EUR 120.00 For Business Accounts Only

MOSL: QUESS CORP (Neutral)-Organic momentum strong, profitability disappoints

QUESS CORP: Organic momentum strong, profitability disappoints

(QUESS IN, Mkt Cap USD0.9b, CMP INR446, TP INR500, 12% Upside; Neutral)

 

• 1QFY20 performance highlights: QUESS' revenue grew 21.7% YoY (in-line) in 1QFY20. Excluding the impact of accounting standard changes, EBITDA was up by 17% YoY (our estimate: +23%) and PAT by 11% YoY (our estimate: 38%). Adjusted for Ind-AS 116, the EBITDA margin stood at 5% (our estimate: 5.3%). Lower margins can be attributed to the seasonality in the IFM business and the cyclical reduction in the number of students trained by Excelus. Reported PAT growth after incorporating Ind-AS 116 changes was 3.4% YoY. Reported EBITDA was at INR1.5b, with the margin at 6.2%.
• Organic growth driven by People and Services Organic revenue growth stood at 21% YoY in 1QFY20. This was majorly driven by strong headcount addition in the general staffing business. QUESS added 32,000 associates in 1Q alone, as against 35,000 in FY19. High associate count was led by addition of 28,000 associates from one single BFSI client. Total contract value (TCV) stood at INR25b across businesses, with the addition of 106 clients.
• Operating cash conversion remained healthy: QUESS' cash flow from operations had improved to 44% of EBITDA in FY19. The conversion ratio of 44% was also sustained in 1QFY20; and the company expects to take this further up to 50% over the medium-to-long term.
• Valuation view: We had earlier downgraded QUESS, as the impact of its aggressive inorganic foray had started to reflect negatively on its financial performance. The company's efforts in margin improvement, cash conversion and turning around performance of its acquisitions have been impressive. However, we have trimmed our EBIT margin estimates by 20bp/70bp for FY20/21 to 4% / 4.3%. Although positive on the long-term prospects of QUESS, we adopt a wait-and-watch approach in terms of its performance in FY20 on: (a) integration of another acquisition - Allsec BPO, (b) margins execution, (c) cash generation and (d) organic revenue growth. Our DCF-based TP is INR500 (12% upside). Maintain Neutral.