TeamLease Services' Q1FY20 results (Outperformer) - HR Services drives Q1 miss; Long-term thesis intact!

Q1FY20 result highlights

• Cons. rev. grew 8% qoq/23% yoy (2% beat) on strong performance in General Staffing and eCentric consolidation in Specialized Staffing. However, weak performance in HR Services (including ~Rs60m provision) meant that reported EBITDA fell 10% qoq/+15% yoy (15% miss; margins at 1.85%). Adjusted EBITDA (excl. Ind-AS 116 impact) stood at ~Rs264m (~3% qoq/31% yoy; 3% miss). Reported PAT fell ~28% qoq/~14% yoy to ~Rs188m (30% miss). Adjusted PAT (ex. provision/excl. Ind-AS 116 impact) stood at ~Rs249m (7% miss).
• General Staffing: Associate base grew ~6.5k qoq (IDFCe: 4K) to ~161k (+17% yoy). Revenue grew by a healthy 7% qoq/23% yoy to ~Rs11.3bn (3% beat), while EBITDA margin came in at 2.07% (-27 bps qoq; +37 bps yoy). Margins declined due to salary increments to core staff in the qtr. Mark-up improved significantly to ~Rs730 vs ~Rs714 qoq due to higher mandates from small/medium clients vs large clients.
• Specialized Staffing: Rev. grew 24% qoq to ~Rs982m (6% beat) with EBITDA margins coming in at 6.4% (+20 bps qoq; IDFCe: 6.3%). Excluding eCentric, rev. growth would still be a healthy 3.5% qoq with margins of 6.7%. Evolve margins have improved 30 bps qoq to 3.3% while IT margins grew 60 bps qoq to 10.5%.
• HR Services: Delay in collections from govt. (due to elections) and certain corporates led to reduced billings, drove a 26% yoy fall in revenue to ~Rs225m (20% miss) which led to an EBITDA loss (further accentuated due to ~Rs60m provision taken on account of delayed payments, expected to fully reverse in Q2/Q3.)

Key positives: General/Specialized Staffing performance strong.

Key negatives: Complete miss on Other HR Services.

Impact on financials: Reduce FY20E/21E EPS by 5.4%/3.4%.

Valuations & view

TEAM remains confident of growing its general staffing business at ~20% revenue CAGR (led by a 15-17% volume growth) over the medium-term. The improved mark-up situation was a positive, although lower mark-ups from big clients are not negative as they are key to grow business in the near-term (these are largely PBT neutral/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. Margin performance (across segments) and turnaround in HR services is a key monitorable. Maintain OP rating with a DCF-based revised TP of Rs3,102. Key risk is severe economic slowdown.