TeamLease Services' Q4FY19 results (Outperformer) - Minor miss, story intact…

Q4FY19 result highlights

• Cons. rev. fell ~1% qoq (but grew 19% yoy; 5% miss) mainly due to lower than expected associate count additions in General Staffing segment. EBITDA grew 13.1% yoy/4.9% qoq to ~Rs257m (7% miss), while margins came in at 2.21% (vs est. 2.24% on lower than est. margins in Specialized Staffing/Other HR Services). PAT grew 22.7% yoy (3% qoq) to ~Rs260m (5% miss; in-line with EBITDA miss).
• General Staffing: Associate base stood at ~154k (added 1.4k net associates’ in this qtr vs 4k est) and grew by 16.5% yoy. Rev. came in at ~Rs10.6bn (+19.6% yoy; 6% miss). EBITDA margin came in at 2.34% (+26bp qoq; IDFCe: 1.95%), improvement was led by continued efficiency gains (core to associate productivity ratio improved to 270 vs 220 yoy and 260 qoq). Mark-up improved marginally at Rs714 vs Rs710 qoq (though was down 5% yoy due to mix changing towards higher fixed fee contracts as they drove large volumes).
• Specialized Staffing: Revenue came in at ~Rs794m (+9.1% yoy; flat qoq; in-line) while EBITDA margins improved 50bps qoq to 6.2% (IDFCe: 7.4%) mainly due to the drag in its IT vertical; IT specialised division margins fell to 9.9% (vs 11% qoq), while telecom margins stood at 3.0% (vs 1.4% qoq).
• HR Services: Rev. grew 26.8% yoy to ~Rs275m (12% fall qoq, 16% miss). Margins too came off ~660 bps yoy to 5.8% due to high base (provisions write-back magnitude was higher in base quarter). TEAM has written back some provisions taken in Q3 during Q4, and this tends to be recurring in nature hence cannot be adjusted.

Key positives: General staffing margins remain strong.

Key negatives: Lower volume growth, IT/Other HR Service margins.

Impact on financials: 7% cut in FY20E EPS. Introduce FY21E financials.

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. Lower mark-ups of new clients are key to grow business in the near-term, but these contracts are largely 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. Margin performance of specialized staffing would remain a key monitorable in our opinion. Maintain OP rating on TEAM with a DCF-based revised TP of Rs3,204; steep valuations leave no room for error.​