Krystal Integrated Services is an integrated facilities management services (FMS) companies, with a focus on healthcare, education, public administration (state government entities, municipal bodies, and other government offices), airports, railways and metro infrastructure, and retail sectors. Its range of service offerings includes soft services such as housekeeping, sanitation, landscaping and gardening, hard services such as mechanical, electrical, and plumbing services, solid, liquid and biomedical waste management, pest control and façade cleaning and other services such as production support, warehouse management and airport management services (including multi-level parking and airport traffic management). It provides staffing solutions and payroll management to customers as well as private security and manned guarding services and catering services. The promoters are Prasad Minesh Lad, Neeta Prasad Lad, Saily Prasad Lad, Shubham Prasad Lad, and Krystal Family Holdings.

The company provided services to 135 hospitals and medical colleges, 228 schools and colleges (other than medical colleges), one airport, four railway stations, and 30 metro stations, along with catering services on certain trains and train routes end September 2023.

Revenue of about 56.62% was from Integrated facility management services, 30.79% from staffing and payroll management, 11.13% from private security and manned guarding, and 1.47% from catering in H1 FY 2024.

Among the select companies in India to qualify for and service large,multi-location government projects, the companyoffers services to key government customers in the healthcare, education, airport, railways, and metro infrastructure sectors, including to Maha Mumbai Metro Operation Corporation Limited and Education Department, Brihanmumbai Municipal Corporation.

Healthcare, education, and infrastructure (airport, metro, and railways) accounted for 34.14%, 30.79% and 7.68% of revenue in FY2023 and 30.65%, 20.22% and 6.19%, respectively, in H1FY2024. Revenue from government contracts accounted for 76.27%, and 73.66%in H1FY2024 and FY2023,respectively. The bid success ratio for government contracts stood at 14.58% in FY2023 down from 19.23% in FY2022.

The total number of customers served stood at 309 customers end September 2023, down from 326 end March 2023. The number of customer locations serviced by it as of end of September 2023 stood at 2,160, down from 2,427 as of end of March 2023 across 16 states and two UTs in India. On-site employees stood at 40,100 heads end January 2024, up from 39,900 heads end September 2023. New customer additions were 57, 89, 70, and 76 in H1FY2024, FY2023, FY2022, and FY2021, respectively.

Extensive experience, understanding the unique requirements and challenges in various sectors especially such as the healthcare, education, airport, railways, and metro infrastructure sectors.

The ability to maintain quality standards, while expanding the service offerings, to meet evolving industry requirementshas led to longstanding relationships with key customers. Four of the top 10 customers, based on revenue generated in FY2023, have been associated for longer than 10 years. Three of the longstanding customers of more than 10 years contributed 17.06% of the revenue in H1FY2024.

The Issue

The offer comprises fresh issue of equities aggregating to Rs 175 crore and offer for sale (OFS) of 1750000 equity shares of Rs 10 face value. The OFS component comprises entirely of sale of 1750000 equity shares by Krystal Family Holdings, a promoter group entity.

On the post-issue expanded equity, the holding of Krystal Family Holdings will stand reduced to 69.33%.

Objects of the Issue

Of the net proceeds of fresh issue, the company will be using Rs 10 crore towards re- and pre-payment of certain borrowings, Rs 100 crore will be used to fund working capital requirements, Rs 10 crore to fund capital expenditure for purchase of new machinery,and the balance for general corporate purposes.

Consolidated outstanding borrowings (gross) were Rs187.343 croreas of end January 2024.

Strengths

Provides a comprehensive range of integrated facility management service offerings across multiple sectors. Has a track record of executing large, multi-location government contracts.

A wide portfolio of services enables designing and delivering a range of customized solutions suited to the specific needs of customers across various sectors, bolstering customer acquisition and retention capabilities.

The wide geographic presence facilitates services to customers preferring a single service provider for operations at multiple locations.

Weakness

Operating in an industry that is intensely competitive and has low entry barriers.

The largest, top5, and top10 customers accounted for 28.59%, 54.07%, and 70.36% of the revenue in H1FY2024, respectively, signaling a significant customer concentration risk.

The inability to acquire new customers or retain customers at competitive profitability or termination of contracts by customers without cause may impact business growth.

The businessis manpowerintensive. Any failure to attract and retain skilled manpower at competitive rates will impact the growth and profitability of the business. The attrition rates were higher at about 31.38% in FY2023, down from 35.88% in FY2022, and 12.98% in H1FY2024.

Most of the revenue came from two geographies and states. While Maharashtra and Tamil Nadu account for 47.41% and 32.4% of the H1FY24 revenue, balance 20.19% was from other states and UTs.

One of its businesses, i.e., private security agency services, accounting for 13% of its revenue,is not eligible for FDI through the automatic route.

A significant part of the revenue is generated from government contracts obtained through a competitive bidding process. Thus, any slowdown in ordering or inability to competitively win contracts will impact operations.

Two writ petitions have been filed against it with the High Court of Delhi challenging the process of evaluation of tenders for work of security manpower services in government schools run by the Department of Education and alleging illegal and arbitrary denial for the awarding tenders.

Does not own the trademark and logos used. Got permission for non-exclusive royalty free license to use ‘Krystal’ till 19 September 2031 by Prasad Minish Lad, one of the promoters and registered owners of the trademark.

An aggregate amount of Rs 5.885 crore and Rs 4.931 crore was unpaid undisputed statutory due towards EPF and ESI, respectively, as of end September 2023.

Experienced negative cash flows from operating activities in H1FY2024 and may face the same problem going ahead.

Valuation

Consolidated sales were up 28% to Rs 707.64 crore in FY 2023. However, with the operating profit margin expanding 10 bps to 7%, operating profit was up 31% to Rs 49.84 crore. Pat from continuing business grew 61% to Rs 33.80 crore, gained largely by lower tax incidence. After accounting for 75% fall in profit from associates, 13% decline in profit from discontinued business, and nil minority interest, net profit was up by 46% to Rs 38.44 crore.

Pat from continuing business was up Rs 20.59 crore with sales of Rs 451.61 crore in H1 FY 2024.

EPS on the expanded equity at the upper price band is Rs 24.2 for FY2023. The PE works out to29.5 times. The P/BV and EV/sales work out to 2.8 times and 1.5 times.

Against this, Updater Service quoted at a PE of 47 times of its FY2023 EPS as well as P/BV and EV/sales of 5.5 times and 1.1 times.Though not an apple-to-apple comparison, Quess Corporation, SIS and Teamlease Services quote at PE of 39.5 times, 19.6 times and 45.2 times of their FY2023 EPS, P/BV of 2.9 times, 2.9 times and 6 times and EV/Sales of 0.5 times, 0.7 times and 0.6 times.