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Buy Teamlease Services; target of Rs 3415: HDFC Securities

November 18
21:25 2019

HDFC Securities’ research report on Teamlease Services

Revenue stood at Rs 12.68bn up 1.3% QoQ vs est. of Rs 12.84bn. Core staffing (90% of rev, +0.8% QoQ) growth was lower than estimates due to fall in NETAP (-10.4% QoQ) offset by growth in general staffing (+2.7% QoQ). EBITDA margin expanded 8bps QoQ to 1.9% vs. est. of 2.2%. Adjusted for one-off margin stood at 2.2%, in line with estimate. Associate/core ratio (-5.8/+8.5% QoQ/YoY) dipped due to temporary addition of core employees to support demand. Mark-up continues to grow (highest in six qtrs), +1.2% QoQ to Rs 736. Salary funding exposure remained flat QoQ at 14% (lowest in the industry). Demand in general staffing continues to be strong led by BFSI, Retail, E-commerce and Food delivery segments. Specialised staffing (~8% of rev) grew 2.3% QoQ driven by IT staffing while Evolve (Telecom) continues to drag. EBITDA margin for specialised dipped by 15bps QoQ to 6.3%. The company is looking for acquisitions in IT staffing to enhance the business mix (higher margin). The problem with such acquisitions is higher receivables, 60-90 days vs. 7-9 days for core staffing. Teamlease employee PF trust has an exposure of Rs 1.74bn towards two NBFCs with maturities between FY21-27. Net impact could be Rs 0.80bn (surplus of Rs 0.90bn) over next seven years. No provisions have been made currently and are contingent in nature.

Outlook

We maintain BUY on Teamlease despite slight miss on revenue and margin in 2QFY20. NETAP trainee’s addition was impacted due by core sector slowdown. However, general staffing (~75% of total associates) is on growth track and will have a strong 2HFY20. Our TP Rs 3,415 is based on 40x Sep-21E EPS.

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