Maintain BUY on Teamlease Services - Slow recovery, focus on cost control - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

Teamlease delivered lower than expected revenue performance due to a slight delay in recovery. The core staffing (-0.4% QoQ) stabilised post a sharp drop in 1Q, while specialised staffing (-2.3% QoQ) was impacted by pruning of low-margin tail accounts. The core staffing headcount was up 4.2% QoQ, led by NETAP (+19.6% QoQ). The recovery in core staffing was a bit delayed, and started in Sep-20; in 2H, it will be led by higher hiring activity in sectors like Auto, e-commerce, BFS and Consumer durables. Core staffing margin expanded 11bps QoQ to 2.1% (estimate of 2.0%), led by cost control and higher core employee productivity (+6.0% QoQ). The cash generation has improved due to lower withholding tax, tax refunds and lower DSO days.

We like the company's low-risk business model (non-outcome based) and diversified exposure across sectors. Factors such as (1) formalisation of jobs, (2) vendor consolidation, (3) focus on collect & pay, (4) cost-cutting by enterprises, and (5) change in labour laws will benefit market leaders like Teamlease. There is further scope for margin expansion through productivity benefits and 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 are the reasons it commands a premium valuation. We increase FY22/23E EPS estimate by 5.5/9.0% to factor in the higher margin. The stock is trading at a P/E of 47.9/34.2x FY21/22E. Our target price of Rs 2,480 is based on 30x Sep-22E EPS (5Y average P/E of ~35x). Maintain BUY.

2QFY21 highlights: Revenue stood at Rs 11.29bn, down 0.6% QoQ, vs. our estimate of Rs 11.53bn. Core/Specialised/HR services revenue was down 0.4/2.3/11.6% QoQ. The mark-up declined to Rs 718 (-4.3% QoQ), and the associate to core ratio increased to 300 (+6.0% QoQ). EBITDA margin for core/specialised stood at 2.1/9.1%, an expansion of +11/+51 bps QoQ. Teamlease received Rs 0.37bn as an income tax refund and is expected to receive Rs 0.30bn in 3Q.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.2321 as compared to the previous close of Rs. 2352.95. The total number of shares traded during the day was 102 in over 56 trades.

The stock hit an intraday high of Rs. 2366.8 and intraday low of 2311.35. The net turnover during the day was Rs. 239350.

Source : Equity Bulls

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