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Buy Team Lease Ltd For Target Rs.2,840

Margins remain healthy despite challenging quarter…

TeamLease Services’ (TLS) results were broadly in line with our expectations. Revenues and margins posted marginal decline QoQ. Revenues declined 0.6% QoQ at | 1,129 crore (vs. our | 1,138 crore estimate) while margins fell 13 bps QoQ to 2.0% (vs. our estimate of 2.1%). General staffing core to associate ratio also improved from 283 to 300.

Revenues to improve in coming quarters

The company added ~7000 employees in NETAP, which means there are green shoots in manufacturing and auto. TLS expects improved demand from these two sectors, going forward. In addition, the company is seeing improved traction in consumer goods, e-commerce, telecom and some financials. This, coupled with addition of 24 new logos in the quarter, addition of large ticket customer and TLS’ commentary of exiting FY21E headcount at higher levels than FY20, reversal of discounts keeps us positive on general staffing revenue growth (11% CAGR in FY20-23E). In specialised staffing, we expect revenues to improve (9.6% CAGR in FY20-23E) led by a revival in IT services and reducing competition intensity in the specialised staffing (as smaller players are constrained by working capital issues). As a result, we expect overall revenues to increase at 10.4% CAGR in FY20-23E.

Many levers to keep margins healthy

The company has undertaken various cost rationalisation efforts like reducing core employee headcount, rationalisation of rentals and improving specialised staffing margins led by improved productivity. This is expected to keep margins healthy in coming quarters. This, coupled with reducing discounting pressure, lower compliance cost (led by introduction of new labour laws), improving revenue growth and focus on high margin customers in specialised staffing will boost long-term margins. Hence, we expect 30 bps increase in EBIT margins to 1.6% in FY21E and another 24 bps to 1.8% in FY21E-Y23E.

Valuation & Outlook

The company’s general staffing business is expected to see improved traction led by opening of the economy, healthy client addition and market share gains. Further, formalisation of the economy (led by new labour laws) will boost long term revenues. In addition, we expect specialised staffing revenues to improve led by a revival in IT services and reducing competitive intensity. This, coupled with cost rationalisation, bodes well for margins. In addition, cashflows are expected to improve led by lower tax outgo and efficient working capital management. Hence, we maintain our BUY rating on the stock with a revised target price of | 2840 (34x FY23E EPS).

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