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Cautious outlook for next few quarters…

About the stock: TeamLease Ltd (TLL) is one of the leading providers of human resource services in the organised segment with ~6% share in flexi staffing.

* Employment services include temporary staffing solutions, IT staffing, regulatory consultancy for labour law compliance and training & skills

* Net debt free and healthy double digit RoCE (>14%) key positives

Q2FY23 Results: TeamLease reported decent margin numbers.

* Revenue increased 4% QoQ to | 1,955.1 crore

* EBITDA margin increased ~30 bps QoQ to 1.6%

* Productivity improved 0.6% QoQ to 352

What should investors do? TeamLease’s share price has grown ~1.5x over the past five years (from ~| 1664 in November 2017 to ~| 2491 in November 2022).

* We change our rating on the stock from BUY to HOLD

Target Price and Valuation: We value TeamLease at | 2540 i.e. 26x P/E on FY25E.

Key triggers for future price performance:

* Key beneficiary of under penetrated temporary staffing market (0.5% in 2015 vs. global average of 1.7%) and formalisation (16% in 2018)

* The pandemic has forced enterprises to shift to a variables cost structure, which is leading to increased outsourcing of flexi staffing. Hence, we expect overall revenues to increase at 14.5% CAGR in FY22-25E

* TLL is expected to recover margins albeit gradually, led by a reversal of discounts, improving of core to associate ratio, improving specialised staffing margins and higher revenue growth

Alternate Stock Idea: Apart from Teamlease, in our IT coverage we like InfoEdge.

* Leadership in recruitment segment and quasi play on Indian start-up like Zomato, PolicyBazaar, Shoekonect, Ustra, Gramophone

* BUY with a target price of | 5,230

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