Buy TeamLease Ltd for the Target Rs. 1,850 by Motilal Oswal Financial Services Ltd
A messy quarter; selective strength
Operating leverage and HR seasonality to aid 4Q margins
* TeamLease’s (TEAM) 3QFY26 revenue growth of 4% YoY was below our estimate of 12% YoY growth. General Staffing (GS) declined by 1.0% QoQ, while Specialized Staffing grew 2% QoQ. EBITDA margin of 1.4% was in line with our expectation (1.4%). EBITDA improved by 11% QoQ. Adj. PAT at INR480m was up 69% YoY/73% QoQ, excluding a one-time impact due to costs related to changes in labor codes of INR57. In 9MFY26, revenue/EBITDA/adj. PAT grew 7.6%/22.7%/38.9% YoY. In 4QFY26, we expect revenue/EBITDA/adj. PAT to grow 10.8%/7.3%/15.1% YoY. We reiterate our BUY rating with a TP of INR1,850.
Our view: BFSI pain largely done
3QFY26 was impacted by BFSI insourcing. The quarter saw a sharp ~27k net headcount decline, largely due to one large NBFC and other BFSI clients moving associates in-house to manage costs. In our view, this was a onetime adjustment rather than a demand shock. Management indicated that the full impact has been absorbed in 3Q, with headcount trends expected to normalize from 4QFY26 onwards. Early stabilization is visible in frontline sales, collections, and service roles, especially across Tier-2 and Tier-3 markets.
General Staffing demand remains selective, with the mix working against near-term growth. Revenue growth stayed below historical trends as incremental hiring is skewed toward non-metro locations, where salary levels are meaningfully lower. That said, logo additions remain healthy (22 new clients in 3Q, over half on variable mark-up), and PAPM continued to inch up YoY. We believe improving rural liquidity, regulatory clarity in BFSI, and steady consumer-linked hiring should support a gradual pickup over the next few quarters. We expect 8%/11% YoY growth in FY26E/FY27E.
Specialized Staffing continues to be anchored by GCCs, despite flat IT hiring. While volume-led hiring from IT services has not yet returned, demand remains steady in niche skills such as AI, data, cloud, and cybersecurity. GCCs now contribute over 65% of segment revenue, with additions continuing across sectors. In our view, lower volumes but higher rate cards should help protect margins, even if headline growth remains measured in the near term. We estimate 6.8% EBITDA margin for 4QFY26.
HR Services momentum improves on seasonality and cost discipline. With most RegTech investments already expensed and HR Tech investments tapering, we believe margin expansion here is sustainable, with 4Q likely to be stronger than 3Q.
Margins hold up despite revenue headwinds. EBITDA stood at 1.4%, supported by productivity gains, digitization, and tight cost control, despite fewer billable days. We believe profit growth should continue to outpace revenue growth as volumes stabilize. We expect EBITDA margins to expand gradually to ~1.5% by FY27.
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 slightly cut our estimates for FY26/27. We reiterate our BUY rating with a TP of INR1,850 (16x FY28E EPS vs. Consensus 2-yr FWD P/E of 13x).
Miss on revenue and margins in line; 107 new logos secured
* Revenue growth of 4% YoY was below our estimate of 12% YoY.
* General Staffing declined by 1.0% QoQ, while specialized staffing grew 2% QoQ. HR services grew 9% QoQ.
* General Staffing associate additions declined 7% QoQ to ~282k. Specialized Staffing’s headcount increased 2% QoQ. At the group level, the net impact was a reduction of ~27k employees.
* EBITDA margin of 1.4% was in line with our expectation of 1.4%. EBITDA grew 11% QoQ.
* 107 new logos were added during the quarter.
* Adj. PAT at INR480m was up 69% YoY/73% QoQ. This excludes a one-time impact on account of costs related to labor codes amounting to INR57m.
Key highlights from the management commentary
* Lost ~27k headcount during the quarter, largely impacting the BFSI segment across General Staffing and Degree Apprenticeship businesses.
* The full impact was absorbed in 3Q, with growth expected to correct in 4Q.
* Management will provide clarity on headcount recovery between 4QFY26 and 1QFY27.
* The company continued to see a gradual structural recovery in the staffing ecosystem. While the pace remains uneven across sectors and geographies, fiscal and monetary actions over recent quarters have begun to support consumption and business sentiment. Customers, however, remain selective with hiring.
* Over the next 3–9 months, demand is expected to broaden gradually, with BFSI stabilizing further. Steady momentum is visible in consumer-linked roles, along with benefits from technology-led productivity initiatives.
* Over the next 3–9 months, demand is expected to broaden gradually, with BFSI stabilizing further. Steady momentum is visible in consumer-linked roles, along with benefits from technology-led productivity initiatives.
* Consumer demand remains mixed, with subdued urban consumption but relative resilience in semi-urban and rural markets.
* Demand is rising sharply in AI/ML coding, data security, data engineering, cloud, and cybersecurity roles. While volumes are lower than conventional tech hiring, higher rate cards support revenue and margins.
* Any incremental regulatory cost is contractually passed through to clients, resulting in no P&L impact from gratuity-related changes.
Valuation and view
* As both the central and state governments look to liberalize and formalize the labor market, TEAM should be one of the biggest direct beneficiaries in the medium term.
* Healthy growth and expected margin recovery should help TEAM deliver a CAGR of 10%/20% in revenue/earnings over FY25-28. We reiterate our BUY rating with a TP of INR1,850 (16x FY28E EPS vs. Consensus 2-yr FWD P/E of 13x).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
