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Turning positive on attractive valuation and long term growth outlook

The staffing industry remains under-penetrated and is set to deliver consistent growth on account of formalization and the implementation of labor law reforms over the medium term. Due to concerns about growth moderation, especially in the specialized staffing vertical, and margin pressure, the stock has seen significant de-rating (down ~59% from the peak). We expect revenue growth to accelerate to 21% YoY in FY25, aided by a recovery in IT Services and a gradual margin recovery (+50bp v/s FY23). Accordingly, we estimate a 33% PAT CAGR over FY23-25. With current valuations focused on near-term challenges, we see scope for a re-rating in the stock as these challenges ease out. With healthy long-term growth prospects, margin recovery, closure of EPF issues and attractive share price, we see a good upside to current valuations and upgrade the stock to BUY with a TP of INR2,890.

Strong structural tailwinds to drive sustainable long-term growth

* Low flexi staffing penetration India (0.6%) compared to developed economies like the US (3.4%) offers good headroom for growth.

* Progressive reforms and regulations will lead to formalization and increased penetration for staffing companies in India. The formal workforce is expected to almost double by CY30 at ~40%.

* As both the central and state governments look to liberalize and formalize the labor market, TEAM should be among the biggest direct beneficiaries in the medium term.

Easing macro to revive growth; expect 17% CAGR over FY23-25

* The staffing industry faced growth headwinds due to high inflation in FY23.

* While we see a slowdown in technology staffing (specialized staffing) and few parts of general staffing, the long-term outlook for the sector is robust.

* Inflation is easing, which should support growth in the near term. Specialized staffing continues to face challenges due to a slowdown in IT Services, which is expected to see a recovery in 2HFY24, leading to a strong bounce-back for specialized staffing in FY25.

* With a strong track-record of growth, easing inflation, an anticipated pickup in specialized staffing and structural tailwinds in place, we expect TEAM to deliver a strong 17% revenue CAGR over FY23-25

Expect strong margin recovery going forward

* TEAM has seen a 60bp drop in profitability to 1.6% in FY23 due to wage increases in its general staffing vertical.

* The management continues to focus on improving productivity to bring cost efficiencies and re-negotiating contracts to boost PAPM.

* Along with the efficiency gains, revival in specialized staffing and increasing contribution from HR services (both high margin) should boost margins going forward

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