Add Quess Corp Ltd for the Target Rs 330 by Emkay Global Financial Services Ltd
Quess reported strong operating performance in 1Q. Revenue grew 7.4% qoq to Rs41.8bn, above our estimate of Rs39.9bn, partly driven by a one-time revenue increase of Rs1.76bn due to the new labor code. EBITDAM moderated by 20bps qoq to 2.0% (up 10bps yoy), largely on the annual merit cycle and variable-pay reset that flowed through in 1Q, of which ~11bps was an optical drag from the Rs1.76bn one-time labor-code pass-through. By segment, General Staffing (GS) revenue grew 8% qoq, led by Manufacturing and CRT (consumer, retail, telecom), even as BFSI challenges persisted amid regulatory headwinds. Professional Staffing (PS) revenue rose 9% qoq on GCC-led demand, while Overseas Staffing (OS) revenue was broadly flat qoq. The management expects acceleration in GS associate additions entering in 2Q, and targets close to double-digit growth in associates in FY27 on the back of the festive season, 86 new contracts signed, and 37k open positions. It continues to guide for PS EBITDAM at 11-12% and Overseas EBITDAM at 6.5-7% as the portfolio matures. Under Quess 2.0, it aspires to lift the higher-margin, dollarlinked revenue mix to 20-25% of revenue (currently ~8%) over the next 3-4 years through partner-led, capital-light talent corridors (Japan signed and live; Nordics/Europe, Israel, and North America in the pipeline), and ~2/3rd of profit from higher-margin segments. We raise our FY27-29E EPS by 3-12% on baking in 1Q performance. Thus, our SOTP-based TP rises by ~14% to Rs330 (from Rs290). We like Quess’s strong execution and remain positive on medium-term growth prospects. However, after 16%/59% up-move in stock price in the last 1M/3M, we see limited upside and, thus, downgrade Quess to ADD from Buy.
Results summary
Revenue was up by 7.4% qoq/14.5% yoy to Rs41.8bn, above our estimate of Rs39.9bn. The new labor code drove a Rs1.76bn one-time revenue pass-through, with ~68% of customers covered by 1Q and the balance expected by end-2Q/early-3Q. EBITDA fell 2.1% qoq/rose 21.2% yoy to Rs845mn, with EBITDAM falling by 20bps sequentially to 2.0%, in line with our estimates. Profit increased 27.7% qoq/60.9% yoy to Rs819mn, above our estimate of Rs551mn, on the back of revenue beat and higher other income (driven by income tax refund). What we liked: Revenue beat, strong performance in the PS business. What we did not like: Continued softness in BFSI.
Revenue growth driven by GS and PS segments
GS revenue came in at Rs36.0bn, up 8.1% qoq/15.2% yoy (aided by the Rs1.76bn onetime labor-code pass-through), with EBITDAM at 1.4% (down 20bps qoq due to passthrough revenue and annual merit cycle). GS revenue growth was led by CRT and Manufacturing, while BFSI saw a marginal decline. PS revenue stood at Rs2.5bn, up 8.8% qoq/3.3% yoy, with EBITDAM down by 170bps to 11.1% on the back of the merit increase cycle and variable payouts. Overseas Business revenue stood at Rs3.3bn, flat qoq/up 17.1% yoy (EBITDA of Rs206mn, at ~6.2% margin), led by the Middle East (27% yoy revenue growth, 12% EBITDAM), Malaysia (55% YoY), the Philippines (17% YoY), and Singapore (12%).
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