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Demerger into three entities to improve focus

Pure-play verticals to help with business positioning

* In an exchange filing, QUESS announced that its Board of Director plans to undertake a three-way demerger of its diversified business segments, resulting in three listed entities with dedicated presence. The three surviving entities will be Quess Corp Ltd (workforce management, 68% of consolidated FY23 revenue), Digitide Solutions (BPM solutions, Insurtech and HRO businesses, 14%) and Bluspring Enterprises (Facility Management, Industrial Services and Investments, 18%). QUESS expects the demerger to take 12-15 months more to receive regulatory clearance.

* The company sees five key rationale for the demerger: a) simplified corporate structure due to independent scaled platforms, b) enhanced management focus and strategic clarity, c) optimal capital allocation strategy for each entity to invest behind its strategic priorities, d) flexibility to pursue independent and differentiated business and strategic priorities, and e) ability to attract investors focused on specific end markets.

* In our initial view, the proposal should be beneficial to both the company and the investor. Over the last decade, QUESS has expanded its presence across multiple business segments and is among the largest players across multiple services, which results in excessive demand for management bandwidth across diverse client requirements. Moreover, given the breadth of QUESS businesses, investors also struggle to evaluate all capabilities presence under the group umbrella appropriately. This proposal should help the company assess on comparable metrics with listed players, which might be welcomed by investors.

* QUESS is hosting an investor meet on 21st Feb’24 to provide more details on its plan and we will await more details before we change our view on the share. We have our Neutral rating with a TP of INR560, implying a P/E of 12x FY26E EPS.

Valuation and View: NEUTRAL

* Though QUESS should benefit from the medium-term tailwinds of formalization and labor reforms, the growth has already been factored into the valuations.

* We expect a gradual recovery in margins over FY25 and FY26, which should support earnings.

* We have a Neutral rating on the stock due to its full valuations, taxation concerns, and weak macro. Our TP of INR560 implies a P/E of 12x FY26E EPS.

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