MOSL: TEAMLEASE SERVICES (Buy)- A clear reflection of business model strengths

​TeamLease Services: A clear reflection of business model strengths

(TEAM, Mkt Cap USD0.5b, CMP INR1831, TP INR2300, 26% Upside, Buy)

• Margin improvement, tax benefits boost PAT: Revenue grew 21.2% YoY to INR8.8b (4pp miss). Slowdown in hiring, led by an inward focus of customers post GST, led to 18% YoY growth in general staffing (v/s 20% in the previous quarter), which is also visible from the QoQ decline in headcount of ~2,000. However, EBITDA margin expansion of 20bp YoY to 1.7% and a near-zero tax rate drove 94% YoY growth in PAT to INR176m (21% beat).
  
• Up on profitability, cash generation: We deem scale-related margin benefits and high cash generation to be the key positives of the staffing business model. Margin expansion in 2Q was a function of [1] associate/core employee ratio of 210 v/s 186 in the previous year, [2] rise in average mark-up per employee per month to INR735 (+5% YoY) and [3] 3.2% contribution of IT staffing v/s 0.7% in 2QFY17; further improvement here could result in a sustained upward trajectory. In 1HFY18, TEAM generated INR420m of cash from operations (152% of EBITDA) v/s INR289m in FY17 (65% of EBITDA).
  
• Acquired 40% stake in Schoolguru: TEAM acquired a 40% stake in Schoolguru, an online content provider for students, valuing the entity at INR430m. The acquisition would complement the training business of TEAM, which includes NETAP, the Skills University and other training services. With revenue of INR40m, the transaction implies a price of 11x; the entity is currently not making any profits. With six recent transactions, the pace of acquisitions has been encouraging.