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MOSL: TEAMLEASE SERVICES (Buy)-Profitability below estimate-Impacted by delay in collections worth INR60m

TEAMLEASE SERVICES: Profitability below estimate; Impacted by delay in collections worth INR60m

(TEAM IN, Mkt Cap USD0.7b, CMP INR2808, TP INR3350, 19% Upside, Buy)

 

Profitability impacted by provisioning in 'Other HR Services'

• 1QFY20 revenue grew 22.5% YoY (v/s est. of 20.8%). EBIT declined 2% YoY to INR171m (v/s est. of 42% growth) and PAT declined 12% YoY (v/s est. of 32% YoY growth).
• EBIT and PAT were impacted by profitability in 'Other HR Services', where the company created a provision for INR60m due to delay in collections. These are expected to reverse in 2Q-3QFY20.
• Adjusted for the provision, TEAM's EBIT would have grown 32% to INR231m while PAT would have increased 15% to INR253m (still a miss to our PAT est. of INR289m).
• The miss excluding provisions came from lower profitability due to 9% salary increment of core employees.

Revenue momentum continues to allay any slowdown concerns

• The growth of 22.5% in revenues was fuelled by General staffing, which grew 23.4% YoY. This was driven by 6,500+ QoQ addition to General Staffing associates (volume growth of 16.6%). TEAM cited 12,000 open positions at this point of time, which lends visibility for sustained volume growth momentum over the next few quarters.
• Organic Volumes in IT staffing (excluding eCentric acquisition) too have been healthy at 13-15%, while Telecom Staffing is flattish.
• TEAM saw the average realization per associate (PAPM) improve to INR730 per month from INR714 in 4QFY19. PAPM had come under pressure last year due to skew of growth towards few large contracts. The mix of growth in the recent past has been more balanced between large, medium and small contracts - which has helped realization.

Valuation View

• We have lowered our EBIT margin estimates for FY20/FY21 by 20bp, owing to TEAM's focus on market share and growth, and also due to the phenomenon of large contracts, which are being won at more aggressive price points. This drives 14%/9% downward revision in our earnings estimate for the period.
• We value TEAM using DCF to arrive at a target price of INR3,350 (implied target P/E of 47x/31x on FY20E/FY21E EPS). At 39x/25.8x FY20/21E earnings, valuations are rich, but justified given the revenue/EBIT/EPS CAGR of 23%/41%/36% over FY19-21. Sustained superiority of the financial performance due to industry trends, business model and operational excellence continue strengthening our long-term view. Buy.