Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable’ rating on the long-term bank facility of RARE Hospitality and Services Pvt Ltd (Rare).

 

The ratings continue to reflect the financial and operational support from the parent - SIS Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), a market leader in domestic manned guarding services market and the largest facility management service provider in India, backed by more than a decade's presence in the industry with strong market position. The ratings also factor in expected continuation of healthy growth in company’s revenue backed by its strong market position and established operational track record.

 

Operating income is expected to grow 8-10% on-year to reach ~Rs 180 crore in fiscal 2025. The growth is expected to be driven by the addition of new customers and an escalation clause built in the existing contract. The company achieved operating income of Rs 168.2 crore in fiscal 2024 against Rs 155.6 crore in fiscal 2023, reflecting healthy growth of 8% on-year. The company’s operating margin is expected to remain at 4.5-5% over the medium term. The operating profitability also improved in fiscal 2024 to 4.4% from 2.6% in fiscal 2023 on account of better contract terms.

 

The financial risk profile is expected to remain healthy, as indicated by low reliance on external debt, but will be constrained by low networth of Rs 15.1 crore as on March 31, 2024. The total external debt on the same date was Rs 18 crore. The company has no major plans for capital expenditure (capex), though if it gets any major contract requiring it to procure newer machines, it might take external debt.

 

Debt protection metrics such as interest coverage and net cash accrual to adjusted debt ratios are expected to be comfortable at 3-3.4 times and 0.3-0.4 time, respectively, over the medium term. The capital structure is supported by adjusted gearing and total outside liabilities to tangible networth (TOLTNW) ratio of 0.9-1.2 times and 3-4 times, respectively, over the medium term.

 

The rating further reflects Rare’s diversified and reputed clientele and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition and large working capital requirement.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to Rare from SIS Ltd. This is because the company is a fully owned subsidiary of SIS Ltd and remains critical to the parent’s operations in the facility management space.

Key Rating Drivers & Detailed Description

Strengths:

• Strong infrastructural, operational and financial support from the parent: Rare is a 100% subsidiary of SIS Ltd, which has a strong presence in the security services market in India and is engaged in manned guarding, cash management, facility management, consulting and investigation, and electronic surveillance businesses. SIS Ltd acquired the company in 2018. Rare benefits from operational and financial support from the parent.

 

• Continuous improvement in scale: The revenue increased to Rs 168 crore in fiscal 2024 (growth of 8%). The company achieved revenue of Rs 156 crore in fiscal 2023 (growth of 19%) against Rs 131 crore in fiscal 2022. Though revenue has shown improvement, the pace of growth has tapered primarily due to want of favourable contract terms with clients. This is reflected by improvement in profitability margin to 4.4% in fiscal 2024 from 2.6% in fiscal 2023.

 

CRISIL Ratings believes the company will be able to achieve healthy revenue growth over the medium term, supported by its improving market presence, robust operational track record and leveraging of established market position of the SIS group.

 

Weaknesses:

• Risk emanating due to the uncertain nature of tax benefit impacting net profit: Rare had an employee base of more than 6,200 in the fiscal 2024 which made it eligible for sizeable tax benefit under Income tax scheme 80JJAA. In fiscal 2024, the profit after tax was impacted due to reversal of benefit due to reduction in number of employees from ~6,770 to ~6,230. In fiscal 2023, the company received Rs 2.3 crore and had to reverse Rs 1.2 crore of tax benefit. The volatility may continue to impact the net profit.

 

• Exposure to intense competition and high client concentration in revenue: The facility management services industry is characterised by the presence of many unorganised regional players. Thus, its ability to gain market share and improve profit margin in the highly competitive facility management industry is a key rating sensitivity factor.

 

The top five clients contributed to around 48% of overall revenue in fiscal 2024, reflecting high client concentration in revenue. The client concentration risk, although high, is mitigated to some extent by its established relationship with these clients and the high-value orders repeatedly secured from them.

Liquidity: Adequate

The company had cash and bank balance of ~Rs 1.3 crore and undrawn lines of ~Rs 3.1 crore as on May 31, 2024. Average utilisation was 88% of total sanctioned working capital bank limit of Rs 25 crore in the six months till May 2024.

 

Furthermore, net cash accrual is expected to be over Rs 5 crore per annum over the medium term, which should be sufficient against annual debt repayment of Rs 0.3-0.5 crore. Liquidity is also supported by need-based support from the parent.

Outlook: Stable

CRISIL Ratings believes that Rare will continue to benefit from the healthy business and financial risk profiles of its parent and its long track record of operations and strong market position. The company will also benefit from experienced management and established relationships with customers.

Rating sensitivity factors

Upward factors:

• Significant scale up in operations with growth of 20% in revenue on consistent basis
• Improvement in operating margin to 4.5% on sustained basis
• Strengthening of the parent’s credit risk profile

 

Downward factors:

• Weakening in the credit profile of the parent
• Decrease in operating margin to below 2.5% impacting cash accrual and debt protection metrics on sustained basis
• Any large, debt-funded capex weakening the financial risk profile

About the Company

Rare was incorporated in 1994 and acquired by the SIS group in October 2018. The Mumbai-based company provides facility management services, including housekeeping and cleaning. Rare is a comprehensive hospitality and facility management company that manages premium segments, including hospitals, banks, corporate complexes, refineries, hotels and guest houses. The company has a core specialisation in providing housekeeping and cleaning services to healthcare and hospitality sectors.

About the Group

Established in 1974 by Mr Ravindra Kishore Sinha, SIS Ltd has been providing security services since inception, mainly manned guarding. It has grown over the years through organic as well as inorganic routes and operates in Australia (through MSS after acquisition of Chubbs Security in 2008), New Zealand (through P4G) and Singapore (through Henderson), apart from India. The SIS group has a pan-India presence through 293 branch offices, 50 regional offices and 29 training academies. It has a trained workforce of 2,84,776 employees.

 

The SIS group provides facility management and cash logistics services. SMC Integrated Facility Management Solutions Ltd (previously known as Service Master Clean Ltd; 'CRISIL A/Stable/CRISIL A1'), a wholly owned subsidiary of SIS Ltd, provides cleaning services. Some of the other group companies in the segment are Dusters Total Solutions Services Pvt Ltd ('CRISIL A/Stable/CRISIL A1') and Tech SIS Ltd ('CRISIL BBB+/Stable'). The SIS group also offers cash management services through its joint venture, SISCSPL and its subsidiary SISPHL. SIS Ltd was listed on the National Stock Exchange and Bombay Stock Exchange effective August 10, 2017.

Any other information: Not Applicable