Recovery expected from mid-2QFY21
Simplification of labor laws key for industry growth
Key highlights from the interaction:
* Trough expected to pass in July: The General Staffing headcount is expected to see a reduction of 5% MoM in 1Q (overall 15% impact for 1QFY21). Furthermore, the management expects the trough to pass mostly by July before the industry starts to recover. Retail (Fashion Retail) and NBFCs have seen a high impact. The severe disruption caused by COVID-19 in Tier-I cities in India poses a risk to recovery. The company has benefited from its customers being large enterprises (150 are Fortune 500 companies). Specialized Staffing has been largely stable, with delays witnessed in some cases.
* Improved productivity, labor reforms to drive industry growth: The simplification of 44 central labor laws in four labor codes is an extremely positive step toward the growth of the Flexi Staffing industry. This would encourage increased compliance to regulations and aid the formalization of the sector. Enterprises (customers) are expected to further adopt temporary staffing in search of better productivity from quality service providers. Players such as Quess, with a relatively broad set of offerings, are expected to gain significantly.
* To improve margins by adding new customers: Facilities Management and Security Services have seen increased pricing pressure. The focus would be on acquiring new customers and modernizing service offerings to improve margins. 40 new customers have been added recently, but the company has not seen huge requirements from them yet as they wait for the economy to recover.
* Debt reduction to be high priority: The new management has alluded to the high debt presence being on account of serial acquisitions in the recent past; its current priority is to reduce debt going forward.
* No more goodwill impairment / acquisitions in sight: The new management has set a target of achieving ROE of 20% in the medium term. The balance sheet cleanup is expected to be complete. The management’s plan to not pursue acquisitions and digest the recently acquired entities is a welcome step.
* Focus on improving OCF/EBITDA to 55–60%: The management is working to improve the OCF/EBITDA conversion to the 55–60% range from the current level of 45%. The primary focus would be on reducing debt. The company plans to stay away from government projects (in some cases) and projects where payments are milestone-based rather monthly in order to improve collections.
* Collections largely on track: Quess is not facing any collections-related challenges as of today given the good quality of its clientele. DSO has gone up by a few days in the Facilities Management division. However, this is primarily on account of lockdown and not because of the cash crunch at the customers’ end.
* Divestment of non-performing assets: The company would look to divest nonperforming assets, such as its Logistics business unit (Dependo). This business has seen increased relevance in the market due to the COVID-19 impact and should help realize a better valuation.
* Monster to see challenges in near term: While the pricing for Monster is oneeighth that of Naukri (market leader), recovery has not happened as the Recruitment segment is yet to pick up. Search activity increased in Jan/Feb, but fell 60% post the COVID-19 outbreak.
Valuation and view
As the economy prepares for a gradual re-opening and enterprises look to dodge supply disruption, we believe the company/sector has already passed the peak of uncertainty. As both the central and state governments look forward to liberalizing and formalizing the labor markets, QUESS should be among the biggest direct beneficiaries. We expect a 13%/21% revenue/EPS CAGR over FY20–22E. Our TP of INR360 implied 14x FY22E EPS is still at a steep 60% discount to TeamLease.
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