Teamlease - Maintain BUY - Resilient business model - HDFC Securities

Mr. Amit Chandra & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities.

Teamlease (Q4FY20): Resilient business model. Maintain BUY
(TP Rs 1, 980, CMP Rs 1, 726, MCap Rs 30bn)

Teamlease delivered inline revenue performance but the margin was below estimate. The impact of Covid-19 is on the Core staffing segment (~90% of rev) while the Specialised staffing segment (~8% of rev) is relatively stable. The impact of lockdown will be visible in 1QFY21E with ~16-18% QoQ decline in core associate headcount. Teamlease has ~40% exposure to high impacted verticals like Infra, Manufacturing, ENU, Auto, and Retail. The exposure to less impacted verticals like BFSI, Agri, Chemicals, Essential Retail, Pharma, Hospitality, and Telecom is at ~60%.

We expect strong recovery 2HFY21, as demand recovers. Margin expansion will happen with growth, improved productivity, cost-cutting, and better revenue mix. Factors such as (1) Formalisation of jobs, (2) Vendor consolidation, (3) Focus on collect & pay (4) Cost-cutting by Enterprises, and (4) Client diversification will benefit market leaders like Teamlease. The company shifted to the new tax regime and will continue to avail the 80JJAA tax benefit. The cash generation will improve in FY21, as the company will not have to pay MAT and will also receive the first tranche of income tax refund (Rs 0.4bn) soon. We cut FY22E Rev/EPS estimate by 11.2/15.2% to factor in COVID impact. Our TP Rs 1,980 is based on 30x (5Y average 1-y forward P/E of ~35x) FY22E EPS. Maintain BUY.

Revenue stood at Rs 13.30bn down 1.6% QoQ, in-line with our est. of Rs 13.14bn. Revenue fall was led by Core staffing (-1.7% QoQ) and HR services (-7.3% QoQ) off-set by growth in Specialised Staffing (+1.8% QoQ).

EBITDA margin contracted 53bps QoQ to 1.5% due to higher provisions in general staffing and HR business. The adjusted EBITDA margin was 2.0%, still below our est. of 2.2%. The core staffing margin was up 60bps QoQ to 2.2%, while specialized segment margin declined 116bps QoQ to 6.1%. Mark-up was stable at Rs 748 (-0.4% QoQ). Salary funding exposure at 14% is the lowest in the industry. Improvement in associate/core ratio, better mark-up, and cost-cutting will improve margins in 2H.

Valuation and view. We like the company's low-risk business model (non-outcome based) and diversified exposure across sectors. There is scope for margin expansion through productivity benefits and a better business mix. Teamlease's ability to grow ~15-20% organically, focus on driving productivity through automation, lower funding exposure, domestic focus, and high management pedigree commands premium valuations vs. peers. We expect revenue/EBITDA/PAT to grow at 6/19/16% CAGR over FY20-22E. The company trades at a P/E of 37.2/26.1x FY21/22E, which is at a discount to its 5Y average multiples.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.1706 as compared to the previous close of Rs. 1727.5. The total number of shares traded during the day was 342 in over 121 trades.

The stock hit an intraday high of Rs. 1729.65 and intraday low of 1701.5. The net turnover during the day was Rs. 586574.

Source : Equity Bulls

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