to ask about the one time cost we have taken in Q3 of Class Transfer, right? It was INR $2.90 crore. So there is no further write off as we have mentioned at that time. That is a onetime exceptional item we have accounted for as per the guidance of ICI. And in the due course, whenever any employee putting to that period is getting separated or leaving, and we have to pay the guarantee, we are claiming that from the customer and making that payment. So there is no cash flow impact because of that. And going forward also, there is no additional impact we are expecting on this one. So what has been done in last Q3 of twenty twenty five, the figure we will set after that, there is no change. I hope that clarifies.

12:08 I remember after that Q3 'twenty five in like next quarter or last quarter, there was a reversal of some amount out of that INR $2.90 crores. So if I'm correct, that... So that was accounting yes, you're correct. In Q4, we have taken some reversal. That was accounting adjustment because on the way to actual valuation, some portion has been transferred from liability to OCI. So that was just an accounting adjustment. It's not related to any business transaction. And we have been talking about the new labor code, which has been which we think will be quite favorable for us because of the minimum wage code.

12:54 So how are we have been on more in the qualitative terms that, know, the the minimum minimum wages will be increased, and that will show up in our contract values and further in revenue. But in terms of quantitative aspect, is there any guideline as to know how much revenue it can increase? Of course, the numbers can be we cannot have exact numbers, but is there a guideline wherein we can say, for example, we do expect a revenue increase of 30% just because of the minimum wage that kicking in, in next three years or some guideline on that front will help investors a lot?

13:44 So as we mentioned, definitely, both on the revenue side, we've seen the uptick, and this is the early stages in this quarter. But going forward, our guidance, we'll like to remain at the 15% to 18% growth overall. And we are in line with that. The margin expansion has happened from 5.2% to 5.4% even in the early stages. And while we can't give you a particular number, but the trend should continue in the next few quarters. Okay. So on the dividends and buyback, we have returned almost close to INR 700 crores in the last few years since our IPO.

14:34 Is there any guideline or kind of the kind of we are a few making, say, INR 400 crores, right, and which may move to INR $4.55 crores over time. So is there any rough or how do investors look at it in terms of how much on an average the company plans to return back in terms of because all the dividends, dividends and the buybacks have been staggered and there is no clear trend. So is there a clarity we can get for the dividend and buyback in terms of the profitability of in terms of the fact this much can be expected to be returned? We have circulated in the past also our policy for the dividend and the buyback.

15:26 And we have been fairly consistent with that. Going forward, too, we expect to return well to our shareholders in the form of a combination of both dividends and buyback, while we will continue to invest in the business also and look to retire some of our debt also. So it will be a combination of all these. Okay. Perfect. And last question is on the cash logistics IPO. So we have been holding it out because of the adverse market circumstances. Is it paying over there? Or do we is there any change in our thinking as of now?

16:14 So as of now, as you know, the approval period has expired, and we will look at it at the opportune time in the future. But the business continues to do very well. It has had a record revenue of INR $2.20 crores in this quarter with a more than 17% EBITDA. So we are focusing on the business. And at the right time, we will look to go back to the market. The next question comes from the line of Abhirav Mandavara from Equitas Investments. Please go ahead.

17:03 Yes. Congratulations on good sets of numbers. My first question is regarding AP Securitas revenue number and EBITDA numbers, if you could provide me? Just follow-up. The revenue numbers they have reported for this quarter is INR $3.88 crore, and the EBITDA number is INR 15.1 crore. So they have shown a growth of 8% in on quarter to quarter basis. Okay. EBITDA of 15.1 crore, right? Yes. It's 4.2% EBITDA they have reported. Okay. And second question is regarding the international business. You mentioned there has already been a wage hike in Australia from July onwards. How much lag does it have in our contract re pricing?

17:53 And when would we be able to pass it on? This is Mutli Krishna here. So this is a yearly event, Abhinav. So there is nothing new, first of all. So yearly, every year in the month of July, we have accounted its increase for the wage. And as per contractual term, we are entitled to pass through those costs onward to the customer, typically what happens is it happens on the anniversary of the contract. So this is spread across all through the year, but the bulk of it actually happens within the next first quarter and the second quarter. Okay. So you mean a lot of contracts we would be renewing now would be getting the rebate benefit from one or two quarter lag?

18:49 Yes. It's not renewal, but it's at the contract anniversaries. So what happens is if you see a signed up a contract, customer contract in, let's say, November 1, the price hike typically happens in November 1. So it's all dependent on individual contracts, but I'm just giving you a very generic thing or which is a very fairly standard one. It happens at a contract anniversary usually. But bulk of it happens very close to and soon after the one July. So July to September quarter is a good material portion of the hike happens through the quarter. And the next quarter between October to December, a very sizable one also happens. And the remainder happens in the next couple of quarters, which is quarter four and quarter one of next year. But those will be not as much.

19:38 So Q3, we will have the maximum price. So what percentage of contracts will be up for? If you could just give me a direction on this. Sorry, I didn't quite catch that question. Can someone repeat that question? While we mentioned that it will be the pass on would be on staggered manner and it's already on a contractual basis. Just wanted to understand in the next couple of quarters, say, Q3, Q4, how much percentage of orders are up for renewal? No, these are not renewals, Pradhan. These are not renewal. What happens is, let's say, we sign a three year or a five year contract.

20:23 At every contract anniversary, typically, the pass through happens. And we have usually costed for it well ahead as well. So it's not that we are taking a loss or anything. It just happens subsequently. So a good portion of that happens in quarter one and a good portion sorry, not quarter one, quarter two, it is the quarter that just went by. And a good portion happens in quarter three. Quarter four and quarter one are very small points. So these are not dependent on renewal. These are obligations at the end of the customer, contracted obligations to pass through the. Got it. Also in terms of international business, our working capital has deteriorated. Apart from this one major order of defense, which has a payment delay, how much will be our operating cash flow?

21:17 I will just answer you with respect to that one customer, it is a major customer for us. So what happened last quarter, we are typically following the July, June calendar, financial calendar. So by the end of June, typically customers tend to and actually some of the major ones, governments and so on and so forth, typically tend to clear off just before June, the outstandings. So June was a better picture. But September, typically, we come back to a normal cycle of working capital. Unfortunately, particular collection got missed out, which we did collect subsequently in the month of October already. We can get back to the usual terms of the international business roughly goes about about fifty days of DSO, fifty, fifty one days of DSO, and we should get back to that in the next quarter, sir. But we are already back there.

22:18 It should be seen in the next quarter, sir. Got it. And then net debt has also increased on a basis, I think, around INR 200 odd crores. So what is the kind of sustainable debt levels you want to keep in the company considering that I understand some cash is there in the international business and the utilization is there in that up. Considering all these factors, how much would be the debt you are comfortable? Rajesh, is this for all in all FX group or is it for international? For the group group. Okay. So group perspective, if you can see that the net debt for India has not increased.

23:06 It has come down from INR $7.96 crores to INR $7.69 crores. It's only for international, it has increased. Last quarter, it was INR 11 crore of net debt. This quarter, it has increased to $2.56 crore and the reason Bodhi has already explained. So when we'll be back to normal when the international will be back to normal DSO of around fifty days in Q3, we are hoping that the net debt of by December, we will be on the reducing side. Whatever increase has happened is only because of international because of one off event of one large customer where payment has got delayed. Got it. The for that order was around $120,000,000 And only, yes. Of that million dollars yes.

23:53 Okay. Thank you. Thank you. The next question comes from the line of Gopinathar Reddy from P and R Investments. Sir, what is the interest rate we are paying on the debt that we have now on an average? So in India, it is around 8.5. Murali, what will be in international? Can you help me on that? I think we'll be hovering about 6.5%. So we are comfortable having please go ahead. So we did have around 7%, seven percent seven two So are we comfortable having this debt instead of I mean, my doubt is because we are doing buybacks and giving dividends instead of paying the state. So are we comfortable holding this debt and we want to continue like this?

25:01 Or what is the plan? So as a policy, we have been studying that we want to maintain this debt to equity ratio somewhere around one. This quarter, due to one special reason, it has gone up to 1.24. Hopefully, it will be back to one or less than one. So keeping that debt in that level, we will also need to see the commitment towards our shareholders. And accordingly, we take the decision of extending back the money to shareholders by way of buyback and dividend. So I'm not saying that we will our total focus will be to reduction debt. We will be doing that also. But at the same time, by maintaining a proper balance in debt to equity ratio, we will be meeting our commitment towards buyback and dividend payout to our shareholders.

25:51 Understood, sir. But our comfort level is it? Yes. Somewhere around one, we need to maintain. Okay. Okay. Last question, sir, how is the Singapore business doing, sir? Mr. Gopi, thanks for that question. The Singapore business is doing well. It's continuing to grow. I think same quarter from as compared to the same quarter last year, I think we posted somewhere about 20% -plus growth. So this is a fairly good growth. We are continuing to keep the orders with us. So we are renewing all the revenues and so on and so forth. The business organically is doing very well.

26:38 The grants, which is usually a big part because the PWM rate hike happens is kind of sunsetting. And that's the reason the EBITDA has kind of declined a little bit quarter on quarter. But other than that, there is nothing fundamental to worry about. And I think the business is doing very good in Q4. Okay. Thank you, sir. That is from my side. Thank you. Thank you. The next question comes from the line of Abhinav Mandovara from Equitas Investments. Please go ahead. Thank you so much for the follow-up question.

27:27 Are we planning with the cash that we have And you are mentioning it, I think, on the interview also that you're planning for inorganic acquisitions. What kind of nature of business are we planning would be? And what will be the time duration when you're paying for some kind of acquisition This is for the international side. This question? Update and follow-up on that.

28:20 Don't think I could quite catch the question, but I'll answer for the infrastructure business. Your question is about that we do have cash and are we looking at acquisitions. So yes, acquisitions as a part of growth is a strategy that is well established in the international business. So we have specific areas where we want to acquire. So we don't want to acquire in every area. So there it gives a specific capability or a geographical expansion or capability expansion and so on and so forth or maybe scale is where we typically acquire. We are in the market looking for possible targets. And as and when it presents itself, we will be cultivating a few targets as well. As and when the opportunity shapes up, we will definitely consider acquisition. Acquisition is a good strategy for international business typically considering the multiples that at which or the price that which they have.

29:25 Sure. Got that. And in domestic side, are you looking for any acquisition,? Sorry, in this case? Domestic. Domestic side. Domestic side. Dheeraj, back to you. The next question comes from the line of Amit Saxena, individual investor. Yes. So on the cash logistics, we just discussed that we have INR $2.20 crores of revenues and I think close to 20% EBITDA margin. So where is it reflected in the disclosures that we have given? So we have INR $2.23 crores of EBITDA, INR 113 crores in Indian securities, INR 72 crores in international securities and 38 crores in SM. So where does this cash logistics numbers actually reflect in our disclosure?

30:27 So the cash logistic is a JV company. We are not holding 51%. So this is not getting concentrated in our consolidated accounts. We used to report it separately in our earnings notes. But since till last quarter, it was under process of IPO, we were not to disclose those numbers, so it was not included. From next quarter onwards, the number will be separately disclosed will be disclosed in the earning note. Currently, it is not disclosed in the earning note, and it is not included in our balance sheet also because we are not holding 51% there. That's a JV company. We are the minority shareholder. So is it like it's part of P and L in the other comprehensive income because the I mean, somewhere in the P and L line, it will be shown, right? Yes. It's our share of profit has only been showing in the PL account.

31:22 Both of published accounts, it will be appearing under the heading of share of profit from joint venture in the yes, contract fee and account. Perfect. Perfect. Okay. Thank you very much. Thank you. A reminder to all the participants that you may press star and one to ask a question. A reminder to all the participants that you may press star and one to ask a question. As there are no further questions, ladies and gentlemen, we have reached the end of question and answer session. I now hand the conference over to Mr. Dheeraj Singh for closing comments.

32:26 Thank you, and thank you to all the participants. We are confident that we shall continue the good numbers and the performance in this quarter and with additional focus on improving the working capital. And we will continue to look at interesting inorganic opportunities. And the whole year on a year on year basis, we are confident that it should be one of our better years. Thank you all for participating again. Happy Diwali again to all of you and happy and safe Diwali again. Thank you. Thank you. On behalf of SIS LIMITED, that concludes this conference.

33:14 Thank you for joining us. You may now disconnect your lines.