Muted quarter, provisioning far sighted
Miss on all fronts
* 2QFY20 revenue at INR12.7b grew 16.2% YoY (v/s est. 23.5%) while EBITDA at INR245m grew 2% YoY (v/s est. 49%). PAT at INR202m declined 20.1% YoY (v/s est. +28%).
* General staffing associates grew by 4,415 QoQ (14% YoY) to 165,029, below our est. of 7,700 additions QoQ. Specialized staffing saw a decline of 309 associates QoQ to 6,549 (+8% YoY), below our est. of 6,975. The decline in specialized staffing headcount was led by reduction in Telecom sub-segment associates from ~3,700 to 3,500.Revenue from Other HR services declined 25% YoY due to planned reduction in exposure to government mandates.
* EBITDA margin at 1.9% was below our est. 2.7%. Miss was led by lowerthan-expected recovery in government provisioning (INR60 set in last quarter), steep reduction in higher margin NETAP employees and increase in other expenses on multiple fronts. EBITDA margins for General Staffing/ Specialized Staffing/Other HR Services stood at 1.8%/6.3%/-0.6%, lower by 10bp/100bp/11.2pp sequentially.
* PAT at INR202m (+7.2% QoQ, -20.1% YoY) was 38pp lower than expectations, led by lower operational income.
Lesser probability of taking provisions on PF exposures
* TEAM has highlighted an exposure of INR1,730m to IL&FS (INR500m) and DHFL (INR1,230m) in its provident fund managed by India Life Capital. Plus there is INR900m surplus with a maturity period of 6 years.
* While prima facie this is worrisome, TEAM might not have to provision the same and here is why. In general, haircut is lesser for a provident fund, if we assume a 50% unrecoverable amount from IL&FS and 40% from DHFL, then too, the total hit will be INR750m. Even on a conservative front, surplus (INR900m) would exceed the unrecoverable amount. Furthermore, half of the PF liability is not claimed in cases of blue-collared employees. Therefore, the liquidity crunch leading to a provision seems an unlikely event.
* Valuation view:
We value TEAM using DCF to arrive a target price of INR3,330 (implied target P/E of 64.4x/39.8x on FY20E/FY21E EPS). We have revised our revenue assumption downward by 310bp assuming 20% growth for FY20. Our EBITDA margins are also revised downward by 20bp for FY20/FY21. At 53.8x/33.2x FY20/FY21E earnings, valuations are rich but justified given revenue/EBITDA/EPS CAGR of 21%/31%/21% over FY19-21. We believe that there can be certain uncertainty in the near term on fresh issues emerging in the current quarter; however, sustained superiority of the financial performance because of industry trends, business model and operational excellence continue strengthening our long-term view. Buy
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