TeamLease Services' Q1FY19 results (Outperformer) - Good start to the year

Q1FY19 result highlights

• General Staffing: Associate base stood at ~137.7K (added strong 5.4K net associates’ vs exp. of 5.7K) and grew by 6.1% yoy. Rev. came in at ~Rs9.16bn (+12.2% yoy; in line). EBITDA margin came in at 1.7% (+7 bps yoy, -13bp qoq; 15bps below est. as mark-up fell from Rs755 to Rs736 qoq). Fall in mark-up  (and margin) is attributable to decrease in funded contracts (down to 16% from 20%) as TEAM did not mind quoting lower mark-up as it was saving on WC requirement. Management believes that these contracts are PBT neutral. Core to Associate ratio improved to 232 (vs 220 qoq, 204 yoy).
• Specialized Staffing: Revenue came in at ~Rs750m (3x yoy; +3% qoq; 3% miss) while EBITDA margin was flat qoq at 7.1% (IDFCe: 8.2%) as it is investing in people to build more capabilities in its telecom vertical; margins are expected to scale up over time as its IT specialised division did margins of 11.6% while telecom stood at 3.9%.
• HR Services: Rev. grew by strong 39.3% qoq to ~Rs303m (74% beat) as the business is seeing significant traction especially in corporate training; EBITDA margin stood at 7.9% (up 110bp yoy).
• Cons. rev. grew 19.7% yoy/4.5% qoq to ~Rs10.2bn (0.6% beat), on the back of strong performance in general staffing & HR services. EBITDA grew 55% yoy to Rs202m (7% miss) on better margin and lesser corp. unallocated exp. yoy. Better than exp. other income & tax write-back led to PAT beat of 1.8% at Rs218m (+33% yoy).

Key positives: Strong net additions, ramp up in HR Services rev.

Key negatives: Weak reported margin in general staffing.

Impact on financials: FY19E/20E EBITDA cut by 3.3%/0.7%.

Valuations & view

TEAM added 5.4K net associates’ vs 5.9K net additions in the whole of FY18 and looks to be on track to achieve 14-15% growth run-rate in FY19E and beyond. Optically margin appears lower due to higher unfunded contracts but it is PBT neutral and WC efficient. Given the macro-economic sweet spot of the flexible staffing industry and TEAM’s leadership position in the same, we remain confident that the company can deliver industry leading growth over the near-to-medium term. We maintain our OP rating on TEAM with a DCF-based revised target price of Rs2,974.