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Result Update: Quess Corp Ltd - BUY - TP Rs.1072 - Kotak

Posted On: 2018-10-31 09:19:22

Quess corp management alluded its focus on execution and balance sheet management to boost its long term earnings growth. Improvement in operating margin will be supported by better revenue mix, improvement in operations of DIGIMAX solutions, turnaround of Monster and other efficiency improvement.

With strong focus on balance sheet management and execution in each of businesses yielded tangible results in H1FY19 with superior working capital management leading to an achievement of 34% OCF/EBITDA conversion.

Key Highlights

- Revenue grew by 50% yoy (26% yoy organic growth) and 6% qoq to Rs.20.9 bn v/s our expectation of Rs.20.1 bn. Growth is spread across all five segments.

- Employee headcount increased by 32% yoy to ~280,400 in Q2FY19. General Staffing business division has added a total headcount of 11,000 across general staffing program during Q2FY19. The Staffing headcount has reached ~175,000 as on 30th Sep'18.

- Despite 9% qoq declined in other income, Quess's Q2FY19 reported PAT increased 13% qoq to Rs.616 mn (-58% yoy) but is lower than our estimates.

- The company highlighted that H2 performance is generally better than H1 performance. Hence, expects strong growth in second half of FY19.

- It has also indicated to achieve an operating margin of 6% in Q4FY19.

- Consolidated tax rate is expected to be in the range of 8%-10% due to benefits available under section 80JJA.

- Billed DSO has reduced to 40 days in H1FY19 from 54 days in FY18 due to better working capital management.

- Expansion of Training and Skill Development centers: Quess signed MoU for DDU-GKY projects worth Rs.160 mn contract value and also opened 2 new DDU-GKY centres along with 10 PMKK centres with a cumulative training capacity of 1,500 students.

- New Store Openings: In H1FY19, it has added 60 new service centres resulting in coverage expansion to 120 towns from 55 towns. It has also added premium 4 new logos.

Valuation & outlook

We have lowered our estimates to reflect H1FY19 earnings and higher tax rates. We now expect Quess to report an EPS of Rs.23.1 in FY19E (earlier Rs.28) and an EPS of Rs. 30.6 (earlier Rs. 32.6) in FY20E supported by both recent acquisitions done by the company and organic growth. We maintain BUY rating on Quess with a revised target price of Rs.1072/share (earlier Rs. 1302/share), valuing the company at a 35x P/E multiple (earlier 40x). In India, every month ~1 million people are entering the workforce, generating sustainable employment becomes an imperative which opens huge growth opportunities for Quess.

Shares of Quess Corp Ltd was last trading in BSE at Rs.703.45 as compared to the previous close of Rs. 691.15. The total number of shares traded during the day was 3370 in over 259 trades.

The stock hit an intraday high of Rs. 711.05 and intraday low of 694.95. The net turnover during the day was Rs. 2367181.

Source: Equity Bulls

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