Buy TeamLease Ltd for the Target Rs. 2,000 by Motilal Oswal Financial Services Ltd
Gradual revival taking shape in 2H
Operating leverage and mix improvement to drive margin gains
* TeamLease’s (TEAM) 2QFY26 revenue growth of 8.4% YoY was below our estimate of 13% YoY growth. General Staffing (GS) grew by 4% QoQ, while Specialized Staffing grew 8% QoQ. EBITDA margin of 1.3% was in line with our expectation (1.4%). EBITDA improved by 25% QoQ. Adj. PAT at INR278m was up 12% YoY/11% QoQ. In 1HFY26, revenue/EBITDA grew 10.2%/23.7% YoY. In 2HFY26, we expect revenue/EBITDA to grow 12.4%/14.4% YoY. We reiterate our BUY rating with a TP of INR2,000.
Our view: BFSI headwinds likely behind
* 2QFY26 performance was somewhat subdued, reflecting continued softness in BFSI and IT Services hiring. That said, overall GS showed sequential improvement in growth, adding 37 new clients (65% under the variable mark-up model) while maintaining PAPM at steady levels. The company’s growing focus on mid- and small-sized accounts (where pricing is 2-3x higher than large clients pricing) supported blended margin improvement.
* BFSI hiring remained below previous peaks but showed early signs of revival in frontline sales roles, while Tier-2 IT firms and GCCs continued to provide steady momentum. Most businesses, in our view, have likely bottomed out and should see a gradual recovery through 2H. We expect 11%/12% YoY growth in FY26E/FY27E.
* Specialized Staffing reported healthy growth of 28% YoY, driven by steady GCC demand and stable IT hiring. Better delivery efficiency and cost management supported margin gains of 60bp QoQ, and we think a continued shift toward higher-value mandates should drive further expansion. We estimate 7.0%/7.2% EBITDA margin for 3Q/4QFY26.
* HR Services achieved EBITDA breakeven, supported by stronger EdTech billings and improved HCM activity. We think investments in this business are largely complete, with the focus now shifting to scaling up revenue. A seasonal uptick is expected in 3Q and 4Q, leading to stronger revenue and EBITDA contributions over the next few quarters.
* Overall, we expect the demand backdrop to turn more supportive in 2H, aided by steady macro conditions and a stable regulatory environment in BFSI. We believe TEAM’s focus on higher-value accounts, broader variable mark-up adoption, and better operating leverage should help it sustain margin gains. We expect EBITDA margins to improve gradually toward ~1.5% by FY27, with profit growth likely to outpace revenue growth over FY25-27E.
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 keep our estimates largely unchanged. We reiterate our BUY rating with a TP of INR2,000 (18x Jun’27E EPS).
Miss on revenue and in-line margins; 140 new logos secured
* Revenue growth of 4.8% QoQ/8.4% YoY was below our estimate of 13% YoY.
* GS grew 4% QoQ, while Specialized Staffing grew 8% QoQ.
* GS associate addition was up 3% QoQ at ~303k. Specialized Staffing headcount was up 5% QoQ. At the group level, net headcount addition was ~11k.
* EBITDA margin of 1.3% was in line with our estimate of 1.4%. EBITDA improved by 25% QoQ.
* 140 new logos were added during the quarter.
* Adj. PAT at INR278m was up 12% YoY/11% QoQ.
Key highlights from the management commentary
* Demand environment is expected to be more favorable in 2H compared to 1H, supported by improving sentiment across core sectors.
* Management indicated that hiring momentum is gradually reviving, with visibility improving across BFSI, consumer, and telecom segments.
* BFSI hiring remained subdued but showed initial signs of recovery, particularly across frontline roles in sales and collections at banks and NBFCs. While overall hiring volumes remain below prior peaks, a more broad-based recovery is expected in the quarters ahead, subject to no new directives from the RBI.
* 37 new clients were added during the quarter, with over 65% under the variable model. Around 23% of the gross associates hired were first-time job seekers (driven by a few clients, mostly on fixed mark-up, who give volumes).
* PAPM has been maintained on a broader basis and has not declined. Large customers are growing larger and typically at the lowest PAPM. Efforts for variable mark-ups and gaining mid- and small-sized accounts are holding PAPM stable.
* Demand remained selective but stable in IT services, with continued growth in Tier-2 IT companies and GCCs.
* Margin expansion is expected to continue, supported by growth in smaller, highPAPM accounts and variable mark-up adoption (~two-thirds of new sign-ups).
* EBITDA growth of ~25% for FY26 remains achievable, with medium-term aspiration for double-digit EBITDA growth.
* GST 2.0 rollout is expected to create incremental staffing demand in consumerrelated verticals over the medium term.
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 12%/23% in revenue/earnings over FY25-28. We reiterate our BUY rating with a TP of INR2,000 (18x Jun’27E EPS)
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