TeamLease Services' Q3FY19 results (Outperformer) - Strong volume growth continues…

Q3FY19 result highlights

• Cons. rev. grew 27.7% yoy/7.5% qoq to ~Rs11.7bn (2% beat), mainly due to strong volume growth in General Staffing segment. EBITDA grew 37.1% yoy to Rs245m (4% miss, due to weakness in Telecom staffing and higher provisions in Other HR Services segment). PAT grew 37.3% yoy to Rs253m (2% miss – in-line with EBITDA miss, partly supported by lower than exp. tax outgo).
• General Staffing: Associate base stood at ~152.7k (added 7.5k net associates’ vs 5k est) and grew by 16.6% yoy. Rev. came in at ~Rs10.6bn (+26.3% yoy; 3% beat). EBITDA margin came in at 2.08% (flat yoy, +20bp qoq; IDFCe: 1.82%), improvement was led by continued efficiency gains (core to associate productivity ratio improved to 260 vs 219 yoy and 241 qoq). Mark-up came off at Rs710 vs Rs730 qoq and Rs755 yoy due to mix changing towards higher fixed fee contracts as they drove large volumes.
• Specialized Staffing: Revenue came in at ~Rs791.5m (~34.8% yoy; 4.7% qoq; in-line) but EBITDA margin fell by 160bps qoq to 5.7% (IDFCe: 7.9%) as it is investing in people/processes to build more capabilities in its telecom vertical; IT specialised division did margins of 11.3% (vs 12.8% qoq) while telecom stood at 1.1% (vs 3.4% qoq).
• HR Services: Rev. grew 65.4% yoy to ~Rs314m (18% miss). However, margins dipped ~270 bps yoy to 1.0% as TEAM booked provisions for overdue government receivables in its training business (this will reverse in Q4 as it is only a timing issue).

Key positives: Strong net additions, healthy margins in general staffing.

Key negatives: Evolve/Other HR Services margins drag profitability.

Impact on financials: 3%/1% cut in FY19E/20E EPS respectively.

Valuations & view

TEAM remains on track to post a 18% associate count increase in FY19E and in the medium-term can easily clock a 14-15% CAGR. 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 Rs2,920.