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TeamLease Services (TLS), established in 2002, is one of India’s leading human resource service companies in the organised sector. The company provides employment and employability and education services to various industries.
TLS’s employment services include staffing solutions, recruitment services and compliance services, whereas its employability offerings include different types of learning and training solutions for retail, institutional and enterprise customers.
TLS has its presence in eight locations, with over 2,500 clients and 1,400 employees across the country. The company, in partnership with the Government of Gujarat, set up Team Lease Skills University (TLSU) at Vadodara, which was India’s first vocational university. In FY15, the company rolled out National Employability through Apprenticeship Program (NETAP) to provide on-thejob training to apprentices. At the end of Q3FY18, TLS had over 175,000 associates/trainees spread across the country and had given employment to over 1.6 million people.
TLS, which got listed on the bourses in February 2016 after an initial public offering (IPO) that saw huge investor response, has been on an acquisition spree in the past two years. The company had said that it planned to use part of the proceeds from the IPO for acquisitions. In FY17, the company acquired ASAP, Nichepro and Keystone (high margin IT staffing) which is expected to be margin accretive; The IT staffing business has about 15 per cent margin vis-à-vis about 1.5 per cent of general staffing business. In May 2017, the company finalised a deal to acquire a 30 per cent stake in Bengalurubased Cassius Technologies, which runs job site Freshersworld. In Oct 17, TLS made a deal to acquire Evolve Technologies, a Pune-based staffing firm, to enter the specialised telecom staffing space. Further, in December 17, TLS completed 40.2 per cent stake acquisition in online learning company Schoolguru Eduserve to accelerate its employability strategy. The company’s recent acquisitions to foray into new verticals will aid company's growth going forward.
Recently, TLS received approval from the Reserve Bank of India (RBI) for increase in the Foreign Portfolio Investment (FPI) limit under Portfolio Investment Scheme from 24 per cent to 75 per cent of the paid-up capital of the company. The company will also benefit from Section 80JJAA deduction of the Income Tax Act, which pertains to employment generation.
TLS generated about 91 per cent of 9M FY18 revenues from staffing and allied services; around 6 per cent from specialised staffing services and the rest from other HR services. The company enjoys strong position in the highly fragmented flexi-staff industry, commanding a market share of around 6 per cent.
Industry Overview
Flexi-staffing industry is in an emerging stage with only 0.2 per cent domestic penetration against 2 per cent globally. The industry is presently in a sweet spot in India led by multiple dynamics playing in favour of the sector. As per Indian Staffing Federation, India is the fourth largest market for staffing solutions with 2.1 million temporary workers in the organised sector. India is the also the world’s second largest labour market. The scope for increase in formal employment in the country, which is currently only about 14 per cent of overall employee base, as well as increase in share of outsourced employee base within the formal employee base, are expected to be the key macro drivers. The organised flexi-staffing industry is expected to grow at a CAGR of 20 to 30 per cent in the next 4 to 5 years on the back of rising preference for organised staffing providers and organised business footprint expansion in tier-2 and tier-3 cities. Over the last few years, increased hiring of contract employees in sectors and industries such as BFSI, retail, e-commerce, logistics and telecom have been the key growth drivers for flexistaffing companies. The next few years could see a pick-up in manufacturing vertical as well (which has large proportion of unorganised players). The amendments to labour laws will increase the use of flexi-staffing.
Also, there is a visible mismatch between the demand and supply of workers in industrialised states in India. While industries are concentrated only in some states, the workers with the requisite skills set are more widely located. For instance, a large fraction of enterprises are located in West and South India, while a large proportion of working age population belongs to East and North India. This presents a substantial opportunity for the staffing solution companies to capitalise in bridging the gap between demand and supply.
Financials
On the financial front, the net sales of the company grew by 8.43 per cent to Rs859.35 crore in the third quarter of FY18, as against Rs792.51 crore in the same quarter of the previous year. The company’s PBDT surged 22.24 per cent to Rs18.41 crore in the third quarter of FY18 on a yearly basis. The company’s net profit also soared tremendously by 98.02 per cent to Rs18.00 crore in the third quarter of FY18, as against Rs9.09 crore in the same quarter of the previous year. The consolidated EPS for the company in the quarter stood at Rs10.76 as against Rs5.39 in the corresponding period last year.
The associates/trainees headcount increased by about 32,000 on a YoY basis and by about 15,000 on a QoQ basis. At the end of Q3 FY18, the company’s associate headcount was 137,000 and NETAP trainee headcount was 40,500. The average mark-up per employee per month (PEPM) for staffing associates increased to Rs755 in Q3 FY18 from Rs735 in Q2 FY18.
On an annual basis, the net sales of the company increased by 19.41 per cent to Rs2,991.08 crore in FY17, as against Rs2,504.92 crore in FY16 on a year-on-year basis. The company’s PBDT surged 19.77 per cent to Rs60.09 crore in FY17 as against Rs40.32 crore in FY16. The net profit also went up by 32.35 per cent to Rs56.64 crore in FY17 as against Rs24.29 crore in FY16.
On the valuation front, the company maintained a PE ratio of 56.36x as against its peers Quess Corp's 62.22x and Security and Int's 106.5x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 19.16 per cent and 14.41 per cent, respectively. The company has reduced its debt and is virtually debt-free.
Conclusion
The flexi-staffing business is traditionally a low margin business and hence, TLS has to depend on operational efficiencies to improve its margins. The company has been able to improve margins significantly over the last five years on the back of improvement in staffing productivity. We expect the company’s EBITDA to grow further in the coming years, majorly driven by higher revenue growth and margin improvement on account of increase in productivity and its recent entry into high margin business, asset-light model and strong technology platform. TLS is also likely to benefit from an increase in penetration of flexi-staffing in India, shift from unorganised to organised players and higher GDP growth. We recommend our readerInvestors to HOLD the stock at current levels.