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Momentum back, one-off mars earnings

Quess Corp (Quess) reported operational recovery (revenue up 8% QoQ) with general staffing sales up 6% QoQ. It posted INR440mn of expected credit losses from the government training business, and management hinted that further write-offs are unlikely. Quess’s commentary on coming quarters is upbeat.

The stock has re-rated significantly over the past year. While the ‘lowhanging’ valuation has disappeared, at 32x FY23E PE, its valuation is appealing still for a high-growth structural compounding story. Past concerns on capital allocation have been fading away, and we believe Quess will remain disciplined on this front. All in all, we are adjusting FY22 estimates for one-offs, but keeping FY23E unchanged.

Operationally robust as momentum comes back

Quess reported healthy recovery (revenue up 23% YoY/8% QoQ) after a sluggish second wave period. General staffing grew 6% QoQ as associate headcount crossed 250k with strong contribution from new clients. The company charged expected credit loss of INR440mn (above EBITDA) against the government training business (part of the WFM segment). The Training & Skill development business continues to face challenges, and Quess is in the process of winding them once contractual obligations have been completed and collections are received. Management hinted that further such write-offs in the training business are unlikely and, adjusted for this, the EBITDA was strong. Global Technology Services and Operating Asset Management segments grew 18% YoY and 15% YoY, respectively.

Continued capital allocation discipline

Management has consciously focussed hard on capital allocation discipline over the past two years (no M&A), and we believe this would improve returns on capital and cash flows. As reflected in this quarter’s recovery, Quess should be now back on the growth track, in our view. The company’s scale and leadership imply a high probability of it outpacing industry growth. It is targeting an RoE of 20%.
 

Outlook and valuation: Going strong; retain ‘BUY’

Factoring in the one-off charges, we are revising FY22 estimates by 18%, but keeping operational estimates constant for FY22 and FY23. We are revising up the DCF-based TP to INR1,095, implying 35x PE on FY23E profit (from INR1,020) (WACC: 12%; terminal growth: 5.5%) as we roll over the valuation by a quarter. Reiterate ‘BUY’

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