Mispricing of business & balance sheet improvement

Concerns around (1) structural impact on the business case of security/FM due to WFH, (2) levered balance sheet and (3) the then impending NCI payments led to the stock languishing ~40% below the pre-Covid level. Our analysis suggests Covid should drive higher (rather than lower) volumes over the medium term for both Security / FM. SIS, being one of the very few players with integrated offerings, should be a key beneficiary. Invoicing trends in Sep-20 suggest overall business is better than in Mar-20. While pockets like FM are still ~25-30% lower, pent-up demand being witnessed in (revenge) travel, shopping and leisure should drive normalisation during the current festive season. Improvement in liquidity position and restatement of debt appetite (from net debt/EBITDA of 1.5x to 1.0x) are key balance sheet positives. Based on our learning from the recent case study of Quess, this business and balance sheet improvement should be the key value drivers going ahead. We upgrade the stock to BUY (from HOLD) with SoTP-based TP of Rs 500 (implying 22x 1-yr fwd EPS, ~40% discount to Teamlease).

* Structurally, business case should become stronger over medium term. Expectations of a wide-scale adoption of WFH across businesses (e.g. IT) led to concerns around diminished business case for security / FM businesses. However, as elaborated in our IT sector thematic, we believe WFH in its current shape is unsustainable over the medium term. Secondly, the fact that verticals like commercial and IT/ITES had held up reasonably well even when ~97% of their employees were on WFH indicates these concerns are overrated. Post complete lifting of lockdowns and normalisation of public transport services, we expect an increased demand for both security/FM (vs pre-Covid). This assessment is also backed by our channel checks at a few customer sites of SIS in Mumbai where we noticed that security guards are currently working more hours (e.g. 12/day vs normal of 8/day) to cater to higher demand. This was led by additional Covid related activities like thermal screening etc. So far, this elevated demand trend was not so pronounced at a broad level as the lockdown and sub-optimal public transport inherently contained the footfalls to an extent. SIS, being one among the very few players with integrated offerings, should be a key beneficiary.

* Expect normalisation of the remaining few pockets during festive season. While international business is currently 115% of pre-Covid levels, India security is 94% and FM is 70-75%. Ad-hoc business (e.g. quarantine work) in international segment, that too at a better pricing, is more than offsetting Covid impact on certain verticals (e.g. aviation). Indian business was largely impacted due to verticals like railways, hospitality, retail, entertainment etc. However, pent-up demand currently being witnessed in (revenge) travel, shopping and leisure should drive normalisation of this gap too (in FM and security) during this festive season.

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