TeamLease Services - Springboard during the good times! - ICICI Securities

With the prospects of economic recovery now appearing brighter, we see TeamLease to be a good proxy play. Offers made in Oct'20 (~12k) signal a key inflection point in the demand trajectory (vs 9MCY20). Outlook on FY21 closing headcount implies strong addition of ~19k over the festive season (Oct-Jan). We expect this strength to be driven by key verticals like Retail & Financials. Adjusted for one-time business closure costs, EBITDA margin showed sequential improvement. As revenue run-rate witnesses a sharp uptick, we expect H2FY21 to witness the benefits of operating leverage besides full impact of some cost rationalisation initiatives. If executed well, the recent labour reforms can be a key long-term growth driver potentially providing an additional revenue line (part-time temp staffing). As in the earlier downturns (e.g. GFC), we expect business services firms like TeamLease to be key beneficiaries, especially during the recovery leg. We upgrade the stock to BUY, valuing it at 35x 1-year forward EPS.

- Operationally in-line quarter. Q2FY21 was operationally in line with the company's general staffing headcount remaining largely stable on sequential basis. Both general and specialised staffing segments witnessed roughly flattish revenue trends. Planned ramp-downs in other HR services continued as the company is in the process of exiting some of the businesses within this segment.

Adjusted for one-time business closure costs, EBITDA margin reported slight sequential improvement (+10bps QoQ) to 2.3%. Both general staffing and specialised staffing witnessed sequential improvement in margins. While staffing productivity showed meaningful improvement (from 283 in Q1FY21 to 300), average realisation per associate remained largely stable.

- Strong near-term as well as long-term outlook. Outlook on FY21E closing headcount implies strong addition of ~19k over the festive season (Oct-Jan). As in the earlier downturns (e.g. GFC), business services firms like TeamLease should be key beneficiaries especially during the recovery leg, which appears to be currently in play. Reduction in cost of compliance under the new labour law paradigm should drive formalisation of workforce and higher demand for flexi-staffing services. Besides, additional revenue opportunities (e.g. part-time temp staffing) can potentially open up. Driven by: 1) full benefits of some cost rationalisation initiatives, and 2) operating leverage, we expect 90bps improvement in EBIT margin to 2.2% over FY20-FY23E. Upgrade the stock to BUY with a revised target price of Rs 3,250, implying 35x 1-year forward EPS.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.2380.8 as compared to the previous close of Rs. 2345.85. The total number of shares traded during the day was 446 in over 221 trades.

The stock hit an intraday high of Rs. 2415 and intraday low of 2312.85. The net turnover during the day was Rs. 1045893.

Source : Equity Bulls

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