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Near-term slowdown in demand, valuations attractive

TeamLease Services (TEAM) reported revenue of Rs19.55bn, modest growth of 4% QoQ in Q2FY23. General staffing revenue (Rs17.8bn) growth was soft at 4.7% QoQ led by moderation in headcount addition. General staffing headcount grew 2.6% QoQ and Degree Apprenticeship headcount grew 3.6% QoQ. Degree Apprenticeship business has been impacted by uncertain regulatory environment. Management does not expect significant increase in headcount in this business in near term.

Specialised staffing revenue (Rs1.4bn) declined 2.5% QoQ due to 9.4% QoQ decline in headcount on slowdown in IT hiring and company’s decision to discontinue working with one of the clients in telecom vertical because of payment issues. IT sector clients have slowed down hiring as they are focussing on improving utilisation. Management mentioned open positions have dropped 40% QoQ and it expects revenue to be flat or decline marginally in coming two quarters. It has witnessed increase in demand for tech roles in non-tech sectors and has added 14 new logos in this segment in Q2FY23 with balance mix of both IT and non-IT.

HR services revenue grew at a healthy pace of 21% YoY, but EBITDA margin was low at 3.2% due to seasonal weakness in H1FY23. The company saw deferral in billing in edtech which it expects to recover in coming quarters. H2FY23 is seasonally strong for ed-tech and the company expects overall margins in HR services to be 8% in FY23.

Consolidated EBITDA stood at Rs317mn, +25% QoQ, -7% YoY with EBITDA margin of 1.6% (-27bps QoQ, -62bps YoY), lower than our expectations of 1.9%. EBITDA was impacted by lower margins in HR business (-110bps YoY) and Rs40mn impact in unallocated EBITDA due to reclassification of skills business (government training) from operating to non-operating segment. Continued associate salary inflation with PAPM remaining flat QoQ is also impacting margins. Management mentioned its focus will be on improving productivity and profitability given demand headwinds. It mentioned investments made in previous quarters have been absorbed and does not expect increase in core headcount or cost in next few quarters.

We reduce our revenue growth estimates by 2.5%/4% and EBITDA margin estimates by 310bps/180bps leading to EPS cut of 9%/10% in FY23/24, respectively. Sharp cut in EBITDA margin estimates is driven by Rs40mn impact of government training business and demand headwinds in various segments. Post the recent correction of ~12%, TEAM is currently trading at an attractive multiple of 28x on FY24E EPS of Rs89. We continue to value the stock at ~32x FY24E EPS to arrive at a target price of Rs2,847 (prior: Rs3,175). Maintain ADD.

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