IGI Logo

A steady quarter…

..but 3Q outlook soft amid BFSI and IT hiring

* TeamLease (TEAM)'s 2QFY25 revenue growth of 23% was in line with our estimate of +21% YoY. Revenue growth was fueled by 8% QoQ growth in General Staffing (+25% YoY). Specialized staffing was down 1.5% QoQ (-1.3% YoY). Overall EBITDA margin of 1.2% was in line, backed by operating leverage in Staffing Business and growth in EDtech billing. Adj. PAT at INR249m was down 10% YoY/28% QoQ. The company's revenue grew 21% in 1HFY25, while EBITDA/PAT declined 4.1%/17.1% vs. 1HFY24. We expect revenue/EBITDA/PAT to grow 15.5%/18.3%/60.8% YoY in 2HFY25. We reiterate our BUY rating with a TP of INR3,550. However, we cut our target multiple to 27x (from 30x earlier) owing to the short-term uncertainty.

* General Staffing showed a mixed performance, with revenue growth exceeding expectations but a weaker margin profile. Margin contracted 20bp YoY to 1.1%. We believe margins may have bottomed out for General Staffing and should gradually improve going forward. However, pressure on PAPM (down from INR679 to INR670) remains a key area to monitor. Additionally, third-quarter performance may be muted, impacted by the BFSI sector (due to RBI’s KYC regulations) and delayed hiring because of the festive season. Moreover, volumes have come back in this quarter, albeit at a lower PAPM, and are likely to remain steady.

* Specialized Staffing growth was driven by demand from GCCs, despite ongoing challenges in the IT industry as closures are taking longer. 3Q is expected to be slow from the IT services side. However, growth from GCCs and non-tech sectors is expected to continue, with moderate growth projected for 3Q. We believe any greenshoots in IT hiring and focusing on high-margin customers, while fine-tuning its approach with low-margin engagements, will directly contribute to profit, thereby driving margin improvement. We a expect consolidated revenue CAGR of 18% over FY24-27.

* We believe that with headwinds from investments in the EdTech and specialized services businesses now behind the company, margin recovery might accelerate moving forward. We estimate FY25/FY26/FY27 EBIDTA margin at 1.3%/1.7%/1.6%. This should translate into a healthy earnings CAGR of 32% over FY24-27E.

* We remain positive on the medium- to long-term opportunities owing to gains from the formalization of the labor market. Following recent corrections, the stock could turn attractive. We maintain our estimates. We reiterate our BUY rating with a TP of INR3,550. However, we cut our target multiple to 27x (from 30x earlier) owing to the short-term uncertainty.

In-line revenue and margins

* Revenue growth of 8% QoQ/23% YoY was in line with our estimate of 21% YoY.

* Growth was led by General Staffing, which was up 8.1% QoQ. Specialized staffing was down 1.5% QoQ. Other HR services revenue was up 110% QoQ, led by the Edtech business.

* General Staffing associate addition (net) stood at ~16k (+6% QoQ). Specialized Staffing’s headcount was down by 230 (-3% QoQ) owing to headwinds in the IT industry, which continue to impact the growth in specialized staffing.

* DA headcount was up by ~3k (7% QoQ), led by automobiles and ITES.

*  EBITDA margin of 1.2% was in line with our expectation, backed by operating leverage in Staffing Business and growth in EDtech billing.

* 178 new logos were added during the quarter.

* Adj. PAT at INR249m was down 10% YoY/28% QoQ.

Key highlights from the management commentary

* In General Staffing, the company saw a net headcount addition of ~16k, which is the highest QTD. BFSI showed mixed results. Revival is seen in microfinance, the payment industry, and the housing finance sector. In the consumer sector, high input costs and inflation led to flat growth. Some clients are approaching the company for improving efficiency through employee management. Telecom continues to benefit from nationwide network upgrades.

* In Specialized staffing, headwinds in the IT industry continue to hurt growth. However, there has been consistent growth in GCC clients, and net positive headcount growth depends on the recovery in IT services. The demand for tech talent is showing gradual recovery, but there has been no big surge due to resource optimization and upscaling.

* Profit expansion is the key focus for this year, and management is confident of maintaining strong double-digit sequential growth in profits.

* The company is investing in a HireTech platform, which is expected to go live in FY26. This platform aims to significantly reduce hiring costs in a phased manner. A capex of INR200m will be spent over 18 months, starting in 1Q FY25. It will benefit all verticals and help improve margins.

* 2HFY25 Outlook: Monitoring recovery in BFSI with caution. Consumer goods and telecom will be pivotal for growth. 3Q may be muted due to BFSI (due to KYC guidelines by RBI) and delayed hiring due to the festive season.

Valuation and view: A key beneficiary of formalization

* 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%/32% in revenue/earnings over FY24-27E. We reiterate our BUY rating with a TP of INR3,550. However, we cut our target multiple to 27x (from 30x earlier) owing to the short-term uncertainty.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412