TeamLease Services' Q2FY19 results (Outperformer) - Strong performance; to continue…

Q2FY19 result highlights

• Cons. rev. grew 24.6% yoy/6.8% qoq to ~Rs10.9bn (2% beat), on the back of HR services. EBITDA grew 58.7% yoy to Rs240m (6% beat) on better margin, especially on the HR services front. PAT beat of 7% at Rs249m (+43.1% yoy) was due to strong operating performance.
• General Staffing: Associate base stood at ~145.1k (added 7.4k net associates’ vs 6k est) and grew by 13.5% yoy. Rev. came in at ~Rs9.8bn (+17.0% yoy; 2% beat). EBITDA margin came in at 1.88% (+15bps yoy, +18bp qoq; IDFCe: 1.75%), improvement was led by continued efficiency gains (core to associate productivity ratio improved to 241 vs 210 yoy and 232 qoq). Mark-up stood at Rs730 vs Rs736 qoq and Rs735 yoy.
• Specialized Staffing: Revenue came in at ~Rs756m (~2.8x yoy; +1% qoq; 2% miss) while EBITDA margin improved by 20bps qoq to 7.3% (IDFCe: 7.8%) as it is investing in people to build more capabilities in its telecom vertical; IT specialised division did margins of 12.8% (vs 11.6% qoq) while telecom stood at 3.4% (vs 3.9% qoq).
• HR Services: Rev. grew by strong 24.6% qoq to ~Rs377m (19% beat) as the business is seeing significant traction post its investments in payroll/compliance; EBITDA margins rose ~270 bps qoq to 10.6% (loss yoy).

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

Key negatives: Evolve margins weak and it would take another two quarters to revive.

Impact on financials: Marginally raise EPS estimates for FY19E/20E.

Valuations & view

TEAM remains on track to post a 14-15% associate count increase in FY19E and in the medium-term. Overall, margins too are expected to improve driven by efficiency gains. Lower mark-ups of new clients are key to grow business in the near-term, but these contracts are PBT neutral and WC efficient, and as a result are not a concern in our opinion. 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 TP of Rs2,994.