Published on 14/02/2018 2:33:21 PM | Source: Motilal Oswal Securities Ltd

Buy TeamLease Services Pvt Ltd For Target Rs.2,700.00 - Motilal Oswal

Past the dent; back on the upward trajectory

* Weak quarter in General Staffing, but expect revival going forward: Revenue for TeamLease (TEAM) grew 13% YoY to INR9.2b, 2pp below our estimate. This was on expected lines, as General Staffing business growth slowed down to 8% YoY v/s +19% in 1HFY18, due to [1] GST-related uncertainty, [2] insourcing by some customers and [3] higher base because of demonetization. However, a sharp uptick in headcount addition (+3k) toward end-3QFY18 (v/s 2k decline in 2Q) indicated a return of traction.

* Higher contribution from Specialized Staffing: With the integration of Evolve and Keystone this year, Specialized Staffing contributed 6.4% of revenue v/s 2.7% last year. Excluding incremental revenue from acquisitions, growth in Specialized Staffing stood at 24% YoY, an encouraging sign. Higher growth v/s General Staffing should continue feeding into margin accretion, as the business is currently exhibiting 10% EBITDA margin, 6% revenue contribution and 33% EBITDA share.

* Strong margins performance: Barring the impact of higher-profitability acquisitions, EBITDA margin in General Staffing (adjusted for one-time writeback of provisions of INR30m) was at 1.7% (+30bp YoY). Our thesis of margin uptick, led by higher realization (INR775 per person per month (pppm), +9% YoY) and scale-led benefits (associate/core employee ratio of 219 v/s 202 last year), has been playing out incredibly well. This drove EBITDA margin of 1.9% (10bp beat) in 3Q. PAT of INR184m grew 60% YoY, led by strong margin performance and 80JJAA benefits.

* Valuation view: We value TEAM using DCF to reach a price target of INR2,700 (implied target P/E of 30x on FY20E EPS); our price target has increased by 8%, led by higher-than-expected margins. At 38/26x FY19/20E earnings, valuations are rich, and our expectations for growth stand at a CAGR of 25%/43%/43% over FY18-20. Sustained superiority of financial performance because of industry trends, business model and operational excellence continues strengthening our long-term view. Buy.

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