Quess Corpmultibaggerstocks.org/wp-content/uploads/2018/10/Quess-Corp.pdf · Singapore IT Staffing...

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Quess Corp

INDUSTRY CMP Recommend Add on

Dips to

Sequential Targets

Time Horizon

DATE 15 Oct 2018

IT / Diversified Rs 789

Buy at CMP

and Add On

Declines

Rs 725-789 Rs 1040 4 - 6

Quarters

Strong Promoters and Management Team One of the largest player in Staffing

Estimate ~27% revenue and ~38% PAT CAGR Strong track record of growing through Inorganic route

Red Flag Price

Level - Rs.615

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HDFC Scrip Code QUECOR

BSE Code 539978

NSE Code QUESS

Bloomberg QUESS

CMP Oct 12, 2018 789

Equity Capital (Cr) 146

Face Value (Rs) 10

Equity Share O/S( Cr ) 14.6

Market Cap(Rs Cr ) 11650

Book Value (Rs) 169

Avg.52 Wk Volume 108012

52 Week High 1300

52 Week Low 700

Red Flag Price Level # 615

PCG Risk Rating* Yellow

Shareholding Pattern % (Sep 30, 18)

Promoters 71.4

Institutions 19.6

Non Institutions 9.0

Total 100.0

FUNDAMENTAL ANALYST

Kushal Rughani [email protected]

Company profile:

The Quess Group is a step-down subsidiary of Canada-based Fairfax Financial Holdings Group. Fairfax is a

holding company, which, through its subsidiaries, is engaged in property and casualty insurance,

reinsurance and investment management. It was acquired in 1985 by its present Chairman and CEO Mr V.

Prem Watsa. Quess Corp (formerly IKYA Human Capital Solutions) is one of India’s leading integrated

providers of business services. Quess is focussed on emerging as the preferred business function outsourcing

partner for enterprise customers across a wide range of industries. Quess’ services and product offerings

are currently grouped under four operating segments: Global Technology Solutions, People and Services,

Integrated Facility Management (IFM), and Industrial Asset Management (IAM).

Quess has team of ~261,700 employees across India, North America, South America, South-east Asia and

the Middle East across all segments. Quess serves over 1,700+ clients worldwide. Quess Corp is promoted

by Fairfax Financial Holdings through its Indian subsidiary, Thomas Cook India Ltd (TCIL) and Mr Ajit Isaac.

The company’s employee headcount as on Mar-18 was at ~2,61,700 as compared to ~1,59,200 employees

last year, a growth of 64%. Consolidated revenue grew 43% to Rs 6,167 cr in FY18. Consolidated EBITDA

surged 49% from Rs 238 cr in FY17 to Rs 354 cr in FY18. The EBITDA margin expanded 23 bps to 5.75%

in FY18. Consolidated PAT surged 154% YoY to Rs 310 cr in FY18. This was on the back of a tax write back

of ~Rs 48 cr, and adjusted for the same, profit would have been of ~Rs 260 cr. Cash flow from operations

stood at Rs 109 cr in FY18.

Investment rationale & key highlights

Quess has posted ~44% revenue CAGR over FY13-18. EBITDA has witnessed 50% CAGR over the same

period. Company continues to grow both organically and inorganically. Net profit has grown at a faster speed

at 79% CAGR over FY13-18. PAT margin has also witnessed a robust 330 bps expansion to 5% in FY18. In

the past few years, company has made 22 acquisitions and investments. Over the same period, Quess has

acquired companies at attractive valuations, and then turned them around successfully. Quess has India’s

largest Staffing team with ~1,60,000 associates. Quess is No.1 in Indian IT Staffing market, No.1 in

Singapore IT Staffing space, and Top 3 BPO services provider in India.

Recently also, the company acquired the online job portal – Monster’s business and entered into the job

seeking segment too. The headcount has also seen ~34% CAGR over FY13-18, and as on Mar-18 it stood

at 2.62 lakh, and on Jun-18, it was at 2.72 lakh. Although acquired operations are running into losses, but

the deal has been executed at low valuations of ~0.6x EV/Revenue. We expect the company to continue its

growth trajectory via both routes. Moreover, acquisitions made in the last 2-3 quarters would start

witnessing better results in all likelihood by Q3/Q4 FY19. We believe premium valuations are justified, given

that the promoter is Fairfax which is backed by Mr Prem Watsa, and also a strong management team that

should ensure a healthy growth momentum for the company. We estimate ~27% revenue and ~38% PAT

CAGR (adjusted for tax in FY18) over FY18-20E. The stock trades at ~25x FY20E earnings. We recommend

Quess as BUY at Rs 789, and add on dips to Rs 725 with TP of Rs 1040 over the next 4-6 quarters. Based

on ~32x FY20E EPS, we have arrived at Rs 1040.

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Key Highlights

Quess Group is a step-down

subsidiary of Canada-based Fairfax

Financial Holdings Group. Fairfax is a

holding company, which through its

subsidiaries, is engaged in property

and casualty insurance and

reinsurance and investment

management.

Quess’ service and product offerings

are currently grouped under four

operating segments: Global

Technology Solutions, People and

Services, Integrated Facility

Management (IFM), and Industrial

Asset Management (IAM).

Quess has a team of ~272,000

employees across India, North

America, South America, South-east

Asia and the Middle East across all

segments. Quess serves over 1,700+

clients worldwide.

In the past few years, company has

made 22 acquisitions and investments. Over the same period, Quess has acquired companies at attractive valuations and then turned them around quite well.

We estimate ~27% revenue and ~38% PAT CAGR (adjusted for tax in

FY18) over FY18-20E.

Company Business Segments People Services (PS):

Quess’ PS segment provides comprehensive staffing services and solutions including general staffing,

recruitment and executive search, recruitment process outsourcing, as well as payroll, compliance and

background verification services under the IKYA and Coachieve brands.

Quess also provides training and skill development services through 95 plus centres spread across 12 states

in India under Quess’ Excelus brand, in partnership with the Government of India. Quess is authorised to

provide training and skill development programmes covering 21 trades/sectors, including the ITES sector

for technical support, the logistics sector for warehouse assistance, and the travel & tourism sector for

domestic tour operators. The logistics division provides first & last mile delivery solutions for leading e-

commerce clients. PS business comprises 47% of the total revenue share of Quess. In FY18, segment

revenue stood at Rs 2878 cr, +23% YoY. EBIT stood at Rs 136 cr, up 25%. EBIT margin stood at 4.7% as

compared to 4.6%.

Growth driver: This business has strong growth prospects, given the low penetration rates of temporary

staffing in India as well as ample supply of manpower being added to the labour force every year. Quess

has also benefitted from a shift in mix towards relatively higher-earnings associates (e.g. driven by the e-

commerce boom), which too has led to increases in revenue per associate. General staffing is by far the

lowest-margin business within Quess’ overall business portfolio, as it is commoditised and has low entry

barriers. However, Quess has consistently tried to move profit margins upward in this business, by offering

relatively higher-value services such as recruitment and attendance, in addition to plain-vanilla payroll

services.

In addition, company also does greater proportion of its business under the pay-and-collect model, which

is relatively working capital intensive. Quess’ margins in its general staffing business are higher than those

of Team Lease, its listed peer, whereas its working capital needs are also higher. Quess has grown in the

general staffing segment purely by organic means, reflecting that the company recognises the inherently

commoditised nature of this business, and is trying to increase the proportion of other, higher margin

businesses in its overall portfolio.

HR solutions: The growth in the HR solutions market is expected to be driven by a surge in overall

employment in India, based on a stable political environment and strong economic fundamentals with

increasing outsourcing of customer-facing sales roles and back office roles. This growth is expected to be

driven by sectors such as BFSI, retail, FMCG & consumer durables, healthcare and e-commerce.

Implementation of GST is expected to open up the outsourcing of jobs in the manufacturing sector. The

total HR solutions’ outsourcing market in India was estimated to be at Rs 98,022 cr in 2016, which posted

21.8% CAGR between 2011 and 2016.

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The temporary general staffing market was at ~Rs 50,033 cr as in 2016. The segment is expected to reach Rs 1,08,749 cr by 2021, and may

post 16.8% CAGR between 2016 and 2021. Increasing demand for skilled labour and the inclination of companies to work with inte rmediaries

would continue to be the key drivers of growth in the temporary staffing market over the next five years.

General Staffing: Quess’ General Staffing business within the People Services segment added 43,000 associates during the year, and became

the first staffing company in India to reach 150,000+ employees. The company’s associate count for the General Staffing business stood at

approximately 157,000+ as on Mar-18. Quess provides temporary staffing solutions across industries, including FMCG, retail and ecommerce,

consumer durables, healthcare, BFSI, logistics, media & entertainment, engineering and manufacturing. Quess’ ability to provide rapid ramp-up

and value-added personnel services across India provides it a significant competitive edge. The company has developed experience in providing

staffing support to the retail and e-commerce industries, including large numbers of sales personnel as well as logistics management staff and

delivery teams.

Recruitment and Executive Search: In terms of Recruitment and Executive Search, Quess provides a range of permanent recruitment and

executive search services across management levels. Quess’ team of professional recruiters, with expertise in their respective domains, provides

these services to clients in industries such as IT & ITeS, BFSI, industrials, engineering, resources, consumer services, reta il, telecom,

pharmaceuticals and healthcare. Solutions offered include talent acquisition, turnkey projects, project -based recruitment, outplacements and

outsourcing of recruitment processes.

Payroll and Compliance: In the Payroll and Compliance management business, Quess provides a comprehensive and cost-effective range of

payroll outsourcing services and statutory compliance management solutions, as well as a suite of background verification services. The

compliance team focusses on employment, labour and corporate secretarial compliance issues. Quess works with over 600 clients across sectors

such as retail, BFSI, FMCG & FMCD, telecom, e- commerce & logistics, and manufacturing & agro etc. It continuously makes efforts in bringing

operating leverage into its operations. The core-to-associate ratio, a key efficiency metric , improved to ~290 in FY 2018 from approximately 200

in FY17.

Training & Skill Development:

The average age of India’s population is projected to be around 29 years by 2020, one of the lowest in the world. India ’s demographic transition

makes it imperative to ensure employment opportunities for millions of youth each year. With nearly 12 mn youth joining the workforce in India

every year, the country is witnessing a huge skill gap in employability. Based on the skill gap study conducted by the National Skill Development

Corporation over 2017 - 2022, there is an additional net requirement of 103.4 mn skilled manpower by 2022 across 24 key sectors. The

Government has started several skill development initiatives to address this challenge. Some of the key initiatives are Deen Dayal Upadhyaya

Grameen Kaushalya Yojana (DDU-GKY), Pradhan Mantri Kaushal Kendra (PMKK), National Employability Enhancement Mission (NEEM) and

several other state government-led programmes as well. Quess is among the largest training and skill development partners for the Ministry of

Rural Development and National Skill Development Corporation. The company trained 17,000 students across 91 training centres last year.

Quess is on track to train 42,000 students across 95+ training centres in the current year owing to the addition of 23 PMKK centres to the

existing 20 centres. Bolstered by its successful track record of running projects under the DDU-GKY and PMKK schemes, Quess has recently

stepped into the Vocationalisation of Schools arena, and was awarded the RMSA Project for Karnataka for the year 2017-18. As a part of this

project, Quess has imparted training in the IT-ITES and retail sector across 75 and 10 government schools in Karnataka respectively.

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Company Segments

Source: Company, HDFC sec Research

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Global Technology Solutions (TS):

The Technology Solutions segment provides a host of IT/ITeS support services viz. customer lifecycle management, business process management, IT

staff augmentation, IT infrastructure managed services, IT products, digital solutions and after-sales support services. Quess offers these services

across India, South-East Asia and North America.

The TS business comprises ~30% of the total revenue share. Quess is the largest IT staff augmentation provider in India , and also operates the largest

independent IT staffing firm in Singapore through its subsidiary – Comtel Solutions. The associate headcount in the company’s professional IT staffing

operations stood at approximately over 12,000 as on 31-Mar-18.

In FY18, the revenue for the TS segment stood at Rs 1,868 cr as compared to Rs 1,183 cr in FY-17, up 58%. EBIT stood at Rs 118 cr as compared to

Rs 82 cr, up by 44%. EBIT margin stood at 6.32% as compared to 6.93%. FY18 saw an improvement in the financial results of Brainhunter (Quess’

vehicle into the North American IT staff augmentation market) and MFX (solutions and products business). Brainhunter and MFX closed FY18 with an

EBITDA of CAD US$ 1.2 mn and US$ 4 mn respectively.

Business process management: The growth in the business process management (BPM) market is driven by an increasing use of automation and

digital transformation. Globally, the BPM industry witnessed a moderate growth of 3.4% to reach US$ 189 bn in 2017, as compared to US$ 183 bn in

2016. India’s share in the global BPM industry has steadily risen to 15% in 2017 as compared to 11% in 2012, due to a shift in focus to high-end

services. The Indian BPM industry is pegged at US$ 32.5 bn in FY18 as compared to US$ 30.1 bn in FY17. With over 2,500 firms, and the emergence

of new technology platforms like analytics, cloud and mobility, the market is expected to reach US$ 50-55 bn by 2025. Demand is being driven by

design thinking, automation & cognitive computing abilities, as well as innovation centres. Supported by Government policies and initiatives, India’s

domestic BPM industry is growing at a rapid pace. Amongst other segments, customer services and high-end analytics remain the key drivers of

industry growth, with 81% share in FY18. Quess already has a high level of service quality and a ready infrastructure in place. It does a lot of data

mining, which in turn helps the management understand the clients ’ needs better, thus enabling the delivery of better services.

Professional IT staffing: The services under IT flexi-staffing includes providing contractual or contingent manpower support for different IT

requirements. According to the Indian Staffing Federation, the professional IT staffing market in India was at US$ 3.04 bn in 2017. With staff strength

of 0.26 mn, the current penetration of IT flexi-staffing is only 5.6% in India. IT/ITES constitutes 90% of the Indian IT flexi-staffing industry, and the

industry is expected to reach US$ 5.32 bn by FY21, growing at 14%-16% YoY. Through Magna, a subsidiary company, Quess provides temporary

staffing solutions to IT and ITeS clients in India. Magna is India’s largest IT staff augmentation provider, based on the number of employees. It provides

the entire range of staff augmentation services across various industries, including banking and financial services, automotive and engineering, telecom,

healthcare, FMCG and retail.

North American IT staffing markets are amongst the most liberal in the world, owing to a low regulatory burden in terms of sector prohibit ions, limits

on the length of assignments and the percentage of agency workers allowed. In 2016, the US IT staffing market size was US$ 28.6 bn, and is expected

to maintain a 4% growth in 2018. Quess’ IT staffing services in North America, the largest IT and ITeS market globally, are provided through its wholly-

owned subsidiaries Brainhunter and Mindwire, both acquired in FY15. Canada-based Brainhunter provides recruitment and staffing services through a

comprehensive range of custom-developed human resource information system (HRIS) software, which is also licensed for client use. Brainhunter also

provides software solutions that enable its clients to leverage technology for recruiting, managing job postings, and candida te submission processes

from multiple staffing vendors in a confidential manner. Mindwire is headquartered in Ottawa, Canada, and focusses on providing the Canadian

Government’s departments and agencies with IT services and solutions.

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The Singapore IT staffing market primarily caters to the staffing requirements of technology and banking majors that operate from Singapore,

including MNCs with their regional headquarters in Singapore. The IT staff augmentation market in Singapore was SGD 2.15 bn in size as of 2016.

The tightening of the issue of the Employment Pass had a negative impact on the staffing market. However, during the last quarter of FY18,

positive trends are being witnessed in terms of the relaxations in issue of employment pass for high-end tech professionals, which is helping the

industry.

Mobile and consumer durable break-fix and repairs market: Consumer electronics’ break-fix market in India is pegged at ~Rs 7,500-10,000

cr, capturing 59% of the total break-fix market. Mobile break-fix is the second-largest segment, constituting 26% of the total break-fix market.

A large part of this market is currently dominated by the unorganised players, presenting a huge growth opportunity for the organised players

led by GST implementation. Mobile break-fix segment in the sector is the most lucrative one, owing to a great growth opportunity of over 20%,

while the consumer durables segment, the largest segment in the industry, is expected to grow at over 15%.

Integrated Facility Management (IFM):

Quess is the leading integrated facility management provider in the country. The facility management business comprises 17% of the total revenue

share of the company in FY18. Quess offers a host of services including soft services (housekeeping), hard services (technical services or utilities),

food & hospitality (industrial catering), pest control, manned guarding and landscaping.

Quess provides facility management & security services to companies operating across sectors like banking & financial service s, healthcare,

education, airports, real estate & property management, manufacturing, information technology, FMCG and travel & tourism.

IFM revenues stood at Rs 1,027 cr in FY18 as compared to Rs 562 cr in FY17, up 83%. EBIT stood at Rs 67 cr as compared to Rs 31 cr, up 120%.

EBIT margin stood at 6.54% as compared to 5.43%. Increased acceptance of outsourcing non-core activities and sustained commercial and office

space absorption have been significant for the growth of this segment in India. In FY16, the FM market size grew to Rs 10,400 cr, at a historic

five-year CAGR of ~15%. The market is highly fragmented and dominated by various small and medium-sized unorganised players and the soft

services (housekeeping) segment, owing to low awareness about the need for professional services (technical services or utilities). The FM market

is now shifting from a single-service contract model to an integrated model. An increase in consumables, manpower and management costs have

impacted the cost of FM services, forcing customers to replace long-term contracts and providing momentum for integrated facility management

contracts in India.

Management believes the IFM business has the potential grow the fastest amongst all the company’s business segments, driven by the growth in

office space across sectors. In this segment, Quess currently provides facility management services for establishments including oil refineries,

hospitals, educational institutions, and multiplexes. A vast majority of the company’s business comes from corporate establishments.

Food services: The food services market in India stood at Rs 7,530 cr in 2016, growing at 17.9% CAGR since 2010. The market is dominated

by the office and health care & educational institutions sub-segments, with a contribution of 34% and 26% respectively. It is estimated to grow

at 22% CAGR between 2016 and 2021, driven by food price inflation, supply chain and sourcing practices, competition, food safety laws etc.

mainly in the industrial, educational and healthcare sectors. The next big trend in the food services market is the growing prevalence of customised

healthy food with high nutritional value, quality, and hygiene.

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As of now, over 2,800 projects have been identified under the mission, and the total investment in the mission is estimated to be over Rs1.3 lakh

cr. These smart cities will use host of digital infrastructure including environmental sensors to detect & measure pollution levels and other

environmental parameters, smart street lights that can be controlled through the command & control room, cameras and VMD boards to control

traffic, GPS devices in waste collection vehicles to monitor solid waste management, automatic number plate recognition & traffic violation detection

sensors.

Internet:

India is ranked second-largest in terms of mobile phone penetration after China, with an internet user base set to cross 50 cr by mid-18. The

overall growth in digital landscape, together with a large working age population of over 90 cr, presents a significant growth opportunity for the

overall recruitment market, especially the online market. With over 80 lakh college-going students in 2016, and the addition of ~30 lakh graduates

every year to the Indian job market, this presents a huge opportunity for the online recruitment market.

Government initiatives like Pradhan Mantri Kaushal Vikas Yojna and Make in India are expected to fuel employment generation in the country.

Manufacturing, IT & BPM/ITES and finance, insurance & real estate are major contributors of organised private jobs that rely heavily on online

recruitment. The online recruitment market in India, the Middle East and South-East Asia is expected to reach US$ 622 mn in 2019, as compared

to US$ 294 mn in 2016, at CAGR of 7.3%. This growth is led by expanding digitisation across these regions, and a demographic shift towards the

younger population.

The internet business segment at Quess consists of its recent acquisition of Monster India and its business in South-East Asia & the Middle East,

and Simpliance, a leading digital labour law compliance platform. Monster, a leading online career and recruitment resource provides relevant

profiles to employers and relevant jobs to jobseekers across industry verticals, experience levels and geographies. The business has operations

across India, Singapore, Malaysia, Philippines, Hong Kong, Vietnam, Thailand, Indonesia, UAE and Saudi Arabia, with ~68 mn re gistered users,

over 86 mn resumes and ~770,000 new monthly registrations.

Acquisitions:

Vedang Cellular Services Private Limited (Vedang): in Q3 FY18, Quess entered into an agreement to acquire 70% equity stake in Vedang

Cellular Services. It completed the acquisition for a consideration of Rs 40 cr. Vedang plans, designs and optimises telecom cell sites, and also

installs active components on cellular towers and their O&M. It is one of the largest players in the telecom network operations and maintenance

space. Vedang had posted revenue of Rs 78 cr, with PAT margin of 7% with deployed headcount of 1,500 professionals in FY17. This acquisition

complements Quess’ current capabilities in telecom network management in terms of diversified service offerings, wider geographical reach and

customer base.

Conneqt Business Solutions (Conneqt; formerly known as Tata Business Support Services Limited): In Q3FY18, Quess entered into an

agreement to acquire 51% stake in Conneqt, earlier a subsidiary of Tata Sons Limited. Quess paid Rs 153 cr cash consideration for the acquisition.

Headquartered in Hyderabad, Conneqt is among India’s premier customer experience (CX) management companies, with over ten yea rs of sectoral

expertise. The company serves third-party clients across sectors like BFSI, auto and manufacturing, telecom & media, retail, and in other emerging

industries, in India and abroad, with an employee strength of ~27,000 employees, handling ~500 mn customer transactions every year, served

through 29 delivery centres and over 470 field offices. Post-acquisition, the company is re-branded as ‘Conneqt Business Solutions’ to give it a

distinct and unique corporate identity in the BPM sector. Conneqt reported revenue of Rs 661 cr with an EBITDA margin of 8.5% in FY17. The

acquisition gives Quess an entry into the area of customer lifecycle management , and also offers strong cross-selling opportunities across their

technology solutions and people services business.

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Manipal Integrated Services (MIS): In Q3 FY18, the National Company Law Tribunal (NCLT) approved the scheme of the merger of the facilities

management business of Manipal Integrated Services. As per that, Quess issued 71.5 lakh equity shares to equity shareholders of MIS as part of

the remaining consideration. In addition to Manipal Group entities, MIS serves more than 150 clients with a presence in healthcare, education and

BFSI sectors. As on 31-Mar-18, MIS had a headcount in excess of 17,500 associates. This strategic acquisition gave Quess a strong foothold in the

rapidly-growing healthcare and education facility management space.

Greenpiece Landscapes India (“Greenpiece”): In Q3FY18, Quess announced the intention to acquire 90% stake in Greenpiece Landscapes

India for a cash consideration of upto Rs 26 cr. Greenpiece is a leading end-to-end design and landscaping services firm catering to marquee

corporate, industrial and real estate firms in India and abroad. Greenpiece generated revenue of Rs 33 cr with an EBITDA margin of 9.8% and

deployed headcount of 700 professionals in FY17. Landscaping is an adjacency to Quess’s facility management business, and this acquisition further

differentiates the offerings. Further, given the fragmented and informal nature of the industry, Quess brings in a much-needed institutional approach

to this segment.

Monster India and its business in South-east Asia and the Middle East (“Monster”): In Q4FY18, Quess announced acquisition of 100%

stake in Monster India and its business in South East Asia and the Middle East for a cash consideration of US$ 14 mn on debt-free-cash-free basis.

Monster, a leading online career and recruitment resource, provides relevant profiles to employers and relevant jobs to jobseekers across industry

verticals, experience levels and geographies. A 20+ year old marquee internet brand provides the widest and most sophisticated job seeking,

career management, recruitment and talent management capabilities globally. Monster worldwide is owned by Randstad. The acquired business

has operations across India, Singapore, Malaysia, Philippines, Hong Kong, Vietnam, Thailand, Indonesia, UAE and Kingdom of Saudi Arabia. With

~68 million registered users, over 86 million resumes and with ~770,000 monthly new registrations, the company is amongst the market leaders

in the online recruitment space across each of its operating geographies. The acquired business had generated revenue of US$ 26 mn in CY 2016

with over 600 professionals. In addition to owning a high-recall brand in the HR space, this ac99999quisition complements Quess’s market leading

presence in the HR services space by establishing end-to-end offerings across the Employee Lifecycle Management space.

If we look at the job board market, ~70% is Naukri.com, the next is Monster with ~20%. So it is like a duopoly structure. Quess believes that if

they can fix Monster to some extent, then it can become strong No. 2, the opportunity to become much stronger is clearly there. In the past also

acquisitions, where company has bought assets and turned them around quite well.

If we compare it with InfoEdge, which is the parent of Naukri.com. Naukri trades at close to 15 times revenue. Though Monster is into losses,

Quess got this under one-time revenue, almost 0.6 times revenue. So, valuation has been very attractive. It is a strong brand that gives complete

new product and geography range.

DigiCare Services (QDigi Services): In Q4FY18, Quess announced the acquisition of 100% stake in HCL Computing Products Limited which

further acquired Care Business of HCL Services Limited, a subsidiary of HCL Infosystems Limted for Rs.30 Cr on a cash-free-debt-fee basis via a

combination of primary and secondary pay-outs. Post-acquisition, the acquired business has been re-branded as ‘DigiCare’ by Quess to give it a

distinct and unique corporate identity in the Consumer Services space.

DigiCare is one of the leading after-sales service providers for product categories such as mobile phones, consumer electronics and consumer

durables in the customer lifecycle management space. It has an extensive service network across the country and provides end to end support

services with over 200 authorized service centers and has a network of 80 walk-in centres. It has strong relationships with leading smart phone

makers and consumer durable companies with over 2 millon repairs annually.

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DigiCare generated a revenue of Rs 191 cr in FY17 with a work force of over 1,400 professionals. This company has exhibited 20% CAGR over the

last two years. The acquisition gave Quess a strategic ent ry into the mobile and consumer durable break-fix and repairs market across India and

has complemented the company’s offering in the Customer Lifecycle Management (CLM) space.

Other key highlights:

Growth story, industry leader, & GST: One has seen a drastic change in Quess as a company. What started out as just an HR-outsourcing

company, today caters to multiple non-core business requirements of corporates. It continues to grow in its existing group of companies, while

adding new companies wherever it sees opportunities. In the organised sector, Quess is the industry leader in most of the segments it which it

operates. The organic sector makes up only 20-30% of the overall industry. However, with the introduction of GST, unorganised players are expected

to face problems, eventually increasing the share of the organised players. This, coupled with the fact that the Government is inclined to introduce

changes with regard to skill development and labour law reforms, are all expected to work in the company’s favour. The management targets 20%

organic growth.

Successful track record of inorganic and organic expansion: Quess has a track record of successful acquisitions, which have been key enablers

for the company to diversify into new service lines and geographies, as well as drive revenue growth and profitability. Quess has made successful

acquisitions and grown inorganically by extracting value from the acquired companies. But at the same time, it has also grown organically. We

believe Quess has tremendous growth potential, given India’s low penetration of ~0.5% working population, much lower than the global average.

Recruitment and regulatory expertise domain understanding: Over the years, Quess has developed considerable expertise in recruiting large

pools of qualified candidates suited to client requirements. Quess has also acquired substantial knowledge of labour laws and regulations applicable

across various states in India, as well as overseas. This enables it to effectively address regulatory issues encountered by clients.

Clients retention: Established client relationships, leading to recurring business Quess has over the years established long-term relationships with

its clients, leading to recurring business. The high client retention levels reflec t the value provided by Quess’ services as well as the company’s

ability to deliver in accordance with client requirements. Such long term, established relationships have helped the company grow with client needs,

increase its market share, and reduce the revenue uncertainty associated with the short-term nature of most of its client contracts.

Changing industry trends: With newer technologies coming up and the rising costs associated with training and development, skills upgradation,

etc. companies are choosing to outsource non-core organisational work to professionals. Thus, reducing the costs related to training of employees,

HR related activities, etc. This is where companies like Quess step in. While Quess has already invested in the required technology and digital

platforms, they can service multiple clients through these existing channels. This way with existing fixed costs, they can ac hieve economies of scale.

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View & valuation:

Quess has posted ~44% revenue cagr over FY13-18. EBITDA has witnessed 50% CAGR over the same period. Company continues to grow with

organic and Inorganic routes. Net profit has grown at faster speed at 79% CAGR over FY13-18. PAT margin has seen robust 330 bps expansion

to 5% in FY18. In the past few years, company has made 22 acquisitions and investments. Over the same period, Quess has acquired companies

at much lower valuations and then turned around very good. Recently also, company acquired Monster Business and entered into job seeking

portal segment. Although acquired operations are running into loss, but the deal has been done at such a low valuations of ~0.6x EV/Revenue.

We expect continuous margin improvement from each of these segments, led by turnaround in recent acquired companies and cost rationalisation

measures. We have taken 70 bps margin expansion over FY18-20E. Strong revenue growth and superior margin mix would lead to stellar ~38%

PAT CAGR over the same period. Given the robust balance sheet, strong return ratios, expansion in margin and strong revenues visibility, stock

deserves to trade at premium valuations. Quess trades at ~17.5x FY20E EV/EBITDA and ~25x FY20 EPS. We value the company at ~23x FY20E

EV/EBITDA and 32x PE, to arrive to target price of Rs 1040. We recommend BUY on Quess at CMP of Rs 789 and add on dips to Rs 725 with TP

of Rs 1040 over the next 12-18 months.

We estimate ~27% revenue and ~38% PAT CAGR (adjusted for tax in FY18) over FY18-20E. The stock trades at ~25x FY20E earnings. We

recommend Quess as BUY at Rs 789 and add on dips to Rs 725 with TP of Rs 1040 over the next 4-6 quarters. Based upon ~32x FY20E EPS, we

have arrived to Rs 1040.

Key risks:

Economic risk: Demand for staffing and other business services is subject to the state of the overall economy. Pronounced softness in the

economy in India or in Quess’ other markets could therefore dampen demand for the company’s services. However, Quess is an outsourced service

provider and as such generally offers cost advantages to clients who would otherwise perform such work in-house. To this extent, an economic

downturn could lead to increased demand for the company’s services, mitigating general economic softness.

Competitive risk: The staffing business in particular is very competitive with low-entry barriers. Therefore, there are a large number of staffing

firms that often compete aggressively on costs. Quess’ quality of service, compliance with all relevant rules and regulations, and scale of operations

provide important competitive advantages relative to such low-cost competitors. However, if competition in the organised sector intensifies and

leads to price wars, Quess’ growth and profitability could be affected.

M&A-related risk: Finally, M&A has been a key element of Quess’ growth strategy. The company has entered new bus iness lines and geographies

through strategic acquisitions, and intends to continue with such selective acquisitions. Although the company has a successful track record of

turning around acquisitions, any large M&A activity in the future may bring with it associated risks.

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Page

Revenue Trend

Source: Company, HDFC sec Research, ̂9M, *15M

1001 1006

25673435

4157

6167

8230

9928

500

1500

2500

3500

4500

5500

6500

7500

8500

9500

10500

FY13 FY14^ FY15* FY16 FY17 FY18 FY19E FY20E

EBITDA & PAT Trend

Source: Company, HDFC sec Research, *15M

133171

222

355

483

637

70 88 113

310 330

470

0

100

200

300

400

500

600

700

FY15* FY16 FY17 FY18 FY19E FY20E

EBITDA PAT

FY18 Segmental Revenue


46.7

30.3

16.7

6.4

People &

Services

GTS

IFM

IAM

%

FY18 Segment-wise EBIT


40.3

35.0

20.2

4.5

People &

Services

GTS

IFM

IAM

%

14

Page

People & Services Revenue

GTS Revenue

Source: Company, HDFC sec Research, ̂ 9M, *15M

622 619

1404

1950

2345

2878

3511

4091

500

800

1100

1400

1700

2000

2300

2600

2900

3200

3500

3800

4100

4400


269 262

737922

1183

1868

2578

3114

250

500

750

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250


15

Page

Income Statement (Consolidated)

As of March (Rs Cr) FY16 FY17 FY18 FY19E FY20E

Net Revenue 3435 4157 6167 8230 9928

Growth (%) 33.8 21.0 48.3 33.5 20.6

Operating Expenses 3270 3935 5812 7747 9290

EBITDA 171 222 355 483 637

Growth (%) 29 30 60 36 32

EBITDA Margin (%) 5.0 5.3 5.7 5.9 6.4

Depreciation 16 27 75 83 92

EBIT 155 196 280 399 545

Other Income 7 15 57 40 54

Interest 31 47 75 79 72

PBT 124 164 261 361 528

Tax 36 52 -48 29 47

RPAT 88 113 310 330 470

Growth (%) 26 28 175 7 42

EPS 7.0 8.9 21.3 22.7 32.3


Balance Sheet (Consolidated) As At March (Rs Cr) FY16 FY17 FY18 FY19E FY20E

SOURCE OF FUNDS

Share Capital 113 127 146 146 146

Reserves 243 709 2315 2638 3075

Shareholders' Funds 356 836 2461 2784 3221

Long term debt 35 274 269 308 352

Short Term Debt 339 456 698 588 513

Long Term Provisions & Others 43 156 254 266 268

Total Source of Funds 773 1723 3683 3955 4363

APPLICATION OF FUNDS

Net Block 44 50 234 246 244

Goodwill 202 379 1096 1096 1096

Intangibles 6 8 303 303 303

Non-current Investment 4 298 90 90 90

Long Term Loans & Advances 90 102 122 153 175

Total Non Current Assets 346 837 1845 1888 1907

Inventories 2 6 8 23 27

Trade Receivables 405 447 921 1145 1360

Cash & Equivalents 110 459 836 994 1282

Other Current Assets Incl Invmnts9999 329 446 822 839 877

Total Current Assets 846 1358 2587 3002 3545

Trade Payables 67 63 148 238 275

Other Current Liab & Provisions 405 486 1058 1164 1277

Total Current Liabilities 451 519 1098 1281 1441

Net Current Assets 396 839 1511 1743 2127

Total Application of Funds 773 1723 3683 3955 4363


16

Page

Cash Flow (Consolidated) As of March (Rs Cr) FY16 FY17 FY18 FY19E FY20E

Reported PBT 124 164 261 361 528

Non-operating & EO items -7 -15 -57 -40 -54

Interest Expenses 31 47 75 79 72

Depreciation 16.0 27 75 83 92

Working Capital Change 67.3 32 47 -170 -181

Tax Paid -36.0 -52 48 -29 -47

OPERATING CASH FLOW ( a ) 257 202 450 284 409

Capex -59 -25 -211 -95 -90

Free Cash Flow 198 177 239 189 319

Investments -189 -469 -636 -31 -22

Non-operating income 7.4 15 57 40 54

INVESTING CASH FLOW ( b ) -241 -478 -790 -85 -58

Debt Issuance / (Repaid) 72.0 360 93 51 46

Interest Expenses -31.0 -47 -75 -79 -72

FCFE 239 491 256 161 293

Share Capital Issuance 88 13 19 0 0

Dividend 0 0 0 -17 -43

FINANCING CASH FLOW ( c ) 128.6 327 36 -45 -68

NET CASH FLOW (a+b+c) 144.9 51 -304 153 282


Key Ratios

Key Ratios (%) FY16 FY17 FY18 FY19E FY20E

EBITDA Margin 5.0 5.3 5.7 5.9 6.4

EBIT Margin 4.5 4.7 4.5 4.9 5.5

APAT Margin 2.6 2.7 5.0 4.0 4.7

RoE 29.0 18.9 18.8 12.6 15.7

RoCE 31.8 15.7 15.6 11.6 13.8

Solvency Ratio

Net Debt/EBITDA (x) 1.5 1.2 -0.2 -0.7 -1.0

Net D/E 1 0 0 0 0

Interest Coverage 5 4.2 3.7 5.1 7.6

PER SHARE DATA

EPS 7.0 8.9 21.3 22.7 32.3

CEPS 9.2 11.0 26.4 28.4 38.6

BV 31.4 65.9 169.1 191.3 221.4

Dividend 0.0 0.0 0.0 1.0 2.5

VALUATION

P/E 113 88.9 37.1 34.8 24.4

P/BV 25 12 4.7 4.2 3.6

EV/EBITDA 65 50 31.4 23 17.5

EV / Revenues 2.7 2.2 1.5 1.1 0.8


17

Page

Ratings Chart

R E T U R N

HIGH

MEDIUM

LOW

LOW MEDIUM HIGH

RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

BLUE LOW RISK - LOW RETURN STOCKS

IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE

IF RISKS MANIFEST PRICE CAN FALL 15%

& IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 15%

IF INVESTMENT RATIONALE

FRUCTFIES PRICE CAN RISE BY 20% OR

MORE

YELLOW MEDIUM RISK - HIGH RETURN STOCKS






FRUCTFIES PRICE CAN RISE BY 35% OR

MORE

RED HIGH RISK - HIGH RETURN STOCKS







OR MORE

18

Page

Price Chart

# Explanation of Red-flag Price level: If stock prices starts sustaining below red-flag level, the premise of the investment needs to be reviewed. Risk averse

investors should exit the stock and preserve capital. The downside of following red-flag level is that if the price decline turns out to be temporary and if

it recovers subsequently you won’t be able to participate in the gains.

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

RECOMMENDATION HISTORY

Date Price Reco Target

13 Mar 2017 Rs 671 Buy Rs. 840

15 Oct 2018 Rs 789 Buy Rs 1040

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.

19

Page

Fundamental Research Analyst: Kushal Rughani ([email protected] ) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 F ax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected]. Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600

Disclosure: I, (Kushal Rughani, MBA), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research repo rt accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Re search Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Repor t. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guar anty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purpose s only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity wh o is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any re gistration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or pric e, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in th is mail and/or its attachments. HSL and its affiliated company (ies), their directors and employees may; (a) from time to time, have a long or s hort position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company (ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damage s sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the di vidend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and fina ncial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may dea l in other securities of the companies / organizations described in this report.

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