Pre COVID, our biggest threat was a human being. This elite status has now been replaced by an invisible organism that wants to kill you for absolutely no reason. Just to make things worse, this organism can largely come to you via your old fear, i.e the human again. This just made a human risky on multiple levels.

When there is an increase in risk, the fear can sometimes go up 10x of the risk, and no the “risk hai to ishq hai” bullshit dialogue from scam does not work here. Fear has been a great tailwind for media, insurance companies, pharma etc. Security services companies are set to benefit greatly from this.To get a better understanding read my old posts on SiS

Since my last post the company has almost fallen 50% in terms of market cap and everything looks dreary and gloomy to the public. When you get a fever, 95% of your body is actually working fine, its just the 5% that is the problem, but you call yourself sick. Similarly the only vertical of SiS that has suffered drastically has been its facility management, which too has only done badly because of the covid pause. There is a lot of other stuff that has happened which is worth taking note of.

    • The reforms have increased the basic wages payable to workers. SIS has been compliant all along. A lot of smaller local companies, have defaulted on this.
    • Lots of small companies have been taking money in cash and have not been GST compliant.
      • In real estate, one would simply pay the builder earlier and trust him to pay service tax, tds, etc and the purchaser had no legal liability. Now for every transaction the purchaser has to pay 1% to the govt directly and the rest to the builder. The compliance is now the headache of the purchaser. Also, the registration office will not register the property unless, the TDS certificate is furnished.
      • Just the same way, when any compliance falls on the head of the user, the user does not want to take any risk. Most corporates who get GST benefit anyway will obviously only deal with companies that comply as they want no risk from an expense.
      • This simple “save your ass” behaviour will make many local players incompetent to provide service as their biggest delta against the organised players was the non-compliance margins.
      • Non compliance in wage structure, non compliance in employee safety, non compliance in PF and SSI & non compliance in taxes etc. This squarely puts the un-organised player out of competition for any organized purchaser.
      • The reforms will not re-distribute market share in the top players in every city, but will completely annihilate any unorganised player providing any services to an organised player.
    • Security service companies are often misjudged as an easy no entry barrier with hardly any investment. This cannot be further off than the truth. While the old school security businesses didnot have a lot a cap-ex, they had a massive amount of working capital. Also, the new age companies will have to massively invest in tooling unlike the business years ago.
    • SiS needs to pay its people, on time, every time.
      • Most employees work hundreds of kilometers away from their families and the the entire family runs on this persons income. They have to be paid ON TIME.
      • Security companies as well as facility management companies have not had good bargaining power all these years. To get margins they have always had to extent the credit period. Only one who was able to generate a high ROCE and pay little interest was able to do this continuously as it was worth it for them. SiS here was a hero because they were able to borrow a lot of their money for as little as 5-7%.
      • The trouble starts when some accounts go bad. What do you do when you donot get paid ? When you do get paid, you make like 4-5% PAT, when you dont, not only do you loose 100% of your bill, but you have also already paid your employees. You have to pay EVERY TIME and not just when you make money.
    • The risk reward for a business like this is so easily underestimated and that’s why you will see a very high turnover rate in the fate of these businesses.
    • SiS has been awesome to keep this under check and also reduce its debt during the pandemic.
    • It also took advantage and closed the purchase of SXP and got a 15% discount or 42 cr discount in the purchase price.
    • SiS has put a hold on all capex that is non IT related, i.e it is only incurring capital expenditure on IT. When you spend on IT and digitization, if done properly it drastically brings down the operating expenses and massively increases efficiency. IT expense is usually front ended, like a prepaid mobile, you pay first and enjoy it later.
    • Every company has learnt to identify and cut fat during this time. SiS has not fired people, which means that they have learnt to re-skill and re-deploy their people effectively between verticals. Versatility and flexibility in process functions are super valuable.
    • TATA motors which was a real shitty company, learnt loads from JLR and is now rolling out one block buster after another by absorbing design skills from JLR. With its international subsidiaries in Singapore and Australia, where SiS earns 10x more per person, simply because of implementation of tech, it can now deploy all that here in India. They know how to do it, they just need to get the pricing right for the implementation.
    • We are just entering the cusp of digitisation. With uninterrupted power becoming the norm, 4G – 5G and a host of IOT devices, it is going to be unimaginable what can be done.
    • Almost no tech is being used for safety and assurance yet but, look at what all can be done. While china is at the borderline of Abuse, we at India are just beginning to USE.
Forget abuse, we need to start to at least use !
    • Facility management is an input, its a cost centre, simply put its a hated part of business. Assurance on the other hand is a product that is being sold, it is a measurable outcome, it is a word that bends more towards a product than a cost. This is a paradigm change for the perception of services provided by SiS.
    • When safety becomes utmost importance, you can actually sell it. See how Thomas Cook is using Apollo’s assurance as a product itself.
    • SiS has not made a single acquisition that has not been profit and ROCE accretive.
    • In his latest con-call Rituraj clearly said that he was not looking at domestic acquisitions thought there we plenty opportunities and companies were desperate, because he was not sure of how long the pandemic would last. But I think it was simply because the future growth of the Indian story will not be linearly correlated to the number of employees. Tech will bring about a massive increase in revenue per employee in the future – STARTING NOW.
    • SiS has also been super smart in acquiring companies ahead of the curve, i.e in countries more developed than ours, rather than try to acquire companies in countries that are worse off. This seems small, but the repercussions are huge. It is a clear show of forward looking character.
    • This video shows the baby steps that SiS has already made towards substituting people with machines.
This Virtual covid Marshall make sure you wear your goddamn mask and that you don’t huddle up for no reason.
  • The Big Valuation Question
    • With the fact that the industry is consolidating due to a change in industry and tax compliance structure as well as the inability of most of companies to end up on the right side of disruption, SiS which is clearly the leader and surprisingly the most efficient one too, a lofty premium is justifiable for this company.
    • Currently at about 6,000 M.Cap with leverage reducing as well as margins set to inch from 4-4.5% to about 6% once the malls, theatres and railway stations open up, the company should be able to throw out about 500 crores of cash with a Net Profit of about 300 cr a year.
    • Further increase will be disproportionate to the number of employees as tech will allow for disproportionate gains. While the depreciation might skew the figures for a couple of years in the future, the operational cash flow and the reduction of debt will be things to watch out for.
    • A 10,000 cr M.Cap is a no-brainer for this company. The rest will depend on the idiosyncrasies of Mrs.Market.

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