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High beta play on economic recovery

Multiple business segments that rely on physical presence (e.g. Excelus, Digicare) were impacted due to lockdowns. This translated into muted sequential performance on headcount, revenue and margins. Salary hikes and seasonality in some businesses were the other factors which dragged down profitability. Despite green shoots of a pick-up in hiring activity, management sounded more cautious on near-term outlook (vs Teamlease).

The company also hinted at some deferment in hiring led by concerns around the 3rd covid wave possibility. In our view, differential portfolio mix is likely a key reason driving this. However, Quess called out the possibility of best ever December quarter and reiterated its earlier outlook of 20% RoE by FY23E and 20% OCF growth. For now, the company indicated there are no plans for merger with AllSec.

As highlighted in our earlier note (link), staffing businesses are high beta plays on recovery in the economy. Adjustments to growth / margin trajectory, drive earnings revision of -4% to 12%. Given Quess’ earnings growth potential (PBT FY20-23E = 35% CAGR), valuations (21x FY23E EPS) still remain attractive. Ongoing cleanup of balance sheet, improvement in return ratios / cash conversion make it a good re-rating candidate.

* In-line result; sequential performance impacted by covid 2nd wave. Sequentially, revenue was largely stable impacted by covid 2nd wave and seasonality. Revenue in key segments like general staffing too remained stable QoQ. Headcount witnessed a marginal increase. Global Technology Solutions (GTS) too stagnated, sequentially. However, some sub-segments within this (e.g. Platform based services, CLM etc.) reported strong growth (5-6% QoQ). Businesses like security etc. which require office presence, declined sequentially due to lockdowns. EBITDA margin contracted 30bps QoQ to 4.9% due to salary hikes. SG&A expenses (as % of revenue) increased from 5% to 6%. Barring operating asset management, margins in the other two key segments contracted. Margins are also impacted due to revenue stagnancy coupled with lockdown impact on businesses which need physical presence like training centres etc.

* More cautious outlook despite strong pick up in hiring. The company hinted at some deferment in hiring led by concerns around 3rd wave possibility. At the same time, Quess also called out the possibility of best ever December quarter and reiterated its earlier outlook of 20% RoE by FY23E and 20% OCF growth. Adjustments to growth / margin trajectory drive earnings revision of -4% to 12%. Given the company’s earnings growth potential (PBT FY20-23E = 35% CAGR), valuations (21x FY23E EPS) still remain attractive. Ongoing cleanup of balance sheet, improvement in return ratios / cash conversion make it a good re-rating candidate.

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