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A mixed-bag quarter

Outlook for 4Q soft amid hiring in BFSI and IT

* TeamLease (TEAM)'s 3QFY25 revenue growth of 19% was in line with our estimate of +17% YoY. Revenue growth was fueled by 19% QoQ growth in the HR business. General staffing was up 4% QoQ, while specialized staffing was 3%. EBITDA margin of 1.2% was below our expectation of 1.4%. Adj. PAT of INR280m (vs. est. INR385m) declined 9% YoY, hurt by higher interest expenses and lower-than-expected other income. The company's revenue grew 20% in 9MFY25, while EBITDA/PAT declined 4%/10% vs. 9MFY24. We expect revenue/EBITDA/PAT to grow 15%/24%/38% YoY in 4QFY25. We reiterate our BUY rating with a TP of INR3,200.

Our view: BFSI could weigh on General Staffing’s performance

* General Staffing’s 3QFY25 performance was muted, affected by seasonal factors and hiring challenges in BFSI due to tightened MFI lending norms and KYC regulations. BFSI, which constitutes ~22% of the company’s headcount and revenue, experienced flat or backfill hiring, leading to a marginal decline in headcount. Despite this, the company is focused on sustaining PAPM levels through value-based selling, targeting high-margin clients, and maintaining absolute profitability.

* While IT hiring is specialized staffing remain cautious, early signs of recovery in cost optimization and digital transformation are visible. Demand from GCCs, particularly in BFSI, healthcare, and manufacturing, remains strong. The company continues to fine-tune its approach by exiting low-margin contracts, which should aid margin improvement going forward. We believe HR services might face lumpiness owing to delays in admission cycles; however, with integration efforts underway for TSR Darashaw and Crystal HR, the segment is expected to stabilize.

* Overall, while near-term pressures persist, the company’s focus on highmargin clients and operational efficiencies should drive gradual margin recovery. We estimate EBITDA margins to improve to 1.2%/1.6%/1.6% in FY25/FY26/FY27, translating into an earnings CAGR of 28% over FY24-27E.

Valuation and revisions to our estimates

* We remain positive on the medium- to long-term opportunities owing to gains from the formalization of the labor market. We cut our FY25 estimates by ~12%, reflecting a mixed 3Q performance and expected softness in General Staffing due to subdued BFSI hiring (~22% of revenue). However, we maintain our FY26/FY27 estimates. We cut our target multiple to 25x (from 27x earlier) owing to the short-term uncertainty. We reiterate our BUY rating with a TP of INR3,200.

Revenue in line but miss on margins; 132 new logos secured

* TEAM’s revenue growth of 4% QoQ/19% YoY was largely in line with our estimate of +17% YoY.

* Growth was led by HR services revenue, which was up 19% QoQ; general staffing was up 4% QoQ, while specialized staffing stood at 3%.

* EBITDA margin of 1.2% was below our expectation of 1.4%.

* General staffing associate addition (net) stood at 1.3k (~1% QoQ). Specialized Staffing’s headcount was up by 30 owing to headwinds in the IT industry, which continue to impact the growth in specialized staffing.

* DA headcount was up by ~1.9k (4.3% QoQ), led by automobiles and ITES.

* TEAM secured 132 new logos during the quarter.

* Adj. PAT at INR280m (vs. est. INR385m) declined 9% YoY, hurt by higher interest expenses and lower-than-expected other income.

Key highlights from the management commentary

* The third quarter is traditionally a festive period, providing a one-time increase in billing.

* The BFSI sector remains stable, although tightened norms around lending in MFI and KYC processes impacted growth in 3Q. The planned absorption of associates in the BFSI sector is underway, impacting net additions in 3Q and 4Q of FY25. Normalization is expected post-4QFY25.

* Large listed credit card companies reported experiencing a slowdown, resulting in flat or backfill positions in this vertical. The company anticipates a marginal decline in headcount in 4Q, although productivity is expected to hold steady.

* In specialized staffing, the company has returned to headcount growth after several quarters, believing it has now bottomed out.

* IT services remain cautious in the near term, though early signs of improvement are emerging in cost optimization and digital transformation. GCCs are a strong growth driver, particularly in BFSI, healthcare, and manufacturing, with an increased focus on technology and specialized roles in non-tech industries.

* In HR services, profitability was impacted due to further delays in the admission cycle and downstream payment delays. Lumpiness in the HR business may occur in 4Q due to delays in admission fees.

Valuation and view

* 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.

* Healthy growth and expected margin recovery should help TEAM deliver a CAGR of 18%/28% in revenue/earnings over FY24-27. We cut our target multiple to 25x (from 27x earlier) owing to the short-term uncertainty. We reiterate our BUY rating with a TP of INR3,200.

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