Quess Corp Ltd (QCL), promoted by Thomas Cook (~63% holding post dilution), provides comprehensive solutions including recruitment, temporary staffing, technology staffing and IT product and solution, skill development, payroll, compliance management, integrated facility management and industrial asset management services. The company derives 86% of its revenues from India while the balance comes from its international business. Over the past three years, the company has made several acquisitions which has fueled its growth and has shown good track record of improving the performance of its acquisitions.
Huge growth opportunities across business verticals: QCL has presence in high-growth business verticals like temporary general staffing, payroll & compliance outsourcing, professional IT staffing, facilities management, etc. under different brands. As per a report by Frost & Sullivan, the market for these segments in India is expected to grow at a CAGR of 19-24% over 2014-19. Further, the penetration level of temporary staffing is low in India (0.1%, which is among the lowest in the world), and is likely to improve from hereon on account of increasing need for cost efficient structures. Thus, we expect QCL to benefit from increasing demand for manpower across industries on the back of its strong Management, healthy track record and presence in diversified business verticals which would help it to enhance its market share and increase revenue.
Focus on improving operating margins: Going forward, we expect the company's overall operating margin to improve on back of (a) change in revenue mix in favor of higher margin businesses (currently the People and Services business contributes ~55% of the company's overall top-line which is a low margin segment) (b) two of its acquisitions Brainhunter and MFX showing improvement in performance with the latter having turned profitable recently, which should result in increase in margins (c) improvement in ‘core to associate employees handled' ratio from ~200 to 250.
Outlook & Valuation: Over the last four years, the company has reported strong revenue CAGR of ~52% and PAT CAGR of ~94% which was largely fuelled by its strategic business acquisitions and by strong growth across business verticals. Going forward we expect the company to report healthy growth on back of increase in industry penetration. Further, the company's profitability is also expected to increase due to its focus on increasing the share of higher-margin businesses in the revenue mix.
On the valuation front, at the upper end of the price band, the pre-issue P/E works out to 40.6x its FY2016 earnings which is lower compared to its peers (Team Lease is trading at 63.1x FY2016 earnings) and also has a better margin and ROE profile. Further, post the IPO, QCL is expected to improve its operating margin significantly. Considering the above mentioned positives and the company's relatively lower valuation, we recommend a SUBSCRIBE on the issue.