IGI Logo

Navigating through near-term headwinds

IT hiring and overseas business likely to remain soft in the near term

* Quess Corp’s revenue was down 9% QoQ/up 2.8% YoY in 4QFY25, below our expectation of -3.4% QoQ/+12.5% YoY (WFM segment estimates, on a like-to-like basis). EBITDA margin stood at 1.8% (up 29bp QoQ) vs. our estimate of 2.4% (in WFM). Adj PAT rose 31% QoQ to INR630m, excluding a one-time exceptional item attributable to goodwill impairment, ECL, and demerger expenses (a full-year impact of ~INR1,640m). For FY25, Quess’ revenue/EBITDA/adj. PAT grew 9.3%/12.0%/ 54.0% YoY. We expect its revenue/EBITDA to grow 5.3%/11.1% QoQ in 1QFY26. We reiterate our Neutral rating with a TP of INR360, implying 19x FY27E P/E.

Our view: GCC pie doing well

* 4QFY25 was a mixed bag for Quess, marked by NBFC-led headwinds in General Staffing (GS), even as demand from manufacturing, retail, and logistics offered some cushion. The sharp ramp-down in a large NBFC client (~38K associates) weighed on volumes and margins, causing a temporary dip. That said, strong gross additions (~89K) and 80 new contract wins highlight good execution, and the company remains confident of regaining lost momentum in the upcoming quarters.

* In Professional Staffing, the pivot toward high-margin GCC-led business continues to yield results, with the segment now contributing 6% of total revenue and margins sustainably crossing 9%. The strategic reshaping of the portfolio – low-margin revenue now at 24% vs. 51% a year ago – should support margin in this segment.

* In our view, the early focus on GCCs and niche roles has helped insulate this segment from broader softness in IT hiring. While the overall IT staffing environment remains muted, we believe the company’s positioning in high-value, specialized mandates and continued traction in GCCs (now 70% of segment revenue) should support steady growth and margin resilience in this vertical.

* Overseas markets remain a mixed bag, with persistent visa challenges in Singapore offset by a turnaround in Malaysia and early traction in the Philippines. Overall margin performance was soft at 1.8%, impacted by corporate costs post-demerger, higher provisioning (ECL of INR 1.2b), and goodwill impairment.

* The company reiterated its aim to exit FY26 with a 2% margin, which is in line with what we have built into our numbers. We believe the completion of the three-way demerger and continued focus on highmargin segments position Quess for gradual recovery, even as near-term pressures from IT hiring, BFSI, and international staffing may linger.

Valuation and change in estimates

* We expect the EBITDA margin to gradually improve to 2.0%/2.1% for FY26/ FY27. Accordingly, we expect an adj. PAT CAGR of 14% over FY25-27.

* While Quess stands to benefit from medium-term tailwinds such as labor formalization and ongoing reforms, near-term pressures across IT hiring, BFSI, and international staffing could weigh on growth and margin recovery.

* Additionally, the qualified opinion from the auditor on certain tax matters adds an element of uncertainty. We reiterate our Neutral rating with a TP of INR360, valuing the stock at 19x FY27E P/E, as we believe the current valuations broadly reflect the medium-term upside.

Miss on revenues and margins; three-way demerger completed ahead of schedule

* Quess Corp’s revenue was down 9% QoQ/up 2.8% YoY in 4QFY25, below our expectation of -3.4% QoQ/+12.5% YoY (WFM segment estimates, on a like-to-like basis). For FY25, revenue stood at INR150b, up 9% YoY.

* Quess completed its three-way demerger ahead of schedule and retained Workforce Management, while carving out Digitide (Global Technology Solutions) and Bluspring (Operating Assets Management) to exit non-core segments aligned with its capital allocation priorities.

* GS grew 3% YoY, Professional Staffing grew 26% YoY, while the Overseas business was down 5% YoY.

** EBITDA margin was 1.8% vs. our estimate of 2.3% (for the WFM business).

* The auditor has expressed a qualified opinion on financial statements on account of certain tax deductions claimed by the company, which are disallowed by the authority. The auditor has been unable to comment on whether any adjustments are necessary. The company has assessed a contingent liability of ~INR2,960m towards these demands.

* Adj PAT rose 31% QoQ to INR630m, excluding a one-time exceptional item attributable to goodwill impairment, ECL, and demerger expenses (a full-year impact of ~INR1,640m).

* Gross addition in GS was ~89k employees in 4Q. Industrials, BFSI, and Retail were among the top recruiting sectors.

* In GS, 80 new contracts were added, while 45 new clients were onboarded in the Professional Staffing segment.

Key highlights from the management commentary

* In GS, weakness in revenue and EBITDA was led by macro headwinds and the NBFC ramp-down (reduction of ~38K count, a client-specific move and not a structural challenge). This had a 7% impact on revenue and a 4% impact on margins on the overall book. The lost growth is likely to be recouped during the year.

* 80 new contracts were added during the quarter (ACV ~INR 1,530m); 323 were added for the full year.

* The company remains fully focused on achieving double-digit (low teens) revenue growth and non-linear margin growth.

* There is a near-term headwind due to the NBFC client ramp-down.

* The company is focused on GCCs and high-margin niche businesses. The share of low-margin revenue dropped from 51% to 24%, while the high-margin segment grew from 19% to 39%. GCCs now contribute 70% of revenue, with 45 new clients onboarded in FY25.

* The company will continue to emphasize high-margin business, enabling nonlinear growth in both margins and revenue.

Valuation and view

* We expect the EBITDA margin to gradually improve to 2.0%/2.1% for FY26/ FY27. Accordingly, we expect an adj. PAT CAGR of 14% over FY25-27.

* While Quess stands to benefit from medium-term tailwinds such as labor formalization and ongoing reforms, near-term pressures across IT hiring, BFSI, and international staffing could weigh on growth and margin recovery.

* Additionally, the qualified opinion from the auditor on certain tax matters adds an element of uncertainty. We reiterate our Neutral rating with a TP of INR360, valuing the stock at 19x FY27E P/E, as we believe the current valuations broadly reflect the medium-term upside.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412