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Aug 01, 2017 02:31 PM IST | Source: Moneycontrol.com

Security and Intelligence Services' IPO to open on Monday. Should you subscribe?

Brokerages have largely highlighted the strong business model of the company along with presence in the organised sector in this space. Further, they said that the company will be able to leverage their leadership positions across several segments of security solutions.

 
 
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The latest addition to companies hitting the primary market is Security and Intelligence Services (SIS) India.

The company’s initial public offering (IPO) will open on July 31, 2017 and close on August 2, 2017. At a price band of Rs 805-815 apiece, the funds raised will be used for repayment and pre-payment of a portion of outstanding debt, its CEO Dhiraj Singh told the press earlier this week. Additionally, it will also be used for other corporate purposes. It has a debt of around Rs 360 crore.

The IPO comprises fresh issue of shares worth Rs 362.25 crore and an offer for sale of up to 51,20,619 shares by existing shareholders.

Axis Capital, ICICI Securities, IIFL Holdings, Kotak Mahindra Capital Company were global coordinators and book running lead managers, while SBI Capital Markets, IDBI Capital Markets are merchant bankers to the issue.

Brokerages have largely highlighted the strong business model of the company along with presence in the organised sector in this space. Further, they said that the company will be able to leverage their leadership positions across several segments of security solutions. Among risks, they saw threats from litigations, political developments along with operational risks.

Moneycontrol lists out what major brokerages are discussing about the issue.

Brokerage: Centrum Wealth Research

Centrum Wealth Research believes that at the higher price band of Rs 815, the stock is valued at 28 times EV/EBITDA and 65.3 times P/E on FY17 basis. This, it said, appears high given the current financials—revenue growth of 15 percent per annum over the past four fiscals, which were aided by acquisitions, EBITDA margins of 4.5 percent and return on equity of 18 percent.

Further, it compared the issue with those of TeamLease Services and Quess Corp. These IPOs got significantly over-subscribed and the stocks are currently trading at high valuation. “If the same happens with this issue despite growth being lower than peers, the listing could be at a premium to the offer price,” the brokerage house said in its report.

The multi-nation security services provider will witness growth from the Indian operations, even as the Australian business is steady, it added. It could benefit from the geographical presence and industry shift from unorganized to organised players.

The broking firm also said that the EBITDA/net profit registered CAGR of 16/12 percent. Additionally, the return profile for the company is decent, it said. Among risks for the company could be the political exposure of the promoters and competition from the unorganized sector.

Brokerage: ICICI Securities

ICICI Securities highlighted the revenue segmentation from the overall Rs 4,567 crore revenue—it derives 87% from security services, 4% from cash logistics and 9% from facility management services.

Further, it said that the company could benefit from increasing importance to statutory compliance and several companies falling under the regulatory umbrella. With this, it said, the market is expected to be more organised, leading to positive impact on growth. “Increasing penetration of security services in B2C and B2G segments would further help in accelerating growth in market revenues as new customers would be added,” the brokerage house said in its report.

Among risks, it believes that a demand reduction for security services could be a key risk. Additionally, adverse ruling in outstanding litigations, and risk to cash logistics business such as contractual liability and inadequate insurance cover could hit the business.

Brokerage: Ajcon Global | Rating: Subscribe

Ajcon Global too said that the valuation at 65 times FY17 EPS is not equivalent to no immediate peers as such in the listed space. Considering the similar nature of services to Quess Corp, the latter’s valuation is at 96 times FY17 EPS.

A combination of factors such as diverse portfolio, and presence in India and Australia, among others, the company will see a significant growth of over 50 percent CAGR in profit over the next two years. Further, investment of DE Shaw and CX Partners instills confidence on corporate governance.

GEPL Capital Research

GEPL Capital said that the company stands to gain from operating leverage. “At a P/E of 65.2x of its FY17 earnings, we believe that SIS demands a discount to its domestic peers,” it said in a report.

Moreover, it too highlighted that the company had a diverse portfolio of private security and facility management services. Additionally, the leadership position of private security services in India and Australia along with a facility management services in India were a few of the key strengths.

Among key risks include:

- Operational risks are inherent in business as it includes rendering services in challenging environments. A failure to manage such risks could have an adverse impact on business, results of operations and 20 financial conditions.

- They have a large workforce deployed across workplaces and customer premises; consequently we may be exposed to service related claims and losses or employee disruptions that could have an adverse effect on reputation, business, results of operations and financial condition.

- The company’s businesses are manpower intensive and their inability to attract and retain skilled manpower could have an adverse impact on growth, business and financial condition.

- They are subject to risks associated with operating with joint venture and other strategic partners.

Brokerage: Motilal Oswal | Rating: Subscribe

Motilal Oswal said that the increased need for security services from growing demand from corporates and residential housing, the company is well-positioned to take the advantage of the same.

“Further, with increase in penetration of ATM of existing banking and demand from new emerging small finance banks is likely to bode well for cash management business,” the broking firm said in its report.

On the financials front, it also said that the company’s debt could come down by about Rs 260 crore, which will boost earnings in FY18.

Meanwhile, the firm believes that the issue’s premium valuation is justified in context of leadership positioning in industry and robust business model.

Additionally, it said that the company reported fixed asset turnovers of 10+ over the past three years coupled with working capital of about 30 days implying a very asset-light business model which has resulted in a core RoCEs of 22% in FY17.

Among risks, it cited a regulatory risk as it is subject to several labour legislations and regulations governing welfare, benefits and training.
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