MOSL: STAFFING-Making hay while the sun shines-Using cash chest to acquire desirable targets available at discount

Staffing: Making hay while the sun shines; Using cash chest to acquire desirable targets available at discount

Recurrent inorganic forays have been core to Quess Corp’s strategy since inception, whereas TeamLease has peddled harder only recently. While their approaches are starkly different, both have been taking advantage of capital availability and valuation mismatches to achieve their respective goals. We have been optimistic about organic growth in their corresponding businesses; their inorganic practice is further cementing our positive stance.

 Market anomaly - a wide gap between acquirers and targets

• For all the acquisitions carried out by Quess over the last two years, the average trailing EV/Sales is 0.6x and EV/EBITDA is 7.1x. For TeamLease's acquisitions, the average EV/Sales is 1.4x (excluding an outlier) and EV/EBITDA is 10.8x.
• Both acquirers, however, have been trading at average one-year forward multiples that are 2-3 times the trailing multiples of the targets. The targets have checked the relevant boxes that characterize the acquirers - high growth and favorable industry dynamics, that too at superior margins.
• We find that two reasons are critical to explaining this variance: (i) targets hitting the glass ceiling and in need of a larger player's network for expansion, and (ii) bargaining power of acquirers - few with the means to acquire many.

 Same game; different goalposts

• Both Quess and TeamLease have been taking advantage of this valuation disparity in fulfilling their respective objectives.
• Quess has been looking at diversifying its set of offerings, adding new dimensions to long-term growth and improving overall margins, as it successfully has since inception. In the process, it has also added companies that have immediate visible benefits, like increased addressable market in key customers, easily executable cross-sell opportunities and ability to pull some levers and cause turnarounds.
• TeamLease, on the other hand, has been making a mark in specialized staffing - now 6% of revenue (and 24% of EBITDA) from no contribution a year ago. It has been strengthening its position in employment-related services by also ramping up on technology investments (Freshersworld and Schoolguru).