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TeamLease Services
Asset-light model enables RoE trajectory
March 21, 2018
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
Co
mp
any
Re
po
rt Madhu Babu
[email protected] +91-22-66322300
Rating Accumulate
Price Rs2,111
Target Price Rs2,450
Implied Upside 16.1%
Sensex 32,997
Nifty 10,124
(Prices as on March 20, 2018)
Trading data
Market Cap. (Rs bn) 36.1
Shares o/s (m) 17.1
3M Avg. Daily value (Rs m) 99
Major shareholders
Promoters 43.71%
Foreign 24.64%
Domestic Inst. 15.94%
Public & Other 15.72%
Stock Performance
(%) 1M 6M 12M
Absolute (1.8) 31.4 118.1
Relative 0.3 29.6 106.4
How we differ from Consensus
EPS (Rs) PL Cons. % Diff.
2019 55.3 60.5 -8.6
2020 70.0 86.5 -19.1
Price Performance (RIC: TLSV.BO, BB: TEAM IN)
Source: Bloomberg
0
500
1,000
1,500
2,000
2,500
3,000
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-1
7
Jan
-18
Mar
-18
(Rs)
Flexi staffing business in India appears to be in a sweet spot led by multiple dynamics playing in favour of the sector. Scope for increase in formal employment in the country (currently at 14% of overall employee base) as well as increased share of outsourced employee base within the formal employee base are the key macro drivers. While increased hiring of contract employees in select industries (BFSI, Retail, eCommerce, Logistics, Telecom) has been the key growth driver for flexi staffing companies over FY13-FY17, we believe FY18-FY20E could see a pick-up in Manufacturing vertical as well. Implementation of GST would be the key driver for traction of organized flexi staffing companies in the Manufacturing vertical (owing to ability to take input tax credit). GST implementation would also reduce the pricing advantage of unorganized players and hence result in market share gains for organized staffing companies.
TeamLease is the leader in flexi staffing business in India and competes neck-to-neck with Quess Corp. TeamLease’s associate count in general staffing stands at 171,000 as on Q3FY18 (v/s Quess’ general staffing headcount at ~150,000). Led by market share gains in favour of organized players, we expect TeamLease to deliver 16/36/22% Revenues/EBITDA/PAT CAGR over FY17-FY20E. We estimate EBITDA margins at 1.8/2.1/2.3% for FY18/FY19/FY20E. Productivity improvement (Associate/Core employee ratio) and improving mix of business would drive margins. Margin improvement over FY18-FY20E would be the key driver for earnings trajectory. Our EPS estimates are at Rs42/55/70sh for FY18/FY19/FY20E. Owing to higher share of business from general staffing, TeamLease’s business remains asset-light. Debtors (including unbilled revenue) for TeamLease stand at 28 days for FY17 (v/s 73 days for Quess Corp and 68 days for SIS India). Hence, despite lower margins (v/s Quess and SIS), TeamLease has a similar ROE profile as its peers owing to lower WC cycle. Teamlease currently trades at 30x FY20E EPS. We value TeamLease at 35x FY20E EPS (v/s 31x Sep 19E EPS earlier). Our TP has been increased by 30% to Rs2450/sh led by P/E upgrade. Retain “Accumulate”.
Key financials (Y/e March) 2017 2018E 2019E 2020E
Revenues (Rs m) 30,418 35,959 41,468 47,668
Growth (%) 21.4 18.2 15.3 15.0
EBITDA (Rs m) 442 641 861 1,110
PAT (Rs m)* 663 722 945 1,196
EPS (Rs) 38.8 42.2 55.3 70.0
Growth (%) 167.4 8.9 31.0 26.5
Net DPS (Rs) — — — —
* Nil tax rates owing to Section 80JJAA benefits led to higher PAT
Profitability & Valuation 2017 2018E 2019E 2020E
EBITDA margin (%) 1.5 1.8 2.1 2.3
RoE (%) 19.1 17.3 18.9 19.7
RoCE (%) 19.2 17.5 18.9 19.7
EV / sales (x) 1.1 1.0 0.8 0.7
EV / EBITDA (x) 77.9 54.0 39.6 29.9
PE (x) 54.4 50.0 38.2 30.2
P / BV (x) 9.5 8.0 6.6 5.4
Net dividend yield (%) — — — —
Source: Company Data; PL Research
March 21, 2018 2
TeamLease Services
HR Solutions market at a mature state in Developed economies: Flexi staffing
business has reached a mature stage in developed economies (US, UK, France,
Germany) growing at 1.5-2x the GDP of the respective countries. While
developed countries (US, UK, Germany) have a GDP growth of 2-3%, flexi
staffing majors in these countries grew at 4-6% organically. Organic revenue
growth of Adecco Group (largest company in the industry) stood at 6/4/4% for
CY17/CY16/CY15, respectively. The Adecco group derives 85% of business from
developed countries. As on CY17, the largest companies in the global flexi
staffing business are Adecco Group (Headcount of 7,00,000 employees with core
employee headcount at 34,000), Randstad (699,000 associate employees with
core headcount of 38,000 employees) and Manpower Group (Associate count at
6,00,000 employees with core employee strength at 28,000). While global
companies had EBITDA margins in the range of 3.8-4.5%, their ROE stands in the
band of 15-20%. Funding of salaries of associates is a characteristic of this
business with most of global players having receivable days of 48-55 days.
Global companies also have leveraged balance sheets with Net Debt/EBITDA in
the range of 0.8 to 1x for CY17. Owing to slower revenue growth, these
companies have been rewarding shareholders with higher dividends as well as
buybacks.
India remains in a sweet spot for Flexi staffing business: Unlike developed
economies, flexi staffing appears to be in a sweet spot in India as growth is likely
to be driven by multiple catalysts - Increasing share of formal employment (14%
as on FY17) and market share gains of organized flexi staffing companies. Clients
across verticals have increased focus on compliance post implementation of GST
(As service taxes need to be remitted to government for clients to take input tax
credit). Unorganized staffing companies are currently 20-40% cheaper than
organized companies owing to non-compliance (Service tax and Statuary
deductions like PF, ESIC are not remitted properly to government). GST
implementation would partially close the loophole which would reduce the
pricing advantage of unorganized players. Organized flexi staffing employee
strength in India stands at 1.8mn as on FY17 and is expected to reach 4.5mn by
FY21 which represents 25% CAGR over FY17-FY21. Leading players in the pack
like Quess Corp, TeamLease, Adecco India, Randstad India and InnovSource
would be the key beneficiaries and are poised to deliver double-digit revenue
growth over FY18-FY20E. We expect TeamLease to deliver 16% revenue CAGR
over FY17-FY20E led by market share gains from unorganized companies.
ROE remains the key focus metric in this business: TeamLease/Quess/SIS have
EBITDA margins of 1.6/5.4/4.9%, respectively, as on FY17. Debtors, including
unbilled days for TeamLease/Quess/SIS, stand at 28/73/68 days, respectively,
for FY17. Despite higher margins of Quess/SIS (v/s TeamLease), ROE profile of all
the three companies remain in a similar band owing to lower working capital
cycle of TeamLease. TeamLease is predominantly focussed on General Staffing
(92% of total revenues) and has very low funding exposure in its staffing
business (~28% of employee salaries in General staffing is funded). Hence,
despite TeamLease’s EBITDA margins being lower than peers, ROE profile of
March 21, 2018 3
TeamLease Services
TeamLease remains in-line with peers owing to leaner balance sheet. For FY17,
TeamLease, Quess Corp, SIS have an ROE of 19/19/18.3%. We believe that ROE,
ROCE and Receivable management (Any spike in bad debts from funding
business can be a very big risk in this business) are key metrics in the business
and TeamLease scores well on all the fronts.
Growth trajectory enables Indian Flexi Staffing companies trade at significant
premium: Global staffing companies (Adecco, Randstad, Manpower) have
delivered tepid absolute returns over the past three years. These companies
trade at 12-14x CY20E EPS with a ROE profile of 15-20%. On the contrary, Indian
Staffing had a dream run on the bourses and with P/E multiples overshooting to
new highs. TeamLease, Quess Corp, SIS stocks are up 117/50/42% over the past
one year. TeamLease trades at 30x (FY20E EPS based on our estimates) almost
at par with Quess Corp (trades at 28x FY20E EPS based on Bloomberg
estimates). Promise of secular revenue growth has aided re-rating. We note that
Section80JJAA of Income tax act have enabled these companies to enjoy almost
negligible tax rate over FY18-FY20E and hence, aiding earnings and ROE
trajectory. Our view is that stringent and archaic labour laws have hampered job
creation in India and hence labour reforms can be the next catalyst for traction
in the sector. We like TeamLease owing to its leadership position in General
staffing, asset light model, strong Technology platform which aids in non-
linearity (Associate/Core employee ratio). Retain Accumulate with target price
of Rs2,450/sh (35x FY20E EPS).
March 21, 2018 4
TeamLease Services
Industry Structure
Market share gains in favour of organized players to remain key growth driver
Overall labour force in India is expected to grow from 450mn in FY17 to 500mn in
FY19 which represents 5.4% CAGR. Of the total 450mn workforce in India, only 60mn
are in the formal sector (13.3% of total workforce). The remaining 390mn labour
force is in the informal sector. We note about 85% of India's workers are in the
informal sector with particularly high levels of informal workers evident in the
Manufacturing and Construction industries.
We see scope for higher growth in formal employment over FY17-FY20E with labour
reforms, increased compliance driving Industries towards formalization. Organized
flexi staffing industry has ~1.8mn employees as on CY17. This is expected to reach
4.5mn employees by CY20 led by increased acceptance of flexi staffing and market
share shift in favour of organized players. Key drivers for revenue growth for
organized flexi staffing companies are market share gains from unorganized players
and GST implementation reducing the price differential between organized and
unorganized players.
Exhibit 1: Trends in Labour force in India
Source: Company Data, PL Research
March 21, 2018 5
TeamLease Services
“Globally about 5% to 15% of a country's workforce tends to get outsourced and
100% of that is in the formal space. In the Indian context, while a larger
percentage, nearing 30% is outsourced, only 1.5% of that is in the formal space
that players like us are in, where all compliances are comprehensively driven. So
there is a large element of outsourcing that happens through informal small
players across the country. So, I think, clearly, where we are coming at it is in
saying that, with the various government policies of labour laws becoming simpler,
the element of enforcement becoming better, coming online and so on, will drive
the element of formalization. So, even if we look at the growth of the last few
years for us, it doesn't reflect the element of the economic growth rate or the
element of job creation at those rates. It's a combination of new industries coming
in, existing companies increasing the share of outsourcing, the aspect of some
element of formalization happening with the outsourcing that various companies
have” TeamLease CEO Mr Ashok Reddy in Q3FY18 concall.
“I mean working population is about 480mn people and if we look at all of us in the
organized staffing space account for about 12 lakh to 15 lakh. So we are like a
sliver on the overall opportunity at this point in time. I mean 1.5% of the
outsourcing is in the formal space, 98.5% is in the informal space” TeamLease CEO
in Q3FY18 concall.
India has the second largest labour market in the world but has the lowest
penetration for organized flexi staffing. Formalization of workforce and increased
traction of organized flexi staffing companies would drive volume growth (employee
addition). We expect organized flexi staffing employee base to reach 4.5mn by FY20
from 1.6mn as on FY17.
Exhibit 2: Flexi staffing employees in India
1.2
1.6
4.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
FY12 FY17 FY20E
(mn
peop
le)
Source: Company Data, PL Research
March 21, 2018 6
TeamLease Services
According to Indian Staffing Federation (ISF), Maharashtra is likely to be country’s
leading state in generating flexi jobs in FY18. This would be followed by Karnataka
and Tamil Nadu.
Exhibit 3: Geographical Breakup of Flexi Staffing Headcount in India
Maharashtra 17.7%
Karnataka 11.3%
Tamil Nadu 10.2%Uttar Pradesh
7.9%
Haryana 7.2%
Telengana 6.8%
Delhi 6.0%
Gujarat 5.2%
Andhra Pradesh 5.1%
West Bengal 4.3%
Source: Company Data, PL Research
Major Industries of operation
Retail, Manufacturing, BFSI and Telecom are the major verticals which deploy flexi
staffing employees. New sectors such as e-commerce and logistics have created
fresh demand for flexi staffing in India. However, post GST implementation,
manufacturing (which has large proportion of unorganized players) is likely to show
higher adaption of flexi staffing.
Exhibit 4: Vertical Break up of Flexi Staffing Headcount
Retail & Cons24.3%
Mnaufacturing 19.5%
Others 19.3%
BFSI9.0%
Telecom & ISP 6.8%
FMCG6.1%
Agri/Dairy 5.4%
IT4.7%
Auto 3.9%
E-comm 1.0%
Source: Company Data, PL Research
March 21, 2018 7
TeamLease Services
Flexi Staffing Industry remains fragmented in India
Flexi Staffing Industry is fragmented, with top players having only 20% market share.
Remaining 80% is fragmented with small and mid-sized companies which are
predominantly regional players. As on Q3FY18, Quess Corp is the largest player in the
Flexi staffing Industry with associate Headcount of ~240,000 employees. The largest
players on the associate count front in staffing are Quess Corp, TeamLease, Adecco,
Randstad and InnovSource.
Exhibit 5: Associate Headcount of Global companies
243,000
178,915
85,000 65,000 65,000 58,000
-
50,000
100,000
150,000
200,000
250,000
300,000
Quess Teamlease Adecco India Randstand (India)
Manpower India
InnovSource
Associate Headcount
Source: Company Data, PL Research, Quess headcount includes Facility management, IT staffing
Dynamics of Flexi staffing Industry
In the flexi staffing employment model, people are hired by a staffing agency and
then hired out to perform work under the supervision of the user company. The flexi
staffing industry operates on the basis of a tri-party agreement between the staffing
intermediary, flexi-worker and client/user organisation. The flexi-workers are hired
by the flexi staffing agencies, work in the facility and under the direct supervision of
the client companies, but receive salary from the flexi staffing agencies. In this
model, the hired flexi-staff remains in the employment of the staffing agency and no
direct employment relationship between the flexi-staff and the user company is
created.
March 21, 2018 8
TeamLease Services
Exhibit 6: Flexi Staffing Industry Model
Source: Company Data, PL Research
Exhibit 7: Flexi Staffing Model Frame work at Teamlease
Source: Company Data, PL Research
March 21, 2018 9
TeamLease Services
Services provided in the Staffing Industry value chain
The staffing solution company helps companies across to outsource activities that
are non-core to their business function. Functions outsourced include Recruitment,
Payroll, Benefits Management, HR Compliance etc.
Exhibit 8: HR Solution industry structure
Source: Company Data, PL Research
Flexi staffing companies offer a range of services which include HR Consulting, Flexi
Staffing and Permanent Recruitment. Teamlease is the largest player in General
staffing with ~178,000 employees as on Q3FY18 and is well poised to ride the growth
potential in organized flexi staffing Industry.
HR Solutions industry
Permanent recruitment
Search
Recruitment
BPO
Temporary staffing
Professional IT
General
Other HR solutions
Others include - Payroll &
compliance, training jobs, portals, etc
March 21, 2018 10
TeamLease Services
Investment Thesis
Implementation of GST to drive market share for organized players
Indian Flexi staffing industry is fragmented with unorganized and small and regional
players having ~80% of the market. The largest players in the General staffing
business are TeamLease, Quess corp, Addeco India, Randstad India, InnovSource, etc.
which together account for only 20% of the total market.
The unorganized staffing companies are 20-35% cheaper compared to organized
flexi staffing companies owing to non-remittance of services taxes (collected from
clients) and non-remittance of statuary deductions (PF, ESIC etc). Our channel checks
suggest rampant presence of regionalized unorganized players which offer staffing
services 20-40% cheaper compared to organized players.
Exhibit 9: Per month Salary structure of an associate in a Organized staffing company and Unorganized Staffing company (Pre and Post GST)
Fig in Rs Organized Staffing Unorganized Player
Pre GST Post GST Pre GST Post GST
Amount Billed to Client per month per employee (Rs) 21,974 22,035 15,700 18,652
Services Tax (Pre GST 15%, Post GST-18%) 3,296 3,361
2845
Amount available with Staffing Company (Net Revenue of staffing company) 18,678 18,673 15,681 15,807
Mark up per associate per month (3.5% of Gross Salary) 632 631 530 535
Gross Salary paid to the Employee per month 18,046 18,042 15,151 15,272
Break-up of Gross Salary
a) Basic Salary ( 40% of Gross) 7,218 7,217
PF Employee Contribution (12% of Basic) 866 866
Still can evade
PF Employer contribution (12% of Basic) 866 866
Still can evade
b) Total PF 1,732 1,732
ESIC
Contribution by company ( 4.8% of gross salary) 866 866
Still can evade
Contribution by employee ( 1.8% of gross salary) 325 325
c) Total ESIC 1,191 1,191
d) Others Allowance( HRA, Medical, Allowances, Statutory Bonus) 7,904 7,902
Take Home Salary Per month of the employee ( a+ d) 15,123 15,119 15,151 15,272
Take Home Salary of employee as a % of amount billed to client 68.8% 68.6% 96.5% 81.9%
Source: Company Data, PL Research
Implementation of GST would has reduced the attractiveness of unorganized players
as these companies would have to remit GST to government in order for the clients
to avail input tax credit. Hence, this has partially reduced the pricing advantage
enjoyed by unorganized players. For eg: An unorganized staffing company can
operate at 28% lower billing rate to client (compared to organized player) and still
promise the employee a relatively higher salary in the pre-GST era. Post GST, the
March 21, 2018 11
TeamLease Services
pricing discount (Unorganized v/s Organized) would reduce to 15% as these
companies would have to remit GST.
However, we believe that unorganized players still are at a pricing advantage owing
to non-payment of statuary deductions (PF, ESIC etc). India has a high amount of
statutory deductions as a percentage of CTC for employees at the lower end of the
salary band. We believe that government reducing the mandatory deductions can
be a shot in the arm for the organized staffing sector.
While the average monthly salary for employees staffed by TeamLease is ~Rs21,500
per month, company makes a mark-up of 3.5% which translates to Rs755 per month
as on Q3FY17. TeamLease mark-up per associate came at Rs755 per employee as on
Q3FY18 (v/s Rs691 per employee in Q3FY17). Management guided that mix shift of
business has been aiding the mark-up improvement.
Exhibit 10: Mark-up realization per associate per month (Rs) of Teamlease
657665
680688
712 712
691
710
729735
755
630
650
670
690
710
730
750
770
1QFY
16
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
4QFY
17
1QFY
18
2QFY
18
3QFY
18
Source: Company Data, PL Research
We believe that General staffing business has low pricing power owing to
fragmented nature of the industry.
“We are price takers given that 98.5% of our market is informal and kind of has
hidden revenues, with which they can play to the client mandate. But having said
that, if we look at what we said in the past and continuing to stay on track for, our
average realization has improved about 5-6% YoY. A combination of some
renegotiation, some of this being on variable pricing models and hence, when CTC
goes up, you get a little uptick on realization, some of them being new contracts.
So combination of multiple things that has been driving that 5-6%. And I think, we
will continue to at least make our plans at this point in saying that we continue to
drive that 5-6% realization growth, and then play to volumes and productivity to
improving the margins.” TeamLease CEO in Q3FY18 concall.
March 21, 2018 12
TeamLease Services
Labour reforms could be the biggest catalyst for formalization of workforce
India's notoriously rigid labour laws are the leading cause for a large presence of
Informal employment in the country. Labour falls under the concurrent list of the
constitution, which implies that both the Centre and the States can form laws on it
and neither has been miserly about this. When combined, each state ends up with
over 200 different labour laws. These disincentivise firms from growing beyond a
certain employee count.
For instance, the Trade Unions Act of 1926 requires firms with seven or more
workers to form trade unions. The Factories Act of 1948 mandates
manufacturing units with 10 or more workers to have several working hour
limits and workplace conditions that become stricter with more workers.
The most burdensome of all is the Industrial Disputes Act (IDA) of 1947, which
covers all industrial disputes and makes it almost impossible for firms with 100
or more workers to fire anyone. Establishments require permission from the
labour department to lay anyone off and such permissions are rarely given
even if the firm is unprofitable.
Therefore, firms with six or less employees have the most labour flexibility. As
expansion of firms comes with high legislative costs in India, it is rational for
them to remain small. This is why 84% of manufacturing employment is
restricted to micro and small enterprises in stark contrast with other developing
countries (46% for South Korea and Thailand, 27% for Malaysia and 25% for
China).
We believe implementation of labour reforms are the key to drive growth in the flexi
staffing sector. Consolidation of 44 labour laws into four laws is still pending owing
to opposition in the parliament.
March 21, 2018 13
TeamLease Services
Exhibit 11: Labour laws impact on India job creation
Source: Company Data, PL Research
Exhibit 12: Labour laws which require reforms
Source: Company Data, PL Research
March 21, 2018 14
TeamLease Services
To protect the interest of stakeholders and to provide security to labour, there are
many labour laws in India. After repealing four labour laws, the Centre was working
on amalgamating 38 more outdated Acts into four codes to bring in simplicity and
rationalism in their implementation.
Labour Code on Wages: This code will supercede following four Acts-
The Minimum Wages Act, 1948
The Payment of Wages Act, 1936
The Payment of Bonus Act, 1965
The Equal Remuneration Act, 1976
Labour Code on Industrial Relations: It will supercede following three labour laws-
Trade Union Act, 1926,
the Industrial Employment (Standing Order) Act, 1946; and
The Industrial Disputes Act, 1947
Labour Code on Social Security: This code will be in place of 15 labour Acts-15
Labour Laws including EPF Act, ESI Act, Maternity Benefit Act, Payment of Gratuity
Act, Employees Compensation Act, Unorganised Social Security Act and various
Welfare Cess /Fund Acts).
Labour Code on occupational safety, health and working conditions: Rest 16 Acts
will be repealed by this Act, which can be listed out after the bill comes.
We believe that government’s ability to drive labour reforms would be the key to job
creation in India. With Automation posing challenge to low-end jobs, India stares at
a risk of high unemployment unless it acts swiftly. In the recent budget, the
government also aims to extend Fixed Term Contract employee hiring to various
other sectors.
March 21, 2018 15
TeamLease Services
Teamlease’s growth trajectory remains strong over the medium term
Among the organized General staffing business, TeamLease remains the largest
player with Quess Corp being the nearest competitor. As on Q3FY18, TeamLease has
171,373 employees in the General staffing business (includes NETAP). Quess Corp is
the second largest player in the General staffing business with ~145,000 employees
as on Q2FY18.
Exhibit 13: TeamLease Associate count in General staffing
49,82061,021
72,49181,022
94,647
120,434
149,902
171,373
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
3Q
FY
18
Source: Company Data, PL Research* Includes NETAP
Exhibit 14: Quess Corp Associate strength in General Staffing
1531331128
44146 4665263541
82170
110000
150000
020000400006000080000
100000120000140000160000
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
3Q
FY
18
Source: Company Data, PL Research
Exhibit 15: TeamLease YoY growth in General staffing revenues
21.0%
11.1%
25.1%
19.0% 20.4%18.2%
7.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
Source: Company Data, PL Research
Exhibit 16: Quess Corp YoY growth in General staffing business
48.7%
29.3%
8.1% 5.8%9.2%
17.2%
25.4%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
Quess YoY revenue growth
Source: Company Data, PL Research
March 21, 2018 16
TeamLease Services
Aided by strong demand from end user clients in Retail, BFSI, e-commerce,
Logistics, TeamLease Associate count has grown at a solid 20% CAGR over FY11-
FY17. Over the same period, Quess corp has grown at 38% CAGR over FY11-
FY17. We believe Quess Corp has shown higher aggression on the growth front
(v/s TeamLease). Quess also has a higher exposure to funding in the General
staffing business.
NETAP driving overall Associate count for TeamLease
We note that TeamLease Associate headcount in General staffing(ex-NETAP) grew a
modest 5.7% YoY in Q3FY18. We believe that this is owing to insourcing in select
clients and GST-led disruption weighing on hiring by select clients. Select top
accounts have also seen significant weakness on a sequential basis. While General
staffing Headcount has been modest, TeamLease has seen a strong surge in NETAP
headcount. Company also mostly doubled the NETAP headcount on a YoY basis. As
on Q3FY18, NETAP headcount stood at 40,423 employees (v/s 19,427 employees in
Q3FY17).
Exhibit 17: Associate count in General Staffing (Ex-NETAP)
10
0,8
88
10
5,0
59
10
8,6
30
10
8,8
60
11
3,7
13
11
5,3
97
12
3,9
46
12
6,4
63
12
9,7
87
12
7,8
84
13
0,9
50
100,000
105,000
110,000
115,000
120,000
125,000
130,000
135,000
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
Source: Company Data, PL Research
Exhibit 18: YoY growth in General Staffing Headcount
12.7%9.8%
14.1%16.2%
14.1%
10.8%
5.7%
0.0%
5.0%
10.0%
15.0%
20.0%
1Q
FY
17
2Q
FY
17
3Q
FY
17
4Q
FY
17
1Q
FY
18
2Q
FY
18
3Q
FY
18
YoY growth in General staffing Headcount
Source: Company Data, PL Research
Exhibit 19: Headcount of TeamLease
Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18
General Staffing 113,713 115,397 123,946 126,463 129,787 127,884 130,950
Netap 14,155 17,787 19,427 23,439 28,051 32,615 40,423
Specialized Staffing Associate count - 1,103 1,261 1,251 1,423 1,631 5,910*
Total Outsourced 127,868 134,287 144,634 151,153 159,261 162,130 177,283
Core Employees 1276 1386 1406 1436 1467 1466 1632
Total Headcount 129,144 135,673 146,040 152,589 160,728 163,596 178,915
Source: x, Company Data, PL Research * Evolve acquisition added 4100 employees
We would like to keenly watch the Headcount addition trends of TeamLease over
the next few quarters to gauge the volume growth momentum in the business
March 21, 2018 17
TeamLease Services
Home-grown companies perform better in India (v/s MNC staffing majors)
The major players in developed countries in the organized staffing business are
Adecco, Manpower and Randstad. However, TeamLease and Quess Corp enjoy the
pole position in Indian Flexi Staffing business.
Large organized staffing players continue to enjoy robust growth aided by share
gains from unorganized players. Acquisitions also continue to be a key driver for
revenue growth in the sector. For eg: Quess revenues have grown at 32% CAGR
(FY11-FY17) aided by solid acquisition strategy.
Exhibit 20: YoY consolidated Revenue growth of listed peers
0.0%
50.0%
100.0%
150.0%
200.0%
FY13 FY14 FY15 FY16 FY17
Teamlease Quess Corp SIS
Source: x, Company Data, PL Research, Acquisitions have led to steep spike in Quess Revenue growth in FY15.
Exhibit 21: YoY revenue growth of Staffing majors in India
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
FY13 FY14 FY15 FY16
Randstand Adecco G4Secure Solutions Innov source
Source: , Company Data, PL Research* Randtstand India and Adecco India growth is represented in the above graph
Exhibit 22: Associate Headcount of staffing companies
243,000
178,915
85,000 65,000 65,000 58,000
-
50,000
100,000
150,000
200,000
250,000
300,000
Quess Teamlease Adecco India Randstand (India)
Manpower India
InnovSource
Associate Headcount
Source: x, Company Data, PL Research, Quess Headcount includes facility management, IT staffing and Industrial asset
March 21, 2018 18
TeamLease Services
Technology platforms can be a differentiator to drive non-linearity
Investments in Technologies remain crucial in the Staffing Business and this drives
non-linearity in the model and improve associate to Core Staff ratio. This helps the
business scale and drive non-linearity. For eg: TeamLease has developed in-house
software tools such as Associate Life Cycle System (ALCS), Candidate Life Cycle
System (CLCS) and Regulatory Life Cycle System (RLCS) platforms to manage
activities and processes relating to staffing business, permanent recruiting business
and regulatory consulting business, respectively. Associate to core employee ratio
stands at 203 for FY17 which is a marked improvement over FY16. TeamLease has
core employees at 1632 employee as on Q3FY18, of which, employees focused in
General staffing stand at 718 employees. Hence, with core strength of 718
employees, TeamLease is managing an Associate strength of 171,373 (General
staffing+ NETAP). This indicates a core employee productivity of 219 as on Q3FY18.
Exhibit 23: Associate to Core Employee ratio of TeamLease
149.0 151.0 152.0 154.0
165.0 166.0
203.0
100.0
120.0
140.0
160.0
180.0
200.0
220.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Company Data, PL Research
TeamLease’s Technology department has 60 employees and they focus on
continuously producing upgrades to various software applications and platforms.
Associate Lifecycle System (ALCS): ALCS is a Microsoft systems based technology
platform that drives TeamLease staffing business. ALCS platform provides
automation to the entire associate lifecycle process from onboarding Associate
Employees, to requesting relevant monthly information from clients, such as
incentives payable and leave of absences, to raising invoices, billing clients and
making collections to releasing monthly salary payments to our Associate
Employees.
March 21, 2018 19
TeamLease Services
Candidate Lifecycle System (CLCS): CLCS was developed principally for permanent
recruiting business. CLCS is a Microsoft systems based platform that automates the
candidate lifecycle from processing job requirements provided by clients, to
registering mandates, searching for matching candidates in database using artificial
intelligence, to sending profiles to clients, processing client shortlists of candidates,
tracking interviews and raising invoices in the case of permanent recruitment
candidates or migrating them to the ALCS system in the case of temporary staffing
candidates.
Regulatory Lifecycle System (RLCS): RLCS is a Microsoft systems based technology
platform designed for regulatory consulting business. The system has an embedded
store of all relevant labour laws in India and is designed to accept inputs of client
data, perform automatic audits of clients' regulatory compliance status and generate
reports.
Technology plays a key differentiator when managing operations in scale and we
believe large companies like TeamLease, Quess Corp, Adecco India are better
preferred on this front. We believe that non-linearity in Associate to core employee
ratio would be the key driver in margin expansion for TeamLease.
March 21, 2018 20
TeamLease Services
Margin Expansion remains a focus area for TeamLease
TeamLease has been showing a steady margin expansion over the past few
quarters led by expansion into Specialized Staffing (IT staffing and Specialized
Telecom staffing). While General staffing has low EBITDA margins (~2%), IT
staffing and Specialized Telecom staffing businesses have higher EBITDA
margins (10-12%). Management guided that key drivers for margin expansion
are higher value added services, mix shift to variable structure and traction in
specialized staffing and IT staffing business. TeamLease’s value-added services
include Self Service app which offers service which include attendance, sales
reporting, asset tracking, training and HRIS module.
Exhibit 24: EBITDA margin of TeamLease
0.7%
1.0%
1.7%1.5%
1.7%1.9%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1QFY17 2QFY17 3QFY17 1QFY18 2QFY18 3QFY18
EBIDTA margin (%)
Source: Company Data, PL Research
Exhibit 25: Segmental margins of TeamLease
1.4% 1.7% 2.1%
16.2%14.2%
10.1%
4.8%
-2.2%
3.7%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2QFY17 2QFY18 3QFY18
General Staffing Specialized Staffing HR Services
Source: Company Data, PL Research
March 21, 2018 21
TeamLease Services
For Q3FY18, TeamLease derived 92% of total revenues from General staffing, 6% of
revenues from Specialized Staffing Services and 2% of revenues from HR services.
The Specialized staffing business of TeamLease was scaled up by TeamLease through
acquisitions in FY17 and FY18 (Keystone, ASAP Infosystems and NichePro in IT
staffing and Evolve in Telecom Staffing Services). TeamLease has acquired Evolve
Technologies, a specialized player in staffing for Telecom vertical. The acquisition
would be consolidated effective November 2017. We believe that margin expansion
would be the key driver for earnings trajectory of Teamlease.
Exhibit 26: Revenue Break up of TeamLease as on Q3FY18
Staffing and allied services
92%
Specalized Staffing Services
6%
Other HR
Services
2%
Source: Company Data, PL Research
March 21, 2018 22
TeamLease Services
Low working capital compared to peers enables steady ROE
Margin trajectory of staffing companies remain company specific. Mix of business is
a key factor which is a determinant for the margins. Segments like IT staffing, Facility
management services, Industrial asset management enjoy have much higher margins
as compared to General staffing. Quess Corp enjoys superior margins (v/s
TeamLease) considering its revenue mix which includes IT staffing, Facility
Management Services, Industrial Asset management. General staffing contributes to
46% of total revenues to Quess Corp (v/s 92% of revenues derived from General
staffing for TeamLease). We note select players continue to remain loss-making at
the EBITDA level (Randstad India).
Exhibit 1: EBITDA margin of major players in the sector
FY12 FY13 FY14 FY15 FY16 FY17
TeamLease -2.2% -0.8% 0.78% 1.19% 1.02% 1.45%
Quess 4.19% 4.3% 3.96% 5.08% 4.78% 5.36%
SIS NA 4.7% 4.8% 4.5% 4.4% 4.9%
Unlisted FY12 FY13 FY14 FY15 FY16 FY17
InnovSource 4.43% 2.71% 3.27% 3.52% 4.45% NA
G4 Secure 5.9% 4.79% 4.85% 4.15% 3.32% NA
Adecco India 1.19% 0.68% 1.46% 1.33% 2.84% NA
Randstad -1.7% -0.7% -1.5% -2.2% -1.1% NA
Source: Company Data, PL Research
TeamLease has relatively lower working capital cycle: TeamLease’s Debtor
(Including unbilled) stands at 28 days for FY17. However, Quess Corp’s Debtor
(Including Unbilled) stands at 73 days for FY17. TeamLease’s business mix is
predominantly in general staffing and hence, less working capital intensive.
However, with acquisitions over the past one half year focused on specialized
staffing, the company has seen a gradual increase in its working capital cycle.
Specialized staffing segments enjoy a higher EBITDA margins at ~10-14% as
compared to General staffing EBITDA margins of 1.5-2%.
Exhibit 27: TeamLease Working Capital Cycle
FY13 FY14 FY15 FY16 FY17
Debtors 18 14 15 18 22
Unbilled 6 4 3 9 6
Total Debtors Including unbilled 24 18 18 27 28
Payable days 16 11 10 17 16
WC cycle 8 7 8 10 12
Source: Company Data, PL Research
March 21, 2018 23
TeamLease Services
Exhibit 28: Quess Working Capital Cycle
15MFY15 FY16 FY17
Debtors 42 43 39
Unbilled 27 31 34
Total Debtors+ Unbilled 69 74 73
Payable days 12 20 19
Working capital cycle 57 54 54
Source: Company Data, PL Research
ROE Metrics of staffing Companies: Despite TeamLease having much lower EBITDA
margins in comparison to Quess Corp and SIS, all the companies have a similar ROE
profile as on FY17. This is owing to lower working capital cycle of TeamLease
compared to peers. We note that ROE profile has remained at a narrow range
across vendors. Lower effective tax rates owing to section 80JJAA benefits is
boosting ROE trajectory for companies. Our view is that ROE, ROCE and ROIC are
the key metrics to watch in the staffing business.
Exhibit 29: ROE Profile of Staffing Companies
23%
11%
19%
30.8
%
29.1
%
19.0
%
16% 18
%
18.3
0%
0%
5%
10%
15%
20%
25%
30%
35%
FY15 FY16 FY17
Teamlease Quess Corp SIS
Source: Company Data, PL Research
Exhibit 30: EBITDA margins of Staffing Companies
1.6
5.44.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Teamlease Quess SIS
EBIDTA margin for FY17
Source: Company Data, PL Research
March 21, 2018 24
TeamLease Services
An Analysis of the Global Flexi Staffing Business
Globally Flexi Staffing Industry has shown cyclical swings
Staffing business growth rates are closely linked to GDP growth rates in the economy
in which they are operating. Adecco Group’s organic revenue growth is at 4/4/4% in
CY16/CY15/CY14, respectively, as it is predominantly present in developed markets.
We also note that Staffing business has seen significant volatility during the
recession phase. Revenues of the Manpower group had declined by 21% YoY in CY09
during the phase of the Lehman Crisis. Even Adecco’s revenues plunged by 26% YoY
during the Lehman crisis owing to retrenchment of temp staff.
Exhibit 31: Manpower Group USD revenues and Constant Currency Growth (%)
20.521.5
16
18.9
2220.7 20.3 20.8
19.3 19.7
9%
1%
-21%
19%
12%
-1% -2%
4%7%
5%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
0
5
10
15
20
25
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16
(US$
bn)
Manpower Group Constant Currency Growth (RHS)
Source: Company Data, PL Research
Exhibit 32: Adecco Group Revenues (USD) and YoY growth (%)
25.87
19.11
24.1826.65 26.65 25.35 26
28.6 29.51
-5.2%
-26.1%
26.5%
10.2%
-4.0%-1.0%
4.0% 4.0% 4.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
0
5
10
15
20
25
30
35
CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16
(USD
bn)
Adecco revenues Adecco (Revenue Growth) (RHS)
Source: Company Data, PL Research
March 21, 2018 25
TeamLease Services
Global Staffing majors operating at 3-5% EBITDA margin
Indian Staffing companies (both domestic and well as MNC arms in India) are
operating at 1.5-5% EBITDA margin based on the revenue mix of the business. This is
similar to global players which have reported EBITDA margin trend of 3-5%.
Exhibit 33: EBITDA margin of Manpower and Adecco Global
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16
Manpower Global margins Adecco Global
Source: Company Data, PL Research
Case study of the Adecco Group
Adecco Group is one of the largest HR solutions providers in the world with presence
in temporary staffing, permanent placement and recruitment process outsourcing.
Adecco, headquartered in Switzerland, has its presence globally across 60 countries.
This group has 7,00,000 associate employees and 33,000 core employees. Given
below are the financial data of the Adecco Group:
Exhibit 34: Adecco revenues (EUR bn) and revenue growth (%)
2119.9
14.7
18.620.5 20.5 19.5 20.0
22.0 22.7
-5.2%-26.1%
26.5%
10.2%
-4.0% -1.0%4.0% 4.0% 4.0%
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0
5
10
15
20
25
CY7
CY8
CY9
CY10
CY11
CY12
CY13
CY14
CY15
CY16
Revenues (EUR bn) Organic Revenue growth (%) (RHS)
Source: Company Data, PL Research
March 21, 2018 26
TeamLease Services
Exhibit 35: Adecco EBITDA Margins
5.5%5.0%
3.4%
4.6% 4.5%4.0%
4.4%4.8%
5.2% 5.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
CY7
CY8
CY9
CY10
CY11
CY12
CY13
CY14
CY15
CY16
Source: Company Data, PL Research
Exhibit 36: Snapshot of Adecco groups key metrics
Adecco group CY12 CY13 CY14 CY15 CY16
Associate Employees 700,000 650,000 650,000 700,000 700,000
Core Employees 32,000 31,000 31,000 32,000 33,000
Revenues (EUR bn) 20.5 19.5 20.0 22.0 22.7
Organic Revenue growth (%) -1.5% 4.0% 4.0% 4.0%
Gross Profit Margins 17.9% 18.3% 18.5% 19.0% 18.8%
EBITDA Margins (Ex –one off) 4.0% 4.4% 4.8% 5.2% 5.0%
DSO 54 54 53 52 52
CFO (EUR mn) 579 520 785 799 687
CAPEX (EUR mn) 88 81 80 97 76
FCF (EUR mn) 491 439 705 702 611
ROE(%) 10.05 15.3 17.2 0.2* 20.5
ROCE(%) 7.6 10.9 12.4 0.2 13.6
Source: Company Data, PL Research * Goodwill amortization has led to tepid reported PAT and hence a huge drop in ROE of Adecco in CY15.
Adecco Group has been generating a strong free cash flow over the past few years.
Hence, company has a steady dividend payout ratio of 56/54% for CY16/CY15. Apart
from dividend, Adecco Group has also been doing steady buybacks which have
aided EPS growth and ROE improvement. However, Flexi staffing companies are on
a strong growth footing In India and hence, dividend payout has taken a backseat.
March 21, 2018 27
TeamLease Services
Earnings and Financial Outlook
Revenue growth to remain strong over FY18-FY20E
TeamLease’s consolidated growth trajectory remains solid with revenues growing at
25% CAGR (FY13-FY17). Over the same period, Associate headcount grew by 15%
CAGR (FY13-FY17). We believe that revenue growth momentum could continue over
the medium term led by market share gains from unorganized sector. GST is a key
catalyst for organized players to gain market share. We believe TeamLease revenues
can grow at 16% CAGR over FY17-FY20E.
Exhibit 37: Consolidated Revenues (Rs mn) and revenue growth (%)
12
,50
7
15
,29
6
20
,07
1 2
5,0
49
30
,41
8
35
,95
9
41
,46
8
47
,66
8
35.1%
22.3%
31.2%
24.8%
21.4%
18.2%
15.3%
15.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
-
10,000
20,000
30,000
40,000
50,000
60,000 FY
13
FY14
FY15
FY16
FY17
FY18
E
FY19
E
FY20
E
Revenues (Rs mn) Growth (%) (RHS)
Source: Company Data, PL Research.
We have estimated for a gradual improvement in EBITDA margins over
FY18/FY19E/FY20 which would drive earnings momentum. Mix shift in favour of high
margin business (Specialized Staffing) and core employee productivity improvement
can drive margin trajectory.
Exhibit 38: EBITDA Margins of TeamLease
-2.2%
-0.9%
0.8%1.2% 1.0%
1.5%1.8%
2.1%2.3%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company Data, PL Research.
March 21, 2018 28
TeamLease Services
Asset-light model to aid FCF generation (ex- acquisition spends)
We believe TeamLease has a low working capital requirement owing to its focus on
General staffing business as well as only modest funding exposure (28% as on
Q3FY18). Debtors including unbilled stand at 28 days as on FY17. However, going
ahead, we expect the working capital cycle to increase slightly due to IT staffing
services. Core capex in business is also modest. Hence, TeamLease’s free cash flow
(excluding acquisition capex) remains strong. FCF/EBITDA stood at 50% for FY17.
Exhibit 39: Core capex of TeamLease
46.2
16.9
28.9
37.8
46.7
18.5
0
10
20
30
40
50
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
(Rs
m)
Source: Company Data, PL Research
Exhibit 40: Free Cash flow (Excluding acquisitions)
-444
-110
135
304
-150
314
-500
-400
-300
-200
-100
0
100
200
300
400
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
(Rs
m)
Source: Company Data, PL Research
Exhibit 41: Consolidated Cash flow summary
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Cash flow from Operations (77) (397) (93) 164 342 (103) 332
Capex (158) (46) (17) (29) (38) (47) (18)
FCF (235) (444) (110) 135 304 (150) 314
Acquisitions 0 0 0 0 0 0 (885)
FCF post acquisitions (235) (444) (110) 135 304 (150) (571)
Source: Company Data, PL Research
However, after including the impact of acquisitions, TeamLease’s FCF remains
negative in FY17 and is likely to remain negative in FY18.
March 21, 2018 29
TeamLease Services
Section 80jjaa benefits aided ROE trajectory
Exhibit 42: Dupont Analysis- ROE breakup
FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Net Profit Margin (%) 1.16 1.53 0.99 2.18 2.01 2.28 2.51
Asset Turnover 6.6 7.2 5.6 4.8 4.8 4.9 4.9
Revenues 15,296 20,071 25,049 30,418 35,959 41,468 47,668
Avg Total Assets 2332 2777 4456 6,354 7,426 8,428 9765
Financial Leverage Ratio 2.14 2.08 1.94 1.83 1.78 1.68 1.61
Avg Total Assets 2332 2777 4456 6,354 7,426 8,428 9,765
Avg Total Equity 1092 1334 2302 3,463 4,172 5,006 6,076
ROE (%) 16.3 23.1 10.8 19.1 17.3 18.9 19.7
Source: Company Data, PL Research
TeamLease’s ROE has seen a strong uptick in FY17 led by Section 80JJAA benefits
which have boosted the reported net margins of the company. We have modelled
negligible tax rate for TeamLease over FY18-FY20E owing to continuation of Section
80JJAA benefits. Hence, TeamLease’s ROE trajectory would remain at 18-20% over
this period.
Acquisitions to boost further growth of revenue and margins
TeamLease has raised Rs1500mn from the fresh issue of shares in its IPO in February
2016. Majority of the issue proceeds have been utilised for expanding into IT staffing
and specialized Telecom staffing. Both these segments have much higher EBITDA
margins (10-14%) as compared to General staffing (~2%- EBITDA margin). IT staffing
has helped in margin expansion strategy for TeamLease over the past few quarters.
Net cash on the balance sheet stands at Rs1000mn as on Q3FY18. We believe
TeamLease will continue to focus on acquisitions in the specialized staffing services.
The company could also raise debt or issue fresh equity for the same.
Exhibit 43: Acquisitions done by TeamLease
Vertical Annual Revenues (Rs mn) Amount paid (Rs mn) Associate headcount Core employees Year of
acquisition ASAP IT staffing 635 670 1000 171 Jul-16
Nichpro IT staffing 260 295 150 30 Sep-16
Keystone IT staffing 75 82 NA Jan-17
Evolve Specialized Telecom 1086 367 4000 150 Nov-2017
Source: x, Company Data, PL Research
“I think we have about Rs100 crores of free cash flow at this moment available
with us. If bigger deals came in, we are not constrained by that Rs100 crores as a
deal size. But we would be happy to raise money, if required, and we are zero debt
also. So whether it is debt or equity to deal that makes sense for TeamLease and
for the longer term path, we'd be open to exploring larger deals” TeamLease CEO
in Q2FY18 concall .
March 21, 2018 30
TeamLease Services
Valuations and View
TeamLease stock has seen a sharp appreciation with stock up 150% over the past
one year. We believe GST would drive share gains in favour of organized players
(from unorganized players) which would drive revenue growth for organized staffing
companies. TeamLease believes that migration in favour of organized players would
only be gradual as compared to pent‐up demand.
Post the strong rally over the past one year, TeamLease is currently trading at 40x
one year forward EPS basis (v/s 23x one year forward earnings traded one year ago).
Incremental re-rating on the multiple appears modest as most of the positives are
priced. Retain “Accumulate” with TP of Rs2450/sh (35x FY20E EPS).
Exhibit 44: TeamLease one year forward PE chart
16
20
24
28
32
36
40
44
48
52
Mar
-16
Apr
-16
May
-16
Jun
-16
Jul-
16
Aug
-16
Sep-
16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb-
17
Mar
-17
Apr
-17
May
-17
Jun
-17
Jul-
17
Aug
-17
Sep-
17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb-
18
Mar
-18
P/E Mean Mean + Std Dev Mean - Std Dev
Source: Company Data, PL Research
March 21, 2018 31
TeamLease Services
Comparative Valuation Table
Indian Staffing companies are trading at much higher P/E multiples (v/s Global peers)
owing to higher revenue growth outlook. However, ROE profile remains in a similar
band for Indian staffing companies v/s Global peers.
Exhibit 45: Global Staffing majors
Revenue (USD mn) EBIDTA (USD mn) EBIDTA margin (%) PAT (USD mn)
Mcap
(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Adecco 15.7 26,729 30,380 31,309 1,402 1,586 1,649 5.2% 5.3% 5.4% 1,008 1,022 1,057
Randstad 13.4 26,290 30,187 31,263 1,304 1,525 1,619 5.0% 5.1% 5.2% 762 1028 1088
Manpower 8.0 21,034 22,992 24,301 898 967 1,050 4.3% 4.2% 4.3% 487 607 609
P/E EV/EBIDTA ROE (%) Dividend Pay-out Ratio (%)
Mcap
(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
Adecco 15.7 13.5 12.0 11.4 9.64 8.7 8.3 21.04 21.6 20.8 58.0 58.0 58.0
Randstad 13.4 14.3 13.0 12.3 11.2 9.8 9.2 15.9 18.9 17.9 62.0 56.0 56.0
Manpower 8.0 17.4 13.5 13.2 9.6 8.7 8.0 21.2 19.2 17.9 22.8 23.0 23.0
Source: Company Data, PL Research
Exhibit 46: Indian Staffing majors
Mcap (USD bn) Revenue (USD mn) EBIDTA (USD mn) EBIDTA margin (%) PAT (USD mn)
FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
TeamLease 0.55 468 553 638 6.8 9.9 12.8 1.5% 1.8% 2.0% 10.2 11.1 13.9
Quess 2.32 620 954 1255 34 57 83 5.4% 6.0% 6.6% 17 47.8 68
P/E EV/EBIDTA ROE (%) Dividend Payout Ratio (%)
Mcap(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E
TeamLease 0.55 54.1 49.7 39.7 77.3 53.6 40.7 19.1 17.3 18.9 0% 0% 0%
Quess 2.32 108.1 47.5 35.0 56.1 39.6 27.2 19.2 22.0 20.0 0% 0% 0%
Source: Company Data, PL Research * Quess , Adecco, Randstad, Manpower estimates are based on Bloomberg estimates
March 21, 2018 32
TeamLease Services
Company Profile
TeamLease Services established in 2002 is one of India’s leading people supply chain
company in the organized segment. The company has its presence in 150 locations,
with 2200 corporate clients and 1800 employees across the country. The company
started with Temporary Staffing and then after adding Permanent Recruitment in
2004, further expanded its portfolio to incorporate Payroll Outsourcing, Labour
Compliances and Training Services to become a one-stop solution for Staffing & HR
Services to various industries offering diverse functional roles. TeamLease focuses on
its vision of 3 E’s – Employment, Employability and Education.
TeamLease, in partnership with the Government of Gujarat, set up TeamLease Skills
University (TLSU), India’s first vocational university, at Vadodara. In FY2015,
TeamLease rolled out NETAP (National Employability through Apprenticeship
Program) to provide on-the-job training to apprentices. The company at present has
about 178,000 associates/trainees spread across the country and have till date given
employment to 1.7 mn people.
Employment
Match the requirements of customers with the right human resource
Access to a better quality workforce through its expanded foothold across the
HR Services value chain
Education
TeamLease Skills University prepares people to enter the workforce by
equipping them with vocational skills
Corridor effect from certificate to degree programs
Employability
Apprenticeship program assists in making up for any skill deficit of the associate
employees
Training interventions to make the candidate pool employable
March 21, 2018 33
TeamLease Services
Exhibit 47: TeamLease Evolution
Source: Company Data, PL Research
2002
Incorporated the company with operations beginning in four offices,
20 clients and 40 employees
2004
Started permanent recruitment business for one client
2005
Strengthened technology infrastructure with centralizing
operations in head office at Bengaluru. Published the first labour
report
2007
Started new service offerings
2008
Initiated discussions for the apprenticeship revamp and made compliance a seperate strategic
business unit
2009
Made the first inorganic acquisition of IIJT education which is into retail
and institutional training
2011
Signed a MOU for setting up India's first skills university with State
Government of Gujarat. Founding members of Indian Staffing
federation
2016
Listed on NSE and BSE with IPO over subscribed 67x
2017
Acquired ASAP Infosystems, Nichepro technologies and Keystone business solutions adding IT staffing
as a new service offering
March 21, 2018 34
TeamLease Services
Key Management Team
Manish Sabharwal - Co-Founder and Executive Chairman: Mr Manish provides
leadership at the Board level and drives strategy. In 1996, he co-founded India Life
Pension Services, a payroll and pension services company that was acquired by
Hewitt Associates in 2002. Consequently, he was Chief Executive Officer of Hewitt
Outsourcing (Asia) based in Singapore for two years. He is an alumnus of The
Wharton School, University of Pennsylvania, Shri Ram College of Commerce, Delhi
and Mayo egllCoC ,remCA.
Mr Ashok Reddy - Co-Founder, Managing Director and Chief Executive Officer: Mr
Ashok oversees operations and represents the company in forums with major
clients. He holds a bachelors degree in commerce from Shri Ram College of
Commerce, Delhi and a Diploma in Management from Indian Institute of
Management, Bengaluru. Prior to his current position, he was a co-founder and
Director of India Life Services, a pension and provident fund asset management
company.
Ms Rituparna Chakraborty - Co-Founder and Executive Vice President: In her
current role, she is responsible for Staffing and also drives our NETAP initiative.
N. Ravi Vishwanath - Chief Financial Officer: Mr Ravi brings in 30 years of
experience in the finance sector. Prior to joining TeamLease, he worked at Sun
Microsystems India. He holds a bachelor’s degree in commerce from Bangalore
University and is a fellow of the ICFAI.
Shareholding Pattern
Exhibit 48: Shareholding pattern as on 3QFY18
Promoters 43.1%
Gaja Capital8.0%
Goldman Sachs 7.4%
HDFC Asset management
9.0%
T Rowe4.4%
FIL Investments4.4%
FID funds 3.1%
Reliance capital 2.6%
Others 18%
Source: Company Data, PL Research* We note that HDFC MF has trimmed its stake recently through multiple block deals
March 21, 2018 35
TeamLease Services
Exhibit 49: Consolidated Model Sheet of TeamLease
Fig in Rs mn FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Consolidated Revenues ( Rs mn) 15,296 20,071 25,049 30,418 35,959 41,468 47,668
Growth (%) 22.3% 31.2% 24.8% 21.4% 18.2% 15.3% 15.0%
EBITDA 120 241 258 442 641 861 1110
EBIT 101 213 228 400 553 767 1015
PAT 178 308 248 663 722 945 1196
EBIDTA Margin (%) 0.8% 1.2% 1.0% 1.5% 1.8% 2.1% 2.3%
EBIT Margin (%) 0.7% 1.1% 0.9% 1.3% 1.5% 1.8% 2.1%
PAT Margin (%) 1.2% 1.5% 1.0% 2.2% 2.0% 2.3% 2.5%
Reported EPS 11.6 20.1 15.9 38.8 42.3 55.3 69.9
Growth (%) NA 73.3% -20.7% 143.8% 8.9% 30.8% 26.5%
P/E 181 105 132 54 50 38 30
EV/EBITDA 260 129 130 77 54 39 30
ROE(%) 16.3% 23.1% 10.8% 19.1% 17.3% 18.9% 19.7%
ROCE (%) 14.9% 22.2% 10.6% 19.2% 17.5% 18.9% 19.7%
Consolidated Balance Sheet (Rs mn)
Networth 1180 1488 3116 3811 4533 5478 6674
Net Cash on Balance sheet 905 1199 2639 1744 1622 2162 3015
Net cash per share 59 78 154 102 95 126 176
Net Cash as a % of stock 2.8% 3.7% 7.4% 4.9% 4.5% 6.0% 8.4%
Debtor days 14 15 18 22 23 24 24
Unbilled Days 4 3 9 6 6 6 6
Payable Days 11 10 17 16 16 16 16
Working Capital Cycle 7 8 10 12 13 14 14
Consolidated Cash flows (Rs mn)
Cash flow from Operations 164 342 (103) 332 322 581 895
Capex 29 38 47 18 25 30 30
Acquisition
884.7 400
Capex+ Acquisition 28.9 37.8 46.7 903 425
Free Cash flow 135 304 (150) (571) (103) 551 865
FCF yield(%) 0.4% 0.8% -0.4% -1.6% -0.3% 1.5% 2.4%
Source: Company Data, PL Research * Low effective tax rates owing to Section 80JJAA benefits is also driving PAT growth over FY17-FY19.
March 21, 2018 36
TeamLease Services
Income Statement (Rs m)
Y/e March 2017 2018E 2019E 2020E
Net Revenue 30,418 35,959 41,468 47,668
Cost of employee salaries 29,377 34,464 39,664 45,619
Gross Profit 1,041 1,495 1,803 2,050
Other costs — — — —
Other Expenses 599 854 942 939
EBITDA 442 641 861 1,110
Depr. & Amortization 43 88 94 96
Interest expense 11 18 12 12
Other Income 224 194 200 205
Profit before Tax 613 729 955 1,208
Total Tax (50) 8 10 12
Profit after Tax 663 722 945 1,196
Ex-Od items / Min. Int. — — — —
Adj. PAT 663 722 945 1,196
Avg. Shares O/S (m) 17.1 17.1 17.1 17.1
EPS (Rs.) 38.8 42.2 55.3 70.0
Cash Flow Abstract (Rs m)
Y/e March 2017 2018E 2019E 2020E
C/F from Operations 332 322 581 895
C/F from Investing (169) (425) (30) (30)
C/F from Financing (411) (18) (12) (12)
Inc. / Dec. in Cash (249) (121) 539 853
Opening Cash 496 247 126 665
Closing Cash 247 126 665 1,519
Key Financial Metrics
Y/e March 2017 2018E 2019E 2020E
Growth
Revenue (%) 21.4 18.2 15.3 15.0
EBITDA (%) 71.6 44.9 34.3 29.0
PAT (%) 167.3 8.9 31.0 26.5
EPS (%) 167.4 8.9 31.0 26.5
Profitability
EBITDA Margin (%) 1.5 1.8 2.1 2.3
PAT Margin (%) 2.2 2.0 2.3 2.5
RoCE (%) 19.2 17.5 18.9 19.7
RoE (%) 19.1 17.3 18.9 19.7
Balance Sheet
Net Debt : Equity (0.4) (0.3) (0.4) (0.4)
Valuation
PER (x) 54.4 50.0 38.2 30.2
P / B (x) 9.5 8.0 6.6 5.4
EV / EBITDA (x) 77.9 54.0 39.6 29.9
EV / Sales (x) 1.1 1.0 0.8 0.7
Earnings Quality
Eff. Tax Rate (8.2) 1.0 1.0 1.0
Other Inc / PBT 36.6 26.7 20.9 17.0
Source: Company Data, PL Research.
Balance Sheet Abstract (Rs m)
Y/e March 2017 2018E 2019E 2020E
Shareholder's Funds 3,811 4,533 5,478 6,674
Total Debt — — — —
Other Liabilities 48 48 48 48
Total Liabilities 3,860 4,581 5,527 6,722
Net Fixed Assets 77 81 87 93
Goodwill 952 1,286 1,216 1,144
Investments 103 103 103 103
Net Current Assets 2,680 3,064 4,074 5,335
Cash & Equivalents 1,696 1,574 2,113 2,967
Other Current Assets 4,151 4,841 5,563 6,253
Current Liabilities 3,063 3,248 3,500 3,781
Other Assets 149 149 149 149
Total Assets 3,860 4,581 5,527 6,722
Quarterly Financials (Rs m)
Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18
Net Revenue 8,169 8,530 8,756 9,181
EBITDA 147 130 151 179
% of revenue 1.8 1.5 1.7 1.9
Depr. & Amortization 13 20 20 24
Net Interest 3 2 3 8
Other Income 57 58 44 42
Profit before Tax 189 166 172 189
Total Tax (196) 2 (1) 5
Profit after Tax 385 164 174 184
Adj. PAT 385 164 174 184
Source: Company Data, PL Research.
March 21, 2018 37
TeamLease Services
Notes
March 21, 2018 38
TeamLease Services
Notes
March 21, 2018 39
TeamLease Services
Notes
March 21, 2018 40
TeamLease Services
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India
Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
45.0% 44.2%
10.9%
0.0%0%
10%
20%
30%
40%
50%
BUY Accumulate Reduce Sell
% o
f To
tal C
ove
rage
BUY : Over 15% Outperformance to Sensex over 12-months
Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months
Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month
Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly
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