SIS IPO - Should you buy?

India's numerous IT companies, malls and banks need security and its offices need cleaners and other tradesmen to maintain them. SIS or Security and Intelligence Services (India) Ltd. does all of this. The company has built a name for itself in the security business and its size is a major advantage. However it is very vulnerable to small changes in labour costs and operates on wafer thin margins. Read on to make up your mind about whether to buy. What it does Security services (guarding those IT companies, malls and banks) is the largest chunk of its business accounting for about 87%% of its revenues and within this segment, a large portion, comes from an Australian subsidiary. This is followed by facilities management (building cleaning, maintenance etc) at 8.45%. Cash logistics, pest and termite control and electronic security make up the rest. The company has 251 branches in 124 locations in India and renders its services at 11,869 customer premises. In Australia the company operates across 8 states, servicing 245 customers. To buy or not to buy SIS's revenue and net profits have grown robustly at 14.5% and 12.4% respectively over the past five years. The company has established a brand in the security business and advantage of size work in its favour. GST and other formalisation initiatives are likely to force the vast number of unorganised players out of the market, driving business to SIS. New ventures such as pest control and electronic security hold promise for the long term. The company employs an army of security guards and related personnel in India, a figure reaching almost 1.5 lakhs. This makes wages the largest component of its costs at 85%. This leaves the company vulnerable to galloping employee costs in India (in the order of 15% per annum over the past four years), labour law changes and sky-high attrition rates of 56% (although this has been steadily coming down). Its slim (EBIT) margins at just 4% underline this vulnerability though they have been defended quite well over the past few years. Where's the money going Roughly half of the IPO proceeds (780 crores) will go to existing shareholders. The other half will be used to pay off debt (200 cr.), replenish working ca