Quess Corp Limited - Capital allocation & margins will be the key - ICICI Securities

As anticipated, Quess executed on cash conversion and deleveraging strategy quite well over the previous nine months. Barring a few segments (e.g. Excellus, IFM), others have seen a good business recovery over H2CY20. As focus shifts from mere Covid recovery to company fundamentals, investor interest will likely turn to aspects like capital allocation and margins / pricing in WFM segment. Apart from potential deployment of overseas cash at AllSec (~Rs 1.5bn), management hinted at no major acquisitions in the pipeline. Given the sub-optimal track record of prior acquisitions, alternative forms of capital allocation (dividend / buyback) will likely be the key investor preference. As it turned net cash positive, company hinted at potential dividend pay-outs in the near future. Pricing pressure, margins in general staffing will be other keenly tracked metrics. As pending recovery plays out in the next couple of quarters, we expect robust earnings CAGR of 80% over FY21-23E. To reflect the lower interest rates, we revise the discount rates of our residual income valuation approach (by 150bps). Our TP implies P/E multiple of 22x FY23E EPS (40% discount v/s Teamlease).

- In-line revenue and margins. Company turns net cash positive. Overall revenue growth was largely driven by general staffing (+9% QoQ), Conneqt (+12% QoQ) and AllSec (+6% QoQ) businesses. Within general staffing, headcount reported a healthy 5% QoQ increase, in-line with expectations. Sequentially, revenue in operating asset management remained stable and was an overhang on growth.

EBITDA margins (overall and even in WFM) remained more or less stable QoQ. While margins in technology services witnessed a slight uptick (+50bps QoQ), OAM margins reported a slight contraction (20ps QoQ). Training & Skill Development (Excellus) and Food catering (within IFM) segments continued to be a drag on the overall profitability. Adjusting for Excellus, management indicated that EBITDA per associate within general staffing has been reporting an expansionary trend.

Adjusted for a lumpy tax refund, cash conversion was muted (OCF / EBITDA = 40%). Growth recovery and slight delay in collections from a key client seem to have driven this tepid cash conversion. From net debt (Rs 450n) in Sep-20, Quess turned net cash positive (Rs 260mn) in Dec-20.

- Capital allocation and margins will likely drive incremental value creation. As the company turned net cash positive, management hinted at potential dividend pay-outs in the near future. Apart from potential deployment of overseas cash at AllSec (~Rs 1.5bn), management hinted at no major acquisitions in the pipeline. Given the sub-optimal track record of prior acquisitions, alternative forms of capital allocation (dividend / buyback) will likely be the key investor expectation. Pricing pressure, margins in general staffing will be other keenly tracked metrics.

- Reasonable valuations. Relatively higher aggregate exposure to troubled segments like Training & Development, educational institutions (through food catering) translated into greater impact on Quess. As pending recovery plays out in the next couple of quarters, we expect robust earnings CAGR of 80% over Y21-23E. To reflect the lower interest rates / liquidity, we revise the discount rates of our residual income valuation approach (by 150bps). Our TP translates into an implied P/E multiple of 22x FY23E EPS (40% discount v/s Teamlease).

Shares of Quess Corp Ltd was last trading in BSE at Rs.551.75 as compared to the previous close of Rs. 548.15. The total number of shares traded during the day was 24160 in over 2062 trades.

The stock hit an intraday high of Rs. 566 and intraday low of 527. The net turnover during the day was Rs. 13356973.

Source : Equity Bulls

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