MOSL: TEAMLEASE SERVICES (Buy)-Sharp comeback in staffing

TEAMLEASE SERVICES: Sharp comeback in staffing

(TEAM IN, Mkt Cap USD0.6b, CMP INR2557, TP INR3500, 37% Upside, Buy)

• Strong headcount growth: Revenue for TeamLease (TEAM) grew by 25% YoY to INR10.9b, (2.5% ahead of estimate) with strength seen across segments. General Staffing was up 17% YoY, Specialized Staffing was up 182% YoY and Other HR Services was up by 175% YoY. Coming out of a soft FY18, 1Q saw a sharp revival in headcount growth, and this further accelerated in 2Q. Net addition was up 13% YoY, post three quarters of single-digit growth. Momentum is expected to continue, aided by a strong pipeline and seasonal strength in 2H.
• Margins aided by operating leverage: EBITDA margin at 2.2% expanded by 50bp YoY, and was 20bp above expectations. It was mainly led by (i) 20bp expansion in General Staffing, resulting out of operating leverage (associate/core employee of 241 in 2QFY19 v/s 210 in 2QFY18), and (ii) 13pp margin expansion in Other HR Services as the segment gained scale. Profitability in Specialized Staffing continues to be impacted by restructuring in Evolve, which is expected to normalize next year.
• Encouraging trends, conviction intact: Several factors during the quarter have been encouraging, keeping our thesis intact, these include (i) revival of headcount growth to historical levels and an outlook of it continuing, (ii) 50bp YoY margin expansion in General Staffing led by productivity improvement, (iii) scaling up of other businesses and diversification of EBITDA (36% of it now comes from outside General Staffing), and (iv) visibility of further tailwinds in margins, mainly out of growth in General Staffing and completion of restructuring in Evolve.