Maintain BUY on Teamlease Services - Structural growth drivers intact - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Mohit Motwani, Institutional Research Analyst, HDFC Securities

Teamlease registered strong growth (+5.1% QoQ) for the second consecutive quarter, in line with our estimate. Growth in core staffing (+5.5% QoQ, 91% of revenue) was led by improved hiring activity in e-commerce, essential retail, BFSI and manufacturing verticals. Stressed verticals like hospitality, retail and travel are not showing signs of recovery though. The core associate headcount growth has been robust (+7.5% QoQ, crossed the pre-COVID level), led by NETAP (+17.5%). The recovery which started in 2HFY21 will be impacted in 1QFY22E by the second wave, but clients are showing resilience and ~80% of the associates being hired are for essential services. Margin came in lower than expected as higher discounts were given to clients, leading to lower realisation (-3.5%), offset by enhanced productivity (+5.4% QoQ). Cash generation has also improved due to lower withholding tax, tax refunds, and lower DSO days (YoY). Going ahead, we expect gradual margin expansion with recovery in growth (by 2HFY22E), improved productivity, better business mix (higher- margin specialised staffing) and low costs of hiring. We cut our EPS estimate by -5.5/-3.4% for FY22/23E to factor in the impact of the second wave of COVID. Our target price of INR 3,950 is based on 38x FY23E EPS (five-year average PE of ~35x). The stock is trading at a PE of 50/35x FY22/23E. Maintain BUY.

4QFY21 highlights: Revenue stood at INR 13.41bn, up 5.1% QoQ, vs. our estimate of INR 13.52bn. Core/specialised/HR services revenue was up +5.5/- 3.5/+32.9% QoQ. The mark-up was down 3.5% QoQ to INR 693 and the associate to core ratio improved to 352 (+5.4% QoQ). EBITDA margin for core staffing/specialised staffing stood at 1.8/11.0% vs. expectation of 2.0/10.5%. Provisions of INR 40mn and reversal of pay cuts (INR 18mn) impacted the margin in 4Q. The company received a tax refund of INR 2bn in FY21 and net cash stands at INR 3.5bn, boosted by the refund and better cash conversion.

Outlook: We expect revenue growth of 24.8/26.5% in FY22/23E and EBITDA margin of 2.2/2.4% respectively, leading to revenue and EPS CAGRs of 26% and 48% over FY21-23E.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.3705 as compared to the previous close of Rs. 3637.2. The total number of shares traded during the day was 4706 in over 892 trades.

The stock hit an intraday high of Rs. 3900 and intraday low of 3609. The net turnover during the day was Rs. 17633218.

Source : Equity Bulls

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