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Published on 24/03/2020 3:40:00 PM | Source: Motilal Oswal Securities Ltd

Neutral Quess Corp Ltd For Target Rs. 560 - Motilal Oswal

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Shift of focus toward RoE improvement

We attended Quess Corp’s (QUESS) Analyst Day. Key takeaways:

All-weather business model to benefit during downturns

* Management indicated that propensity of clients to outsource increases during downturns. In good times, the flexi staffing business model anyways benefits from outsourcing of non-core activities by clients to support their growth.

 

Shift of focus toward RoE improvement

* The company indicated that key focus going forward will be on RoE improvement at contract/individual business unit level.

* CEOs of different segments will have RoE targets. The focus will be on these rather than the EBITDA margin/gross margins targets.

* Over time, the company intends to divest businesses that do not meet the RoE threshold, which we understand is 20%.

* QUESS also hinted at further headroom for an improvement on asset turns.

* At the company level, RoE of ~20% is aspired to be achieved by FY23.

* Strengthening governance, improving capital allocation and balance sheet lightening are the other key priorities of the new CEO.

 

Strategic priorities in key segments 

* In general staffing, QUESS remains focused on volume growth through new client additions.

* Driving greater share of value-added services (VAS) and efficiency improvements through digitization are other strategic priorities.

* Expanding bill rate model and enhancing sourcing channels are the key priorities in the Indian IT staffing business.

* Renewed sales engine, renewed focus on new acquisitions (enterprise, tech, SE Asia), rebuilding/modernizing talent, reinforcing performance culture and digital marketing are the key priorities in Monster.

* Focus beyond BFSI industry and strengthening of GTM team are the focus areas in overseas IT staffing business.

* Faster collections, project closures and reducing capex intensity will be the key objectives in training and development.

 

Valuation and view – Weak macro + COVID-19 to be a double whammy

* Through Comtel, QUESS has exposure to geographies like Singapore which were severely impacted by COVID-19.

* Increasing spread of COVID-19 in core geographies like India will pose a key risk to business continuity of QUESS. This will be a double whammy given the already weak economy and demand for business services.

* We downgrade our FY21-22 PAT estimate and TP by 6%. Maintain Neutral.

 

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