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No major surprises

2H to be better in terms of margin

* Quess Corp (QUESS) delivered 3.5% QoQ/9.1% YoY growth in revenue in 2QFY25, in line with our estimate.

* The headcount addition was muted at ~11.8k net. EBITDA margin at 3.8% (stable QoQ) was in line with our estimate of 3.8%. Adj. PAT increased 34% YoY to INR921m, below our estimate of INR1,053m, largely due to lower other income and ETR (8.4% vs. 10% estimated).

* For 1HFY25, revenue/EBITDA/PAT grew 8.9%/19.2%/63.9% YoY. We expect revenue/EBITDA/PAT to grow by 10.2%/11.5%/41.4% YoY in 2HFY25.

* We reiterate our Neutral rating due to full valuations, taxation concerns, and limited margin expansion. Our TP of INR750 implies 20x Sep’26E P/E.

Our view: General staffing doing well, IT still muted

* 2Q growth was again driven by general staffing, with the management noting robust demand in manufacturing, logistics, and healthcare. While IT staffing remained subdued, GCC segment continued to expand, accounting for ~68% of IT staffing revenue. The mix is increasingly shifting toward GCC and niche skill-driven demand (carries higher margins), which we believe provides resilience against the softer IT/ITES staffing market. We anticipate a pickup in IT hiring later in FY25.

* For 3Q, the company expects net additions and quality mandates from GCCs, though Quess is facing challenges in its international business as wage inflation and regulatory issues impact visas in the APAC region, putting short-term pressure on this segment.

Valuation and change in estimates

* We have kept our estimates largely unchanged. We expect EBITDA margin to gradually improve to 3.8%/4.1%/4.3% for FY25/FY26/FY27. Accordingly, we expect a PAT CAGR of 29% 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 due to full valuations, taxation concerns, and limited margin expansion. Our TP of INR750 implies 20x Sep’26E P/E.

In-line revenue and margin

* Revenue was up 3.5% QoQ/9.1% YoY in 2QFY25, in line with our expectation of 3.3% QoQ/8.8% YoY.

* Workforce Management (WFM) grew 13% YoY; Operating Asset Management (OAM) grew 9% YoY; Global Technology Solutions (GTS) grew 7% YoY; and Product-led business (excluding Qdigi) grew 12% YoY.

* EBITDA margin was stable at 3.8%, in line with our estimate of 3.8%. For WFM/GTS/OAM, EBITDA margin was stable at 2.4%/4.8%/17.5% in 2Q.

* Adj. PAT was up 34% YoY to INR921m, below our estimate of INR1,053m, largely due to lower other income and ETR (8.4% vs. 10% estimated).

* QUESS added total ~11.8k employees in 2Q (10.5k employees in WFM).

* In WFM, 128 new contracts were added with an ACV of INR1b (74 contracts added in GS).

Key highlights from the management commentary

* GCC revenue contribution was 68%. 3Q is expected to see net additions and quality mandates, with 74% of new business coming from GCCs. The entire mix for QUESS is changing.

* Overseas staffing saw muted growth. Headwinds continue in APAC due to regulatory issues impacting visas.

* Customer Lifecycle Management follows a strong trajectory, driven by domestic and international markets.

* Foundit registered healthy growth while seeing a decline in cash burn. Job postings have increased. Placement agencies and smaller staffing companies are not spending. Candidate services are growing. IT services saw slow growth, but the order book is seeing strong build-up. EBITDA is expected to break even before 4Q end, contributing to better EBITDA margins.

* 2H is expected to be better in terms of margin. 1H witnessed cyclicality in F&B and telecom businesses. Margins are expected to inch toward 4% in 2H. Levers for margin improvement include a recovery in international business and volume growth.

Valuation and View: Reiterate 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 FY25-27, which should support earnings.

* We reiterate our NEUTRAL rating due to full valuations, taxation concerns, and limited margin expansion. Our TP of INR750 implies 20x Sep’26E P/E.

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