Maintain ‘buy’ on SIS India, TP unchanged at Rs 1,532

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New Delhi | Published: June 28, 2018 2:17:00 AM

SIS reiterated its aim of becoming the leader across the three domestic segments, (viz. security services (SS), facility management and cash logistics (CL), stressing that it would selectively choose targets and thus consider only strategic-fits.

SIS’s M&A approach is extremely selective with only strategic-fits on the radar

We recently met SIS India’s Group managing director Rituraj Sinha for a strategic and business update. SIS reiterated its objective of becoming the leader across business segments, but cautioned that its M&A approach is extremely selective with only strategic-fits on the radar. Furthermore, the operating strategy remains centered on improving the proprietary operational model. This is in line with our view that SIS has a best-in-class operational model in terms of efficiency. Sinha said the FY18 growth momentum has continued into FY19E, which indicates that the current growth run-rate is healthy. We reiterate ‘buy’ with an unchanged TP of Rs 1,532.

On M&A, SIS reiterated its aim of becoming the leader across the three domestic segments, (viz. security services (SS), facility management (FM) and cash logistics (CL), stressing that it would selectively choose targets and thus consider only strategic-fits. SIS also outlined its unwavering focus on improving the ‘seven-finger operational model’, which monitors key parameters such as receivables collections, recruitment, retention and monthly net change in sales. Our checks show that SIS’s peers are behind the curve in implementing such an efficient operating model. On growth, SIS indicated that the FY18 growth momentum continues into FY19E; we thus estimate the domestic SS and FM segments will clock FY19E sales growth of 20% and 30%, respectively.

India businesses are SIS’s growth engines and we believe the company’s strong competitive edge in the country underpins its outperformance. Our initiation report ‘Guarding the gates’ published on April 23, 2018 details SIS’s strong key operating and strategic parameters. Given the company’s track record, we expect its India growth to be 18–20% pa over the next three-four years.We value SIS on a three-stage DCF to capture its long-term potential and thus retain buy. Our analysis shows that CMP builds in an Ebitda CAGR of ~15% for FY18–28E, which might actually come in higher around 18%. SIS is currently the second-largest SS, fourth-largest FM and second-largest CL player in India.

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