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Downbeat commentary on margins

While provision for bad debts had hitherto been a recurring problem, it is comforting to note that, for FY21, most of these provisions were reversed and cash collections were not impacted. Despite good increase in headcount (+5% QoQ), revenue (+6% QoQ) and productivity (from 334 in Dec-20 to 352), normalised general staffing EBITDA margin was largely stagnant. This was driven by the discounts-led pressure on mark-ups, which is likely to continue through FY22. We see this partly offsetting the (1) full benefits of cost rationalisation initiatives undertaken in FY21 and (2) growth led operating leverage. Growth outlook sounded cautious in light of the 2nd covid wave disruption. Nevertheless, the outstanding carry forward Sec 80JJAA benefit (~Rs 30cr) in conjunction with net headcount addition in FY22 (min 8%) gives the company confidence about ETR remaining at 0%. While recovery in growth and margin expansion was delayed by 2nd covid wave, we are confident of robust earnings growth (FY21-24E EPS CAGR: 47%) and cash conversion over medium term. Maintain BUY as we expect TeamLease to be the best proxy play on workforce formalisation.

In-line revenue and margin.

Headcount / revenue in general staffing increased by ~5% / 6% on a sequential basis. Specialised staffing witnessed ~3% QoQ decline in revenue. Due to increase in corporate training activity, other HR services segment grew ~33% QoQ, albeit on a lower base. However, it should be noted that the company continued the process of scaling down its exposure to some segments within HR services (Government Training & Development, Permanent Recruitment). Adjusted for provisions / wage cut reversal, EBITDA margin in general staffing remained more or less stagnant. This was despite the good increase in revenue (+6% QoQ) and improvement in staffing productivity (Associate to core = 352, from 334 in Dec-20). This was driven by discounts-led pressure on mark-ups, which is likely to continue through FY22. Improvement in the mix led to a slight expansion in EBITDA margin of specialised staffing business (+30bps QoQ to 10.9%). Margins in HR services reported strong improvement adjusted for one-time provision (Rs40mn). Analysis of FY21 cashflow statement suggests that while provisions for bad debts had been a recurring problem, most of these provisions were reversed and cash collections were not impacted.

Bright medium-term prospects.

While recovery in growth and margin expansion was delayed by 2nd covid wave, we are confident of robust earnings growth (FY21- 24E EPS CAGR: 47%) and cash conversion over medium term. Maintain BUY as we expect TeamLease to be the best proxy play on workforce formalisation.

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