SIS India (Security and Intelligent Services) Ltd’s Rs 780 crore IPO opens for bidding for public investors today at a price band of Rs 805-815 per share. The security staffing company plans to raise up to Rs 362.25 crore in fresh capital by issue of fresh equity shares in the IPO, while the remaining portion of the issue comprises an offer for sale of up to 51.2 lakh equity shares by the existing shareholders.
While the high growth potential of the security services industry in India, and specially SIS Ltd’s outperformance on top of the industry growth might make the issue attractive, some investors might want to exercise caution given the high valuations, with the company’s share price asking for a P/E multiple (price-earning ratio) of as much as 65x.
Here are top five factors to consider while applying for SIS IPO.
Business model: SIS earns over 85% of its revenue from providing security services to offices, commercial complexes, banks and more. Of this revenue, it earns about 65% from an Australian subsidiary. The remaining part of its overall revenue is earned through fast-growing cash logistics and facility management services. The company has 251 branches in 124 locations in India. It employs about 150,000 people across the country.
Growth potential: The Economic Times said citing a Frost & Sullivan report that the security services market will likely grow at a CAGR (compounded annual growth rate) of 20% through the financial year 2020. SIS has been growing at a pace 50% faster than the industry average, quickly gaining market share. Its revenue has risen at an average of 14.5% over the last five years, while the net profit has grown at 12.4% during the period.
Anchor issue: Ahead of the IPO, SIS raised Rs 351 crore from 18 anchor investors by allotting them 43 lakh shares at Rs 815 per share — the upper end of the price band. The anchor investors include Abu Dhabi Investment Authority-Behave, Reliance Capital Trustee Co. Ltd A/C Reliance Tax Saver (Elss) Fund, Birla Sun Life Trustee Co. Pvt Ltd A/C Birla Sun Life Small & Midcap Fund, Amundi Funds Equity India and Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.
IPO proceeds: A well over half the IPO proceeds, at about Rs 418 crore, will go to the existing shareholders selling their equity stake in the public issue. From the remaining amount of fresh capital — Rs 362.25 crore — being accrued to the company, about Rs 200 crore will be used to pay off debt; Rs 60 crore will be deployed to replenish working capital, and the remaining will be used for general corporate purposes. Of the total IPO quota, 15% of is being offered to HNIs and 10% is being offered in the retail category.
Risks: SIS Ltd’s wage costs for its 1.5 lakh employees constitute about 85% of the company’s total expenses. Any potential rise in the wage costs for such a large army of employees will significantly dent the company’s margins. A high dependence on low-skilled manpower leaves the company vulnerable to high attrition rates and unpredictable changes in labour laws. Further, some investors might question the rationale for investing in a company with just about 4% in EBIT margins, with an asking P/E multiple of about 65x.