EUR 120.00 For Business Accounts Only

MOSL: TEAMLEASE (Downgrade to Neutral)-Valuation factoring in long term growth potential

TEAMLEASE: Valuation factoring in long term growth potential

(TEAM IN, Mkt Cap USD1.1b, CMP INR4658, TP INR4320, 7% Downside, Downgrade to Neutral)

 

Demand outlook remains favorable, but margin pickup to take time

• TEAM delivered a strong operational performance in 2QFY22, with revenue up 10.7% QoQ on broad based growth across all three verticals. It also added 25k associates (record high) in 2Q, benefitting from a strong demand environment as well as seasonality and flow through from a COVID-impacted 1QFY22. EBITDA margin inched up by 10bp QoQ to 2.2% on strong growth in the Specialized Staffing business and partial drawdown in General Staffing, while HR Services broke even. Higher D&A resulted in flat EBIT margin, which missed our estimate.
• Despite the strong business performance, TEAM reported an adjusted loss of INR493m on account of loss provisions in its PF trust on DHFL investment resolution. This provision was surprising as TEAM had earlier maintained that reserves and future gains will compensate for any shortfall. While we view this as a one-time hit, this is likely to impact investor confidence.
• The management remains positive on growth, as a supportive macro and new logo additions boosts associate demand. We expect the company to report good revenue growth in all verticals on continued improvement in General Staffing, pick-up in HR Services, increased manpower demand, and higher margin replacements in the IT Staffing business.
• With the management expecting a flat margin over the next few quarters due to higher costs and stable PAPM, the growth momentum in earnings will be a more reasonable 28% over FY20-23E.
• While we remain positive on the medium- to long-term opportunity for TEAM, as it should benefit from formalization of the labor market, we view the current valuation as rich and hence downgrade the stock to Neutral.