TeamLease Services - IPO Note - Valuations expensive - Angel Broking

TeamLease Services Ltd (TSL) is one of India's leading providers of human resource services in the organized segment. It's staffing business accounts for 98.8% of the revenues while HR services accounts for the balance. It has a market share of ~6% in the Indian Flexi-staffing Industry. It delivers staffing services across industries like banking, manufacturing, retail, telecom, etc. The company has shown significant growth over FY2011-15, posting a revenue CAGR of 30.7% and after posting losses till FY2013, the company has since turned profitable and reported net profit of ~Rs. 30cr in FY2015 vs. a net loss of ~Rs. 16cr in FY2012.

Lower penetration levels suggest huge growth potential: The flexi-staffing industry in India as of FY2014 was valued at around Rs. 180-220bn and the penetration level of the industry in India at ~0.4% is lower than in developed regions where the penetration level is between 1.5-3.0%. Going forward, as per industry reports, Flexistaffing industry is expected to report a CAGR of 25-30% and be around Rs. 610-640bn by FY2019 and the penetration level is expected to improve to 1.0% over the same period on back of increasing number of enterprises turning formal, skill development in the country, and regulatory amendments in favour of formal employment.

Focus on improving operating margins: The HR services business, which commands higher margin, accounts for a very small portion of company's overall top-line. HR services offers recruitment services, regulatory services, skills and development corporate training, and payroll services. The company is now focusing on such higher margin businesses apart from its regular staffing business. It is also looking for opportunities in the IT vertical and improving employee productivity.

Intense competition and lack of pricing power: The flexi-staffing industry is highly fragmented with intense competition. Almost 70-80% of the industry is unorganized consisting of smaller players and balance comprising of major players like Adecco, Randstad, Quesscorp, etc. TSL faces stiff competition from these companies as well as other small players, thus leading to lack of pricing power.

Outlook Valuation: TSL being leading staffing company in India and has the potential to further increase its market share. However, although the company has shown good growth momentum, it operates in an industry characterised by intense competition, lack of pricing power, low entry barriers and high degree of fragmentation which renders limited scope for margin improvement.

On the valuation front, at the upper end of the price band, the pre-issue P/E works out to 60.6x its 1HFY2016E annualised earnings. In comparison, its global peer Adecco is trading at 12.9x 9MCY2015 annualised earnings and has a better margin and ROE profile. Further, post the IPO, TSL's ROE is not expected to improve significantly in the near term. Considering the above mentioned business concerns and expensive valuation, we recommend a Neutral on the issue.

Source : Equity Bulls

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