Quess Corp Limited - Light at the end of the tunnel? - ICICI Securities

Relatively higher (1) breadth of services and (2) aggregate exposure to troubled segments led to a stronger and longer impact of Covid-19 pandemic on revenue and profitability (vs TL/SIS) of Quess Corp in Q2FY21. In that context, relatively cautious outlook on the impending festive season is unsurprising. As some of these segmental operations opened up (e.g. Training & Development) from Oct-20, the trough for revenue / margins is behind us. We expect part time/task based temp staffing to become a meaningful revenue contributor over the medium term. Robust cash conversion (OCF/EBITDA = 183%) and debt repayment (by ~Rs 5bn) during H1FY21 were commendable. Besides the expectation of a strong improvement in business (NTM EPS growth = 80% YoY), continued focus on balance sheet rationalisation, cash conversion and RoE improvement (to 20% by FY23) are the key premises behind our BUY rating. Current valuations are compelling (14x FY22E EPS). Using residual income valuation approach, we value the stock at Rs650, implying ~20x 1-year fwd EPS (at ~45% discount to TeamLease).

- In-line revenue and margin. Sequentially, while the overall headcount was down ~3%, overall revenue increased ~10%. Organic revenue growth (+6% QoQ) was driven by general staffing (+5.3% QoQ), Conneqt (+17% QoQ) and QDigi. Normalisation of supply side issues in some of these businesses seem to have helped. Facility Management, Security Services, Training & Skill Development and Industrials businesses continued to be the key overhang on the overall revenue. Sequentially, EBITDA margins reported a slight deterioration. Training & Skill development and Facility Management businesses dragged down the EBITDA margin. On a like-to-like basis, Technology Services is the only segment that delivered EBITDA margin expansion (30bps to 13.3%) on a sequential basis.

- Cautious outlook on different business segments. Quess' outlook on festive season related uptick in Dec-20 sounded relatively downbeat vs other companies. The company expects festive season related ramp ups to be less pronounced than in the previous years with muted trends in segments like traditional retail. While training centers of Excelus had re-opened in majority of states, management foresees lesser profitability with new SOPs in place. Going ahead, the company expects EBITDA margin to remain similar to that of FY20.

- Business and profitability at trough; compelling valuations. Relatively higher aggregate exposure to troubled segments like Training & Development, educational institutions (through food catering) translated into greater impact on Quess. As some of these business operations progressively opened up from Oct-20, we expect the worst is behind for both its revenue and profitability. In addition, ongoing improvements on aspects related to (1) cash conversion, (2) leverage, (3) RoE and undemanding valuations (14x FY22E EPS) underpin our BUY rating.

Shares of Quess Corp Ltd was last trading in BSE at Rs.403.8 as compared to the previous close of Rs. 409.4. The total number of shares traded during the day was 34872 in over 1015 trades.

The stock hit an intraday high of Rs. 414 and intraday low of 400.95. The net turnover during the day was Rs. 14162494.

Source : Equity Bulls

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