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Not out of the woods yet

2H to mirror 1H performance; margins peak out

* Quess Corp’s revenue was up 5% QoQ/3% YoY in 2QFY26, largely in line with our expectation of 6.3% QoQ growth. EBITDA margin was up 13bp YoY at 2%, in line with our estimate. Adj PAT rose 2% QoQ to INR520m. In 1HFY26, revenue/EBITDA/adj. PAT grew 2.6%/10.5%/4.5% YoY. In 2HFY26, we expect revenue/EBITDA/adj. PAT to grow 6.5%/31.0%/7.3% QoQ. Limited growth triggers in the core general staffing (GS) business and muted operating leverage amid a slower scale-up in professional staffing (PS) and overseas businesses keep us on the sidelines. We reiterate our Neutral rating with a TP of INR280, valuing the stock at 17x Jun’27E EPS.

Our view: PS business growth a key monitorable

* GS recovery on expected lines: We believe GS continues to stabilize after past one-offs like the NBFC ramp-down, aided by festive demand across Manufacturing, BFSI, and Consumer-Retail-Telecom (CRT) segments. Net additions of 21k reflect improving demand visibility, supported by macro tailwinds such as rate cuts, GST 2.0, and lower taxes. Management aims to sustain 10-15k net adds QoQ and guides that 2H will remain broadly similar to 1H, which we view as a steady but not accelerating growth trajectory.

* Margins were stable at 1.4%, with PAPM in the INR670-680 range. In our view, while execution and collections remain robust, the rising dependence on Tier-3/4 sourcing keeps the business operationally intensive, which could constrain both margin expansion and productivity gains.

* Professional segment remains resilient: PS delivered 220bp margin improvement QoQ, supported by the rationalization of low-margin contracts and healthy GCC demand. Although one client issue impacted revenue (~INR300m), the margin mix improved. With 73% of headcount now tied to GCCs and a visible mandate pipeline, growth should remain steady. In our view, the early focus on GCCs and niche roles has helped insulate this segment from broader softness in IT hiring.

* However, the segment’s scale (6-7% of revenue) remains modest relative to GS, and the near-term contribution from ‘Origint’, despite healthy traction, is unlikely to materially move the needle for overall profitability.

* Margins at peak levels; upside capped: Quess delivered its highest-ever EBITDA (INR770m, 2% margin, up 10bp QoQ), led by a richer mix from PS and overseas operations (~50% of total EBITDA). However, the company has reiterated its target of exiting FY26 at a 2% margin, which is in line with what we have built into our numbers and suggests limited upside from these levels. We see little headroom for margin expansion in FY27 unless high-margin PS business scales meaningfully faster than GS.

Valuation and change in estimates

* We estimate revenue growth of 4.6%/14.2% in FY26/FY27, with stable EBITDA margins of ~ 2%.

* We believe growth triggers in the core GS business remain limited, as the segment is already operating with high sourcing intensity and limited pricing flexibility. The PS segment continues to perform well but remains too small to offset GS cyclicality in the near term.

* Additionally, the company’s dependence on Tier-3/4 sourcing and slower overseas scale-up could constrain operating leverage, keeping margin expansion muted. We reiterate our Neutral rating with a TP of INR280, valuing the stock at 17x Jun’27E EPS.

In-line revenue and margins; gross additions at 115k

* Revenue was up 5% QoQ/3% YoY, in line with our expectation of 6.3% QoQ.

* GS grew 3% YoY. PS grew 11% YoY. Overseas business was up 3% YoY.

* EBITDA margin was up 13bp YoY at 2%, in line with our expectations.

* Adj PAT was up 2% YoY at INR520m.

* Gross additions stood at ~115k employees in 2Q. Industrials, BFSI and Retail were among the top recruiting sectors.

* In GS, 72 new contracts were added, while 18 new were added in PS.

Key highlights from the management commentary

* Over the last 2-3 quarters, Quess focused on stabilizing after one-off events such as the NBFC ramp-down, with efforts in 1H directed toward recovering volumes in GS.

* Festive hiring momentum led to higher net additions, supported by seasonal demand in Manufacturing, BFSI, and CRT segments. The season benefitted from macro tailwinds such as repo rate reduction, lower tax rates, and GST 2.0. The company remains confident of repeating its 1H performance in 2H.

* Strong execution in collection efficiency continues, with dominance in the ‘collect-and-pay’ model. Cash conversion remains stable.

* CRT remains a mature segment with a healthy pipeline and sourcing funnel. While Telecom hiring is muted, Retail and E-commerce continue to grow.

* Manufacturing is growing faster than other sub-segments.

* PS remains a high-growth, high-margin business within the portfolio, maintaining margins at 12.2%. Margins are expected to remain stable at low double digits.

* Around 73% of headcount is tied to GCC projects across digital, telecom, and technology roles.

* Broad-based strength observed across the Middle East and Malaysia, with growth in both IT and non-IT verticals. The Philippines also delivered a strong quarter.

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