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Maintain BUY on Teamlease Services - Recovery on the cards ICICI Securities

Posted On: 2020-08-05 09:27:17 (Time Zone: Arizona, USA)

Mr. Amit Chandra & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities.

Teamlease delivered an in-line revenue and better margin performance in what is being termed as a tough quarter. The impact of the pandemic was felt on core staffing (-14.4% QoQ) and specialised staffing (-5.3% QoQ). The core staffing headcount fell by 14.5% QoQ but was better than expected. EBIT margin expanded 56bps QoQ to 1.4% (estimate of 1.3%), led by tight cost control, higher core employee productivity, and increasing mark-up. The cash generation (OCF/EBITDA at 80%) improved due to lower withholding tax. Teamlease has ~40% exposure to high impacted verticals like infra, manufacturing, ENU, auto, and retail. The exposure to less impacted verticals like BFSI, agri, chemicals, essential retail, pharma, hospitality, and telecom is at ~60%. Recovery is expected in 2H with a flat 2Q.

We like the company's low-risk business model (non-outcome based) and diversified exposure across sectors. Factors such as (1) formalisation of jobs, (2) vendor consolidation, (3) focus on collect & pay, (4) cost-cutting by enterprises, and (5) client diversification will benefit market leaders like Teamlease. There is further scope for margin expansion through productivity benefits and a better business mix. Teamlease's ability to grow ~15-20% organically, focus on driving productivity through automation, lower funding exposure, domestic focus, and high management pedigree are the reasons it can command a premium valuation. The stock is trading at a PE of 40.2/28.6x FY21/22E. Our target price of Rs 2,120 is based on 30x June-22E EPS (5Y average P/E of ~35x). Maintain BUY.

1QFY21 highlights: Revenue stood at Rs 11.36bn, down 14.6% QoQ, vs our estimate of Rs 11.53bn. Core/Specialised/HR services revenue was down 14.4/5.3/57.2% QoQ. The mark-up increased to Rs 761 (+1.7% QoQ), and the associate to core ratio increased to 283 (+7.2% QoQ). EBITDA margin for core/specialised stood at 2.0/8.6%, an expansion of -20/+252bps QoQ.

Salary funding exposure at 14% is the lowest in the industry. The Teamlease PF trust has an exposure of Rs 1.73bn towards two bankrupt NBFCs, which is a risk. The company has not made any provisions regarding the same.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.1952 as compared to the previous close of Rs. 1879.1. The total number of shares traded during the day was 1292 in over 469 trades.

The stock hit an intraday high of Rs. 2015.95 and intraday low of 1932.85. The net turnover during the day was Rs. 2534875.

Source: Equity Bulls

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