TeamLease Services' Q3FY20 results (Outperformer) - FY20E guidance cut; Margin weakness continues…

Q3FY20 result highlights

• Cons. rev. fell ~7% qoq/~15% yoy to ~Rs13.5bn (3% beat). General Staffing business grew ~7% qoq (3% beat), while Specialized Staffing grew ~4% qoq (2% beat – driven by IMSI consolidation). EBITDA grew 12% qoq/yoy to ~Rs275m (in-line). Higher Depreciation/Interest (post Ind-AS 116) meant that PAT was flat at ~Rs255m, but still was a ~20% beat due to higher other income (~Rs20m one-time element in OI).
• General Staffing: Associate base grew +2.2k qoq (IDFCe: 4.5k) to ~167k (+9% yoy) due to higher than normal attrition. Revenue grew ~7% qoq/15% yoy to ~Rs12.2bn (3% beat), but EBITDA margin drag continued (1.62% vs 1.83% qoq; 2.08% yoy) due to weak associate additions. Adjusting for one-time client receivable provision of ~Rs13m, margins were still weak at ~1.73%. NETAP adds, however, improved by ~1k qoq to 52.4k. Mark-up improved to Rs 751 vs Rs739 qoq. Margin weakness was despite improving productivity (to 266 from 261 qoq).
• Specialized Staffing: Reported rev. grew ~4.2% qoq to ~Rs1.05bn (2% beat) while EBITDA grew ~21% qoq to ~Rs76m. However, adjusting out IMSI consolidation, rev/EBITDA fell ~3%/4% qoq due to weak eCentric performance (15% qoq rev. fall). Evolve (Telecom) margins lagged at 2.3% (vs 2.9% qoq), while revenue fell ~4% qoq.
• HR Services: Rev. fell ~2% yoy, but grew 9% qoq. EBITDA came in at ~Rs6m, but this includes ~Rs12m of govt. provision writeback (underlying EBITDA weak). ~Rs28m of writeback is expected in Q4.

Key positives: Gen. Staffing revenue due to higher mark-ups.

Key negatives: LTL margin pressures across segments continue.

Impact on financials: Cut FY20E/21E EPS by 10%/7%. Introduce FY22E.

Valuations & view

TEAM’s near-term performance is expected to remain weak, given that the company has toned down its FY20E guidance down to 10%/15% volume/value growth in General Staffing (versus 12-14%/20% earlier). The lower growth would also mean margin pressures in the interim (due to negative op. leverage). Other HR services is going through its own transitory phase as corporate training business would take time to ramp-up over low margin government business. As a result, we expect the stock price to trend weak in the near-term until meaningful growth comes back in the General Staffing business (which would be able to lift-up consol performance on its own might regardless of Other HR Services/Telecom staffing drags). We roll-over our DCF-based valuation and arrive at a new target price of Rs2,742. We continue to like the macro-economic sweet spot of the flexible staffing industry and TEAM’s leadership position in the same, maintain OP.