TeamLease Services - Worst of slowdown impacts Q1 revenues; margin execution steady - ICICI Securities

TeamLease Services (TL) was expected to report a weak Q1FY21 given pandemic-induced declines in general staffing volume, NETAP volume, and de-emphasis from government skill development programs. However, the magnitude of weakness was lower than expected with the company reporting a sequential decline of 15% in revenues. EBITDA margins improved by 66bps QoQ to 2.1% on the back of cost optimisation measures and rationalisation of core employee headcount (which helped improve productivity ratio to 283 from 264 sequentially in Q1FY21). General Staffing headcount declined by 10% QoQ. Company believes the largest impact of pandemic has been felt in Q1 and revenues should grow sequentially Q3 onwards. Upgrade to HOLD with a target price of Rs1,850.

- General staffing decline lower than expected. General staffing revenues declined by 14% with headcount down sequentially by 10%. EBITDA margins declined by 20bps due to discounts given to existing clients and drop in variable pay, offset by optimisation in core employee rationalisation (core employee productivity improving to 283 from 264 sequentially) and lower) discretionary expenses. Funding mix remained unchanged at 14% QoQ.

- Profitability improved in specialised staffing despite decline in revenues. Specialised staffing revenues declined by 5% with a headcount decline of 10%. Margins improved by 220bps QoQ to 8.6% primarily on the back of removing redundancies in core employees mix by integrating IMSI, Evolve and IT businesses into one single shared cost centre. Profitability improvement was due to TL not engaging in significant discounting, rationalisation of certain accounts and gaining new higher-margin business.

- 'Other HRO services' weak: Revenues from 'Other HR Services' declined by 57% QoQ and 46% YoY to Rs122mn given weakness in training & skill development segment and the company moving away from government skill training engagements. TeamLease sees traction within its compliance business and expects the segment to perform relatively better going forward.

- Upgrade to HOLD. Maximum impact of pandemic was reflected in Q1 topline, with growth expected to resume from Q3. Company is in a unique position to partake of vendor consolidation opportunities in the current business scenario. PAPM (pricing per associate per month) has been stable at Rs750, even after providing discounts. With a focus to maintain margins, TL has refrained from providing significant discounts/markup to gain business. Margins should stabilise through the rest of FY21E as cost optimisation measures, productivity improvements and investment in automation of processes give an impetus. Upgrade to HOLD with a target price of Rs1,850/share.

Shares of TeamLease Services Ltd was last trading in BSE at Rs.1914 as compared to the previous close of Rs. 1848.4. The total number of shares traded during the day was 1199 in over 376 trades.

The stock hit an intraday high of Rs. 1918.25 and intraday low of 1870.1. The net turnover during the day was Rs. 2273357.

Source : Equity Bulls

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