TeamLease Services' Q4FY18 results (Outperformer) - Associate count growth to rebound in FY19E

Q4FY18 result highlights

• General Staffing: Associate base stood at ~132k (added just 1.4k net associates vs exp. of 4.3k on account of higher churn esp. in one its large client) and grew by 4.6% yoy. Rev. came in at ~Rs8.8bn (+13.1% yoy; 2% beat led by 3% beat in gross billing/associate). EBITDA margin came in at 1.83% (+27 bps yoy; 9bps below est. on account of lower net adds led –ve operating leverage). Core to Associate ratio improved to 220 (vs 219 qoq, 203 yoy). Avg. mark-up per employee per month came in at ~Rs761 for Q4 (FY18 avg. at Rs755).
• Specialized Staffing: Revenue came in at ~Rs728m (3x yoy; +24% qoq; in-line) while EBITDA margin weakened to 7.1% (-300 bps qoq), mainly due to Evolve consolidation. Adjusting for Evolve, revenue was flat qoq (27.3% yoy). Associate base improved by 38 qoq to 5,948. Evolve revenue/EBITDA stood at ~Rs430m/Rs21m respectively.
• HR Services: Rev. at ~Rs217m grew 67.1% yoy (in-line), EBITDA margin stood at 12.4% (Q4 has high margin due to provision write-backs).
• Cons. rev. grew 19.6% yoy/6.5% qoq to ~Rs9.8bn (2% beat), on the back of decent performance across segments and Evolve’s consolidation. EBITDA grew 85.2% yoy/27.2% qoq to ~Rs227m on rising mark-up and improved productivity (broadly in-line).
• PBT grew by 35% yoy but PAT at ~Rs212m was down 36% yoy as the base quarter had a large tax write-back (PAT was a miss of 11% due to higher finance costs due to WC in Evolve and lower other income).

Key positives: Improvement in avg. mark-up and productivity.

Key negatives: Low net additions; weak margin in specialized staffing.

Impact on financials: FY19E/20E EBITDA increased by 2.5%/4.2%.

Valuations & view

Although TEAM closed FY18 with its lowest headcount growth since FY11 (GST/client issues), the company remains confident of touching the 14-15% growth run-rate in FY19E and beyond. 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 Outperformer rating on TEAM with a DCF-based revised target price of Rs3,034.