Neutral Quess Corp Ltd For Target Rs.670 by Motilal Oswal Financial Services Ltd
Navigating through headwinds
BFSI expected to remain soft in the near term
* Quess Corp (QUESS) delivered 7% QoQ/14% YoY growth in revenue in 3QFY25, in line with our estimate. The headcount addition was muted at ~7.5k net. EBITDA margin stood at 3.6% (down 20bp QoQ) vs our estimate of 3.8%. Adj. PAT increased 22% YoY to INR1,026m, in-line with our estimate of INR1,026m. For 9MFY25, revenue/EBITDA/PAT grew 10.6%/15.5%/50.7% YoY. We expect revenue/EBITDA/PAT to grow by 8.5%/3.4%/10.5% YoY in 4QFY25. We reiterate our Neutral rating with a TP of INR670, implying 18x Dec’26E P/E.
Our view: GCC pie doing well
* 3QFY25 saw steady growth, led by general staffing, while Manufacturing and Retail continued to experience healthy demand with 14,000 open mandates. Despite furloughs and delayed onboarding, IT staffing remained stable, with GCCs accounting for an increasing share of IT staffing revenue. We think that the ongoing shift toward GCCs and niche, high-margin roles has helped cushion the impact of a softer IT/ITeS market, and we expect IT hiring to show signs of recovery in 4QFY25, supported by a healthy pipeline of 1,600 open mandates.
* On the international business front, challenges persisted, particularly in Singapore, where macroeconomic uncertainty, wage inflation, and regulatory constraints affected hiring. Additionally, visa-related issues in the region further intensified the pressure, creating hurdles for near-term growth. However, demand in the Middle East remained strong, providing some relief to the overall international business, in our opinion.
* Margins were impacted by seasonal factors, investments in sales and leadership, and festive payouts, resulting in an EBITDA margin of 3.6%. While IT hiring remains sluggish, the company’s strategic push toward highmargin GCCs and specialized roles is expected to drive gradual margin expansion, with EBITDA likely to rebound to 2.4%-2.5% in the coming quarters for the Workforce Management (WFM) business. The company continues to invest in its GTS platform, leadership, and digital capabilities, ensuring sustainable long-term growth post-demerger.
* We believe that near-term pressures in Singapore and softness in BFSI may weigh on margins, but ongoing efficiency improvements and a strong domestic pipeline should support steady margin recovery into 4QFY25 and FY26.
Valuation and change in estimates
* We have kept our estimates largely unchanged. We expect EBITDA margin to gradually improve to 3.7%/4.0%/4.1% for FY25/FY26/FY27. Accordingly, we expect a PAT CAGR of 28% over FY24-27E.
* Though QUESS should benefit from medium-term tailwinds of formalization and labor reforms, the growth has already been factored into the valuations. We reiterate our Neutral rating with a TP of INR670, implying 18x Dec’26E P/E.
Beat on revenues and in-line margins; 87 new contracts secured in GS
* Revenue was up 7% QoQ/14% YoY in 3QFY25, above our expectation of flat QoQ/7.0% YoY.
* WFM grew 18% YoY; Operating Asset Management (OAM) grew 15% YoY; Global Technology Solutions (GTS) grew 10% YoY; while Product-led business (excluding Qdigi) dipped 29% YoY.
* EBITDA margin was stable at 3.6% vs est 3.8%. For WFM/OAM/GTS, EBITDA margin was stable at 2.3%/4.7%/17.1% in 3Q.
* Adj. PAT was up 22% YoY to INR1,026m, in-line with our estimate of INR1,026m. QUESS added a total of ~7.5k employees in 3Q (up ~1% QoQ) and 4.5k employees in WFM.
* Moreover, 124 new contracts were added in WFM, with an ACV of INR1.5b (87 contracts added in GS).
Key highlights from the management commentary
* The company’s growth was driven by Telecom and Retail, while Logistics, Ecommerce, and Manufacturing & Infrastructure (M&I) remained subdued.
* Strong GCC contribution was observed in IT staffing. A focus on niche skills and higher realization roles has improved margins in domestic IT.
* IT staffing remains stable, despite furloughs and delayed onboarding, with a shift towards high-margin roles.
* GS headcount addition was 5,000 during the quarter, with YTD net HC addition at 46,000.
* GS headcount growth in BFSI remains flat due to softness in unsecured lending; a near-term slowdown is expected in BFSI.
* IT staffing benefited from GCC contributions, though overall IT hiring was modest; margins improved due to better mandate quality.
* Significant investments were made in sales, leadership, and product development within the GTS platform to drive post-demerger growth.
* EBITDA margin stood at 3.6%, impacted by investments in sales and leadership, festive payouts to associates, and one-time demerger-related costs.
Valuation and view
* 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 FY25-27, which should support earnings. We reiterate our Neutral with a TP of INR670 implies 18x Dec’26E P/E.
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