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General staffing revenues surpass pre-Covid levels…

TeamLease Services’ (TLS) revenues increased 5.1% QoQ (up 0.8% YoY) mainly led by 5.5% QoQ growth in general staffing and 32.9% QoQ growth in other HR services, partially offset by 3.5% QoQ decline in specialised staffing. EBITDA margins were flat QoQ at 1.9% in Q4FY21 (vs. our expectation of 2.0%). General staffing core to associate ratio also improved from 334 to 352.

Higher outsourcing, formalisation to drive growth

We expect revenues to be impacted in Q1FY22E mainly due to lockdown. However, we expect revenues to improve from Q2FY21E onwards led by a gradual recovery in the economy and improved traction in healthcare, education, e-commerce, manufacturing, essential retail and IT. This, coupled with addition of new logos and large ticket customer are expected to further drive general staffing revenues. In addition, from a structural perspective, we believe that since the pandemic has forced enterprises to variablise its cost structure, it will lead to higher outsourcing of labour making flexi staffing a key beneficiary.

In addition, the introduction of labour laws and einvoicing could boost formalisation of the economy making TeamLease a key beneficiary of the same. In specialised staffing, we expect revenues to improve (15.5% CAGR in FY21-23E) led by a revival in IT services. As a result, we expect overall revenues to increase at 21.7% CAGR in FY21-23E.

Near term margins to be impacted

General staffing margins in the quarter were impacted by wage reversal (| 70 lakh), provisions (| 60 lakh) and discounting. We expect margins to be impacted in the near term as we believe the reversal of discounting will take time. However, we expect the company to register healthy margins in FY23E mainly led by reversal of discounts, improving of core to associate ratio, improving specialised staffing margins and higher revenue growth. Hence, we expect margins to improve by 50 bps to 1.8% over FY21-23E.

Valuation & Outlook

We expect revenues to improve from Q2FY21E onwards led by a gradual recovery in the economy and addition of new logos. In addition, we believe TeamLease will be a key beneficiary of structural changes in the Indian economy led by higher formalisation and outsourcing. Further, we expect specialised staffing revenues to improve led by a revival in IT services. Further, improving cashflows and margins are other key positives. Hence, we maintain our BUY rating on the stock with a revised target price of | 4,205 (45x PE FY23E EPS) (earlier target price | 3,290).

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