MOSL: TEAMLEASE SERVICES (Buy)-Margin story playing out better than expectations

TeamLease Services: Margin story playing out better than expectations; overshadowing the slight revenue miss

(TEAM IN, Mkt Cap USD0.7b, CMP INR2885, TP INR3400, 18% Upside, Buy)

• Continued pick-up in General Staffing: Revenue for TeamLease (TEAM) grew 20% YoY (est. of 27% YoY) to INR9.8b. The miss stemmed out of General Staffing (13% YoY), which saw some weakness in FY18, although the trajectory is already looking upward (8% YoY growth in 3QFY18). Performance in the other segments remained strong (210% YoY in Specialized Staffing and 67% in Other HR Services).
• Solid margins performance: EBITDA margin of 2.1% (adjusted for one-off provision write-back) expanded 60bp YoY, led by (i) expansion of 20bp in General Staffing and (ii) higher proportion of revenue from Specialized Staffing (7% in 4QFY18 v/s 3% in 4QFY17). Improvement was seen on both the key determinants of margins - 8% increase in realization and an increase in Associate/Core Employee ratio to 220 in 4QFY18 (from 203 last year). PAT of INR212m declined 36% YoY, in line with our estimate, as the revenue and other income miss was offset by the margin beat.
• Soft year, strong outlook: At 19% revenue growth, FY18 was soft relative to historical CAGR of 25%. However, 70bp margin expansion kept the upward trajectory on track, leading to growth of 86% YoY. PAT growth stood at 28% YoY. Although organic revenue growth trajectory took a dent in FY18, growth is expected to swing back to normal in FY19, while the backdrop of under-penetration and formalization remains intact.