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Near term impact to be manageable

Long term outlook optimistic

* TEAM delivered an in line performance in 4QFY21, with total revenue increasing 5% QoQ. Revenue growth was led by the General Staffing business (+5.5% QoQ) – general staffing and NETAP trainee headcount increased by 16k (+8% QoQ). Margin in 4QFY21 were stable, despite an impressive improvement in FTE productivity (352 v/s 334 in 2Q), led by continued customer discounts. It reported an adjusted PAT of INR268m, implying a PAT margin (in line) of 2%.

* TEAM remains optimistic about a recovery in long term growth. We expect the revenue impact in 1QFY22E, on account of the second COVID wave induced lockdowns, to be much more manageable than FY21. We expect a quicker recovery in the General Staffing business and expect 24% revenue CAGR in this segment over FY21-23E.

* Increased manpower demand and higher margin replacements in the IT Staffing business should improve margin by 30bp in FY23E from FY21 levels. This, in turn, should result in an adjusted PAT CAGR of 43% over FY21-23E.

* Over the medium term, as both the central and state governments look forward to liberalizing and formalizing the labor market, TEAM should be among the biggest direct beneficiaries.

* We marginally reduce our FY22E estimate by 2% to factor in a revenue impact from the ongoing lockdown. Our TP of INR4,000/share implies 41x FY23E EPS. Reiterate Buy.

Operations in line, growth in headcount encouraging

* Revenue was flat YoY at INR13.4b (in line). EBITDA grew 31% YoY (est. +35%) to INR261m. Adjusted PAT rose 40% YoY (in line) to INR268m.

* Revenue growth for TEAM stood at 5% QoQ, but was flat YoY. Growth was led by General Staffing (5.5% QoQ) and Other HR Services (33% QoQ), but was partly offset by a decline in the Specialized Staffing segment (3.5% QoQ). General Staffing surpassed its pre-COVID revenue run-rate.

* EBITDA margin stood at 1.9%, flat QoQ, but was up 40bp YoY. Margin was aided by a rise in FTE productivity to 352 in 4QFY21 from 264 in 4QFY20.

* Adjusted PAT grew 40% YoY to INR268m. The same was impacted by lower other income. Without adjusting for DTL on goodwill amortization, reported PAT stood at INR196m in 4QFY21.

* Billable headcount was up 8% QoQ and 4% YoY. General Staffing headcount is back to pre-COVID levels.

* Cash conversion ratio to PBT improved to over 300%, of which 156% is contributed by tax refunds and the balance by efficient working capital management. Cash available at the end of FY21 stood at INR2.5b.

Key highlights from the management commentary

* The General Staffing segment has surpassed its pre-COVID revenue run-rate, with headcount at pre-COVID levels. Performance in 4QFY21 is on the back of strong performance in Jan-Feb’21. The effects of the second COVID wave started in Mar’21. Clients are cautious, but the management expects the turnaround to be faster than FY21.

* The company added 100 new logos in FY21 despite the pandemic. New signups resulted in a 43% growth in associates, whereas the balance came from existing customers.

* TEAM incorporates certain permanent discounts in its pricing for a few customers, which will pressurize margin. However, this should be offset by an increase in productivity.

Valuation and view – A key beneficiary of formalization

* Given some level of uncertainty in the economy (due to the back and forth on lockdowns), some of the otherwise permanent roles are likely to be fulfilled through flexi-staffing, as employers attempt to maintain variable costs. We noticed similar trends in the immediate aftermath of the GFC and demonetization, when staffing companies benefitted due to positive hiring trends in some verticals. Such a trend should likely play out in the near term, benefitting staffing firms such as TEAM.

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

* We marginally reduce our FY22E estimate by 2% to factor in revenue impact from the ongoing lockdown. Our TP of INR4,000/share implies 41x FY23E EPS. Reiterate Buy.

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