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Expect a strong business recovery in FY22

Long term outlook optimistic

* TEAM’s operating performance was a beat on our estimates, with total revenue increasing 2.7% QoQ. Revenue growth was led by 17%/22% QoQ growth in Specialized Staffing/Other HR Services, offset by a 1% growth in the General Staffing business. Margin in 1QFY22 inched up by 20bp QoQ to 2.1%, led by strong growth in the Specialized Staffing business and partial reversal in provisions in Other HR Services. It reported an adjusted PAT of INR243m, implying a PAT margin (in line) of 1.8%.

* The management remains optimistic about a recovery in long term growth. We expect an impact on revenue growth in FY22, due to lockdowns induced by the second COVID wave, to be much more manageable than FY21. As a result, discount reversals, new logo additions, and strong growth in certain key industries should aid 25% revenue growth in the General Staffing business.

* Increased manpower demand and higher margin replacements in the IT Staffing business should result in strong growth in Specialized Staffing in FY22. An expected reversal in provisions in Other HR Services and increasing proportion of Specialized Staffing should aid a 40bp margin improvement by FY23E from FY21 levels. This, in turn, should result in an adjusted PAT CAGR of 42% over FY21-23E.

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

* We have increased our estimates by 7%/4% to factor in higher margin for FY22E/FY23E. Our TP of INR4,200/share implies 42x FY23E EPS. We reiterate our Buy rating.

Operations above our estimates; strong performance in Specialized Staffing

* Revenue/EBITDA/PAT grew 21%/20%/42% YoY (est. +18.5%/+4%/+19.8%) to INR13.7b/INR295m/INR243m.

* Revenue grew 3% QoQ ahead of our expectation of 0.5%. Specialized Staffing/Other HR Services grew 17%/22% QoQ, dragged down by the 1% growth in General Staffing.

* EBITDA margin inched up 20bp sequentially to 2.1% due to higher revenue growth in the Specialized Staffing business (higher margin).

* Adjusted PAT rose 43% YoY (above our expectations) to INR243m, led by beat in operating profit.

* In 1QFY22, the company gained INR43.7m from fair valuations of ARPL, which is now a subsidiary of the company (stake increased to 60%). This was partially offset by the INR18m write-off towards TDS receivables of previous years. Including this, PAT stood at INR269m, a growth of 57% YoY.

* Associate headcount declined marginally by 1% QoQ to 226k, despite impact from the second COVID wave. The decline in headcount is after the highest (post demonetization) additions in 4QFY21.

* Specialized Staffing had a net associate addition of over 10% and 27 new logos in 1QFY22.

* NETAP business added 24 new logos in 1QFY22.

Key highlights from the management commentary

* Industry sentiment is returning, and TEAM continues to remain focused on productivity to capture upcoming opportunities.

* Entering into 2QFY22, the management said a lot of demand is returning as companies are not cutting down, despite anticipation of a third COVID wave. This is driving strong growth. e-commerce, Food Tech and Industrial are the key growth segments for the company.

* The management expects further margin expansion in FY22. Profit contribution would increase in Other HR services from 2QFY22.

* Margin in specialized Staffing is seeing a strong improvement and investments in this segment will pay off in the subsequent quarters.

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 have increased our estimates by 7%/4% to factor in higher margin for FY22E/FY23E. Our TP of INR4,200/share implies 42x FY23E EPS. We reiterate our Buy rating.

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