SIS LIMITED (SIS) Q1 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to SACE Ltd Q1 FI27 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. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touch-tone phone. I now hand the conference over to Mr. Minish Toshniwal, President, M&A and Investor Relations from Safe Limited. Thank you and over to you, sir.

Thank you. Good afternoon, everyone, and we welcome you to the Q1 FY27 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 FY26, you saw, on a very strong financial trajectory. In fact, it was a record revenue of close to 16,000 crores, which was a 21% year-on-year jump, And an EBITDA of over 700 crores, which was 18.7% year-on-year, and we exited the year with an EBITDA run rate of 207 crores on a quarter, which was also a record. So, further to FY26, now, FY27, I'm pleased to report, is also off to a very solid start. It's reflecting strong execution across all of our business lines and with a continued momentum in both growth and profitability as well. Now, Labour Code has been the talk of town, as you know, for the last almost 7-8 months, and it's building up during this quarter, May 8-9. The rules were finally notified, which we have been eagerly waiting, and now the implementation is underway. We have always maintained that Labour Code 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. Labor codes, as we have always maintained, will ensure level playing field for all service providers. And it is expected, which 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 under great, multiple fronts in terms of contract negotiations, et cetera. Now, as part two, as you all know, we are a very strong FCS. And over the last six, seven years, we have clearly established a track record of returning capital in some form or the other, if either it is dividend or buyback or ideally both in some mix. And thus, we have still a consistent yield track record for all the investors. 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, 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 106 crore rupees, and maximum price that has been sanctioned is 478.50, implying a decent premium on the current running price. Somewhere next week, it's scheduled to open. So, once this program concludes... We would have cumulatively returned over 700 crores to the shareholders, thus, you know, 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% QOQ growth. EBITDA continues to remain above 200 crores milestone. Although quarter-on-quarter is flat, it is 207 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. Now, coming to the details, on a consolidated level, monthly revenue run rate is now 1,578 crores across all segments. The quarter revenue is 4604 crores, increase of 29.7%, as I said. India security has now crossed a quarterly revenue milestone for the first time at 2,000 crores, with Q1 FY27 revenue at 2,004 crores. A 37.3% growth on a year-on-year basis. In FM, we have reported a revenue of 642 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 has reported the highest ever quarterly run rate of revenue of 1,982 crores, nearly touching to 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. 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 contract as well as rationalizing SG&A cost. So, on a console EBITDA level, we grew 36.2% year-on-year to 207 crores and a margin of 4.5%. India Security reported a stable margin of 5.1% at 103 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%. EBITDA improved to 69.6%, which is a 52% jump year on year. The decline from Q4 to Q1 is always on the expected lines because for Australia, Q4 has historically been the highest due to high margin events, etc., which fade out during the Q1 year. So, it's as per the previous practice. Coming to Pat, it was 101 crore, 101.7 for the quarter, which is a margin of 2.2%. On ROSI front, we've been continuously guiding that we will be consistently pursuing incremental higher ROSI. So now the ROSI stands at 16.7%, which is actually an improvement of 14% from a year ago. On capital efficiency, the DSO stands at 66 days. These are up by 3 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 Ikiraj Sina, GMD, and Mr. Rajesh Kumar, he's the CFO, Mr. Murali Krishna, CEO, SIS International, and we are open now for Q&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 one on the touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Abhinav Mandovura from Equitif Investments. Please go ahead.

Hi, thanks for the opportunity. My first question was regarding AP Securitas. What is the revenue and EBITDA number for the quarter?

Just pulling it up.

For this quarter, the revenue of 85% was 321 crores, and the EBITDA, they have repressed 12.2 crores.

3.31, sorry. It's not 3.21, it's 3.31. 3.31 crore in revenue and 12.2 crore 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?

Hi, this is Rituraj Abhinav. 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 witness shortages. And by about July, when the farm labor returns back to their blue-collar jobs. There's subsides, so there is nothing exceptional to report.

So you didn't find a labour shortage and any outlook around that?

No, I don't see any exceptional labour 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. You have seen taking minimum wage hike. So, how have you been able to call that or have there been some lags?

So, important question. I think Labour Code's model rules were notified finally by the government on 8th of May, which triggered all... Notify implementation dates for labor codes in their respective states. Thank you. All the new codes become fully operational. SIS. Question. Please don't see. Thank you. They will also come through with some meaningful level of minimum wage hikes. 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 Vineet called out, overall tailwind for SIS. I'm prepared to pass these through. In Q1 is less evident because this whole thing started only on 8th of May. Q2 and Q3. Become more.

The next question was regarding the cash business IQ. What is the status of it, and can you just share us with the latest revenue and fact 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 derating and significant derating has happened, we are waiting on a more opportune time to take this company to market.

Thank you. I will be back in the queue.

Thank you. The next question is from the line of Umang Shah from Bank Entry Advisors, PMS. Please go ahead.

Hi, sir. Thank you for taking my question, and thank you for the opportunity. Congrats on a good set of results. I had one question, 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. 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 hike 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. This has a time lag. You know, 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, he's on call as well. So Murali, if you would want to add more specifics to what's happening in Australia.

Yes, yes, yes, he is connected, he is connected. Yes, Murali, please go ahead. Am I audible? Yes, yes.

Yes, okay.

So, as was just said, all our contracts have a natural rise and fall clause.

So, therefore, the... Sorry to interrupt, sir. There is a disturbance in your voice.

I am in a calm location, not sure what's happening. It's better not. Very static, Murali, very static. Maybe your phone is close to the speaker phone, isn't it?

No. Not really. Is it better not? No, sir.

Okay, never mind, Moodley. I have more or less answered the question, so if there is any follow-up, please email to us. Moodley will respond separately.

No, sir. I think this is very clear. That was it. That was the only question. Thank you.

Moodley, 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 1 on their touchstone telephone. The next question is from the line of Parag Chawar from Knightstone Capital Management. Please go ahead.

Hi, could you throw some light on the share purchase of OCTR UTS that you are doing, and please don't say this is a treasury operation.

It is a treasury operation.

That's a single stock that you are buying. Is there something more to read?

No, that is the single stock we have bought till now. That would be a more correct statement.

Fair enough. Thank you.

Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press star and one on the touchstone telephone.

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 touchstone telephone.

The next question is from the line of Manoj Redisama from JN Wealth Management Service Ltd. Please go ahead.

My question is regarding how big of the metro services are to our business.

For example, if we take the Hyderabad business, how many employers?

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.

I want to tell you that metrics are happening at various cities, so will that provide significant upside to our business? That is what I wanted to understand.

Hello, Mr. Manoj.

Yes, sir. Your voice is not audible. Hello, Mr. Manoj. Your voice was not audible. Can you please say the question again?

If that were to happen, will that benefit SIS? Is my question.

The next question is from the line of Abhinav Mandobra from Equitas Investments. Please go ahead.

Hi, this is Ria from Akhuda. I just had a couple of questions. In terms of the India business, since we're expecting the new labor board to be implemented and you said the pass-on would 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, etc. 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 margin sustainable going forward?

Just margins. 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% all park range. Are these margins sustainable? I would think so. And I have in the past also said that our objective is to move. Thank you. Park Range in India. So that's the answer to your second question. The first question is around minimum wage hikes. Now that's a great debate, Rhea, 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. Good morning, everyone. Thank you. Increase their wages. Karnataka has probably witnessed one of the highest percentage hikes in excess of 20-odd percent. Haryana, again, has been exceptional at 40 percent plus. You know, UP came through at 23-24 percent, if I remember correctly. Thank you. In line with the 5% odd annual minimum wage hikes that have been coming through since COVID. But whether all states... Similar pattern is very hard for me to say.

Right. But the state where 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 20-30% also in the state. So how are these contracts laid down, the nature of the contracts involved complete pass flow or is it a one-on-one negotiation which you do with the customers?

There is no negotiation. Our contracts are structured on open book costing, where we define the minimum wage basis on which the price of a product category is built. So let's say, for example, the minimum wages in a state is 100 rupees. It may be 140 rupees. Now, if the government changes the minimum wages from 100 to 110 rupees, We simply reprice the contract basis that change. Got it.

So, Rhea, one more. Sorry. Yeah, go ahead, Rhea.

No, no, we need to go.

Okay. What I was saying is when you asked about the margin, see, ever since we've been interacting, the SIS flagship security business, that operates at consistent 5.5% type of margins, right? What you are seeing change is post-acquisition, and that asset was acquired, and obviously it had lower margin given the lower scale. 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, you know, coming to the original margins that we used to operate over a period of the next four to eight quarters, you know. So that's why they are sustainable. It's only because of the acquisition effect you are seeing as low. And then FM, we've always been guiding ever since we were 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 threat as of now. Got it, got it.

And in terms of the entire payment for acquisition has been done?

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, thank you, Pramash.

Thank you. The next question is from the line of Umang Shah from Banyan Tree Advisors PMS. Please go ahead. Hello, Monksha. Please go ahead. Hello, Monksha. Please go ahead.

Hi, Charlie was on mute. I wanted to ask a question with labor codes 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 will that delta increase? Any rough idea would be great.

Well, it's impossible for me to say what is the degree of non-compliance a smaller operator might be opting to. So, it can be anything. I mean, you know, you could be non-compliant to PF, you could be non-compliant to PF, ESI, and bonus. You could be non-compliant to minimum wage as well. You could be non-compliant 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. 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 on whose payroll an individual works, but is also the person on whose premises or whose establishment. The individual works. In the past, a customer who wanted to circumvent the laws to cut cost could have easily given a contract to a non-compliant vendor and assumed that the onus of all compliances has now shifted from the customer, on whose site the guard may be working, to the contractor. Who has given non-compliant rates? So outsourcing had become a method to circumvent compliance costs. The government has now plugged that gap. The government's new definition says that if I have a guard working on my premises and he is not getting PF, 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. This is a tectonic shift. This basically means that the arbitrage discussion, which was always there in this industry, you know, there's a cost arbitrage operating with the non or the lesser compliant players. That conversation is completely shifted now to the customer's doorstep. Whether a customer hires... 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 LIN number. There is an equivalent of a GST number now called LIN number, labor identification number. And all filings have to happen on Shrum Suvidha portal, just like you file for GST on GST in network. So, as a customer has to, under his LIN number, show that he has 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 SS 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. 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. So that clarity that the labor code has brought in will certainly create a more level playing field in the times to come.

It's very useful, sir. It was 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 touchtone telephone. Reminder, anyone who wishes to ask a question may press star and one on the touchtone telephone.

The next question is from the line of Anant Munra from My Temple Capital.

Please go ahead.

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?

Okay, okay. So, have we worked out any benefits that could accrue to us?

Well, a large chunk of the benefits actually go to the employee himself, right? So, the scheme is designed such that if anybody joins a company and he continues to work for 12 months, then the government will pay him 15,000 rupees directly to his personal account. And then there is You know, 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.

That was it for mine. Thank you.

As there are no further questions from the participants, I now hand the contents over to Mr. Iturath Sina for closing comments.

Thank you, everyone, for joining the call. It's been a pleasure talking to you, and very happy to report that SIS has got off to a solid start in the first quarter. 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... You know, 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 rupees 478.

You know, and I hope that we are able to allocate capital back.

Like Vineet mentioned, this is our ninth. Action to return capital to employees, five VIVACs, 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 700-odd crores to our shareholders since IPO. I would draw your attention to the last but probably a very important aspect, which is... Our return ratios, they bottomed out. In Q1 of FY25, our return on equity was down to only 9.4%. Today, two years later, our ROC 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...

With significant businesses, let's say 500 crores in PAT, that would leave less than 500 odd companies, maybe 10%. Amongst those 500 companies, if you filter how many deliver a 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 in patch and our material businesses with consistent year after year, 15% growth in profits. 15% or greater return profile. So that's what we are shooting for. FY26 was the year of rebound. We delivered 15 and 15. I hope we'll be an inflection year or the second year where we'll be in that zone, hopefully. So thank you very much for your support and your conviction and 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.