SiS – Is this a security services company or a Bank ?

I know it seems like a totally crazy comparison, but hear me out.

A Bank lends money to its borrowers and earns interest. The more it lends, the more it earns and if they can’t collect the money the outstanding is termed as an NPA. Whether the bank makes money or not, it has to pay its depositors interest.

Now a security services company LENDS its personnel to companies for fees. They need to pay the salaries to the employees whether they make money from the business or not. If the company can’t recover money from the company, it becomes and NPA too. To do more business, the company simply needs to LEND more personnel.

There’s more. While banks do a lot more work than simply lend and borrow, they primarily make money on the SPREAD, i.e the difference between lending cost – borrowing cost – management cost. Guess what ? It’s the same in the security business, you have to appraise the client to see whether he is worth providing a service to or not and the SPREAD is simply the FEES – Salaries – management cost.

This is oversimplified but, the point i’m trying to make here is this. People think security business is a super asset light business, well yes, but it’s a super heavy working capital business.

As a business owner, your want to pay the bill for security is bottom rung. A security company cannot really push you too hard as he knows, there is always a player willing to provide your service at a cheaper cost, lower quality, but yes cheaper cost.

With this new set of eyes, let’s examine the business of SiS.

@ 900 a share SiS has a market cap of Rs 7,000 cr for sales of Rs 7,000 cr. A simple 1x sales, which is pretty much the value that SiS is willing to buy companies in the same line of business. This is full value ! Any benefits of integration, synergy etc is all already included in it.

Rituraj Sinha, who runs SiS says “any company in the security business that reaches a 500 million $ turnover will cross 2 billion $ in 7 years.” SiS crossed the 1st mark in 2015, making the target 2022 for a 14,000 cr turnover. 2x from today’s sales. 2x sales in the next 3-4 years on such a huge base. A good goal to chase !

The central factor in building a good services business is money, because, you need it to expand as well as you need it to buy out companies.

A little snippet from SiS history. When SiS was growing from a micro – small – medium company they could not really harness the power of banks for acquisitions as banks lend against collateral as primary security, and SiS being in the services business had almost nothing to offer. SiS then used to leverage its Security business in Australia to raise money on the Australian companies receivables, in a “revolving credit” to buy out players in the Indian market. Oh and the man raised it at 5%, to deploy it in a business with a 19% ROCE.

When Rituraj says he is in the “security business”, i am a little confused whether he means protection business or capital markets 😉

SiS is creating jobs in India today. The most important thing we need after water, air and food. Today they employ over 2,00,000 people and are likely to go over 3,00,000 in the next 3-3.5 years.

SiS is in security services, cash management, facility management etc, but most interestingly they have now moved into the B2C segment for alarm monitoring and response solutions for homes and small businesses. This business has suffered extremely high attrition, and SiS may have found a solution to that.

The primary moat that SiS has is its capital allocation and cash management skills.

I don’t consider its market share, execution capacity , culture and management as big a moat as i consider their brand as one. In the security business SiS and G4S have an extremely high degree of trust, maybe like HDFC and SBI have in banking. This goes a long long way in pricing power. In the fund management business there is this joke that goes “No one ever got fired for buying IBM” similarly, no one will get fired for hiring SiS.

The Regulatory licenses around the cash management business have become a lot more stringent off late. The requirements have increased and the margins have become thinner. This industry too will get consolidated. Also if the rumours of slowly scrapping the 2000 note are true, and the highest denomination is 500, the business will automatically go up 4x 🙂

SiS was originally built out of Patna, the gold mine for recruitment in the north and the east. SiS very early, started training academy and graduate training academy. Also, they provide a lot of training under the national skill development program.

SiS is on a journey to be the a company that has 14,000 cr sales in the next 3-4 years. They would like to have a PAT of 3.5-4%, but even if they continue to maintain the 2.5-3.0% , it translated to a PAT of 350 to 420 crores. Huge, huge amount of profits. TO do this they would have to grow above 20% in revenues and about 30% in profits to reach there by 2022. Assuming that they can continue to maintain a PE of 30, and if bought and sold correctly you can easily get more than a doubler in 3 years.

Yes, a small cap can give you way better returns, but can you put in largish chunks of money in them ?

There is no speculative return to be made from PE expansion as it already trades at 30 PE, but chasing earnings growth at a good price too could make you a packet of money through happy compounding.

Buy.