TeamLease Services (TEAM IN)

Rating: HOLD | CMP: Rs2,980 | TP: Rs3,203

May 29, 2019 Margin expansion remains key

Q4FY19 Result Update Teamlease (TEAM) reported a tepid quarter with gross revenues declining by
~1% QoQ & specialized staffing and other HR service verticals pulled down
 Change in Estimates |  Target |  Reco
overall performance. Specialized staffing growth in Q4FY19 was mild at 9.1%
Change in Estimates on a YoY basis. Q4FY19 performance was tepid mainly due to flat growth of
Current Previous specialized staffing vertical, flat EBITDA growth & associate employee’s
FY20E FY21E FY20E FY21E
additions. Specialized staffing revenues stagnated QoQ (+0.3%) with
Rating HOLD HOLD
Target Price 3,203 3,203 revenues being INR 794mn. IT staffing continues to grow well but weak
Sales (Rs. m) 53,531 61,969 53,531 61,969
growth in telecom vertical is a headwind. General staffing pipeline for FY20E
% Chng. - -
EBITDA (Rs. m) 1,314 1,518 1,314 1,518 appears to be strong & the structural story around increased formalization of
% Chng. - -
labor market & TEAM spot in flexible staffing industry keeps us positive.
EPS (Rs.) 72.7 89.2 72.7 89.2
% Chng. - - However, stretched valuations of 42.x/ 34.8x FY20/21E keeps us cautious
especially when operating leverages are showing signs of weakness.
Key Financials Maintain HOLD rating, with unchanged target price of Rs.3203.
FY18 FY19 FY20E FY21E
Sales (Rs. m) 36,241 44,476 53,531 61,969  Miss on Revenues and margin: Revenue came in at Rs11,634 mn down 1%
EBITDA (Rs. m) 688 945 1,314 1,518
QoQ and up 19% YoY (Ple: Rs12,115mn). Gross margin came at 5.8% up
Margin (%) 1.9 2.1 2.5 2.4
PAT (Rs. m) 738 984 1,243 1,524 30bps QoQ. EBIDTA margin came at 2.21% up 12bps QoQ and below our
EPS (Rs.) 43.1 57.6 72.7 89.2 estimates (PLe: 2.3%). Absolute EBIDTA came at Rs257mn which is 7.7%
Gr. (%) 28.1 33.4 26.3 22.6
DPS (Rs.) - - - -
below our estimates led by weak margins in specialized staffing. PAT at
Yield (%) - - - - Rs260mn was 0.8% partially ahead of estimates aided by higher other income
RoE (%) 18.3 20.1 20.7 20.6
and thus offset impact of miss on revenue and margins
RoCE (%) 7.6 8.5 10.3 10.9
EV/Sales (x) 1.4 1.1 0.9 0.8
EV/EBITDA (x) 71.6 52.6 37.2 31.6  General staffing- Margin expansion offset by Tepid Revenue growth:
PE (x) 69.1 51.8 41.0 33.4 General staffing associates stood at 154,095 grew by 16.5% YoY with weak
P/BV (x) 11.5 9.5 7.7 6.2
addition of ~1400 QoQ. Revenue remain weak at Rs10,565mn (-0.5% QoQ/
+20% YoY). However, margins expanded by 25bps QoQ/ 46bps YoY with
Key Data TLSV.BO | TEAM IN tailwind from improvement in employee productivity and operational
52-W High / Low Rs.3,339 / Rs.1,990
efficiencies. We note that ratio of associates to core staffing associates
Sensex / Nifty 39,502 / 11,861
Market Cap Rs.51bn/ $ 729m improved to 270 (vs 260 in Q3FY19). Pipeline remain strong with open position
Shares Outstanding 17m
3M Avg. Daily Value Rs.112.83m
at end of Q4FY19 with 10000 (vs ~5500 in Q4FY18).

 Telecom staffing drags Specialized staffing: Revenue came at Rs794mn

Shareholding Pattern (%)
(flat QoQ/ +9% YoY) with EBITDA margin of 6% (+50bps QoQ/ -97bps YoY).
Promoter’s 40.78
Foreign 42.38 IT staffing business saw improved momentum in FY2019 with ~18% growth in
Domestic Institution 7.61 associates to 2,100. Though IT staffing continues to grow well, weak
Public & Others 9.23
Promoter Pledge (Rs bn) - performance in telecom staffing (Evolve) is dragging growth for the segment,
Telecom staffing (~50% of total IT staffing business) dragged the margins in
Stock Performance (%) FY19 (Q3FY19 EBITDA Margin for Telecom Staffing- 3%). Management
1M 6M 12M expects telecom margins to recover back to ~5% with investments made last
Absolute (0.6) 6.2 11.6
year and realignment of associates from non- profitable projects to profitable
Relative (1.7) (2.8) (1.3)
projects. However also cited that revenue growth is expected to be flat in this
segment.
Aniket Pande
aniketpande@plindia.com | 91-22-66322300
Rajat Gandhi
rajatgandhi@plindia.com | 91-22-66322246

May 29, 2019 1

 TeamLease Services

Body Text Q4FY19: Quick view on results

Y/e March (Rs mn) Q4FY19 Q3FY19 QoQ gr. Q4FY18 YoY gr. PL Estimates Variance
Revenues 11,634 11,722 -0.8% 8,756 32.9% 12,115 -4.0%
EBITDA 257.3 245.2 4.9% 151.4 69.9% 278.7 -7.7%
EBITDA Margins 2.2% 2.1% 12 bps 1.7% 48 bps 2.30% -9 bps
EBIT 232.5 220.5 5.5% 200.0 16.2% 248.4 -6.4%
EBIT Margin 2.0% 1.9% 12 bps 2.0% -5 bps 2.1% -5 bps
Net Profit 262 252 4.0% 174 50.5% 260 0.8%
Source: Company, PL

Revenue came in at Rs11634mn Weak performance with tepid revenue growth

down 1% QoQ and up 19% YoY (Ple:
Rs12115mn). Revenue miss on Revenues Growth YoY
account of lower than expected
14,000 35.0%
associate and trainee’s addition in 29.1% 27.7%
General staffing. 12,000 24.6% 30.0%
23.0%24.0%
10,000 21.4% 21.2%
19.7%19.7% 25.0%
19.0%
8,000 20.0%
12.3% 12.7%
6,000 15.0%

10,213

11,722

11,634
10,907
4,000 10.0%
6,877

8,147

8,169

8,530

9,181

9,774
7,226

8,756
2,000 5.0%
- 0.0%
3QFY17

4QFY17

3QFY18

4QFY18

2QFY19

3QFY19

4QFY19
1QFY17

2QFY17

1QFY18

2QFY18

1QFY19
Source: Company, PL

General staffing associates stood at Addition of General staffing associates slowed in Q4

154,095 grew by 16.5% YoY with
weak addition of ~1400 QoQ. General Staffing associates Growth YoY (%)
Pipeline remain strong with open 16.2% 16.6%16.5%
180,000 18.0%
position at end of Q4FY19 with 10000 14.1%
160,000 14.1% 13.5% 16.0%
(vs ~5500 in Q4FY18). 12.7%
140,000 14.0%
10.8%
120,000 9.8% 12.0%
100,000 10.0%
80,000 5.7% 6.1% 8.0%
60,000 4.6% 6.0%
40,000 4.0%
20,000 2.0%
0 0.0%
Q1FY17

Q2FY17

Q3FY17

1QFY18

2QFY18

3QFY18

1QFY19

2QFY19

3QFY19
Q4FY17

4QFY18

4QFY19

Source: Company, PL

May 29, 2019 2

 TeamLease Services

Key Highlights from concall:

 Company currently has open position of 10000 (vs ~5500 in FY18) and will
continue to focus on filling this position.

 Management cited that demand was across BFSI sector, Digital, E-commerce
and Manufacturing.

 Management guided to achieve 15-17% associate growth in medium term.

 Revenue from Telecom staffing (Evolve) stood at Rs43 Cr with EBITDA of

Rs1.3Cr (EBITDA Margin- ~3%) with core employee count of 86 and associate
count of 3800.

 In IT staffing business, Telecom staffing (~50% of total IT staffing business)

dragged the margins in FY19 (Q3FY19 EBITDA Margin for Telecom Staffing-
3%). Management expects telecom margins to recover back to ~5% with
investments made last year and realignment of associates from non- profitable
projects to profitable projects. However also cited that revenue growth is
expected to be flat in this segment.

 HR services: Excess provisions taken in this segment in Q3FY19 partly

reversed in Q4FY19, as grants from state governments come in for the
government training business. Target is to provide all general staffing clients
with value added services also, thus providing a more comprehensive suite of
services and improving customer stickiness.

Marginal Recovery in mark-up

Mark-up (Realization per associate per month)

755
760 747
735 736 735
740 729

720 712 712 710 710 714

700 691

680

660

640
1QFY17

3QFY17

4QFY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19
2QFY17

Source: Company, PL

May 29, 2019 3

 TeamLease Services

Strong addition of NETAP trainees

NETAP Trainees Growth QoQ (%)

60,000 25.7% 30.0%

23.9%
50,000 22.3% 25.0%
20.7%19.7%
40,000 16.3% 20.0%

30,000 15.0%
9.2% 10.3%
7.8% 6.9%
20,000 6.5% 10.0%

10,000 2.6% 5.0%

0 0.0%

Q1FY17

1QFY18

2QFY18

3QFY18

4QFY18

1QFY19

4QFY19
Q2FY17

Q3FY17

Q4FY17

2QFY19

3QFY19
Source: Company, PL

Segment-wise performance Analysis

Particulars Q4FY19 Q4FY18 YoY gr. Q3FY19 QoQ gr. FY19 FY18 YoY gr.
Revenue:
General Staffing and Allied Services 10565 8830 20% 10617 0% 40115 33749 19%
Specialized Staffing Services 794 728 9% 792 0% 3092 1829 NC
Other HR Services 275 217 27% 314 12% 1269 663 91%
Total Income from Operations 11634 9775 19% 11723 -1% 44476 36241 23%

EBITDA:
General Staffing and Allied Services 247 162 53% 221 12% 808 615 31%
Specialized Staffing Services 49 52 -7% 45 9% 202 180 NC
Other HR Services 16 27 40% 3 423% 83 39 111%
Unallocated -57 -33 72% -23 152% -151 -149 1%
Total EBITDA 255 208 23% 246 4% 942 685 37%

EBITDA Margin
General Staffing and Allied Services 2.3% 1.8% 50 bps 2.1% 20 bps 2.0% 1.8% 20 bps
Specialized Staffing Services 6.1% 7.2% -97 bps 5.6% 50 bps 6.5% 9.9% -340 bps
Other HR Services 5.8% 12.3% -662 bps 1.0% 480 bps 6.5% 5.9% 60 bps
Total 2.2% 2.1% -10 bps 2.1% 9 bps 2.1% 1.9% 23 bps
Source: Company, PL

May 29, 2019 4

 TeamLease Services

Financials
Income Statement (Rs m) Balance Sheet Abstract (Rs m)
Y/e Mar FY18 FY19 FY20E FY21E Y/e Mar FY18 FY19 FY20E FY21E

Net Revenues 36,241 44,476 53,531 61,969 Non-Current Assets

YoY gr. (%) 19.2 22.7 20.4 15.8
Employee Cost 34,712 41,971 50,718 58,778 Gross Block 1,768 1,818 1,868 1,918
Gross Profit 1,529 2,504 2,813 3,191 Tangibles 190 200 210 220
Margin (%) 4.2 5.6 5.3 5.1 Intangibles 1,578 1,618 1,658 1,698
SG&A Expenses - - - -
Other Expenses 841 1,560 1,499 1,673 Acc: Dep / Amortization 393 498 625 751
Tangibles 136 162 192 223
EBITDA 688 945 1,314 1,518 Intangibles 257 336 432 528
YoY gr. (%) 85.6 37.3 39.1 15.5
Margin (%) 1.9 2.1 2.5 2.4 Net fixed assets 1,375 1,320 1,243 1,167
Tangibles 54 38 18 (3)
Depreciation and Amortization 92 105 127 126 Intangibles 1,321 1,282 1,226 1,170

EBIT 597 840 1,187 1,392 Capital Work In Progress 2 60 60 60

Margin (%) 1.6 1.9 2.2 2.2 Goodwill - - - -
Non-Current Investments 1,202 1,441 1,441 1,441
Net Interest 25 52 21 12 Net Deferred tax assets 399 653 653 653
Other Income 156 181 80 160 Other Non-Current Assets 1,019 1,637 1,637 1,637

Profit Before Tax 728 968 1,246 1,540 Current Assets

Margin (%) 2.0 2.2 2.3 2.5 Investments 323 160 160 160
Inventories - - - -
Total Tax (9) (16) 3 15 Trade receivables 2,235 2,643 3,227 3,735
Effective tax rate (%) (1.3) (1.7) 0.2 1.0 Cash & Bank Balance 1,424 1,230 1,967 2,859
Other Current Assets 130 194 194 194
Profit after tax 738 984 1,243 1,524 Total Assets 8,860 10,698 11,941 13,265
Minority interest - - - -
Share Profit from Associate - - - - Equity
Equity Share Capital 171 171 171 171
Adjusted PAT 738 984 1,243 1,524 Other Equity 4,246 5,220 6,463 7,988
YoY gr. (%) 28.1 33.4 26.3 22.6 Total Networth 4,417 5,391 6,634 8,158
Margin (%) 2.0 2.2 2.3 2.5
Extra Ord. Income / (Exp) - - - - Non-Current Liabilities
Long Term borrowings - - - -
Reported PAT 738 984 1,243 1,524 Provisions 437 566 566 566
YoY gr. (%) 28.1 33.4 26.3 22.6 Other non current liabilities 49 94 94 94
Margin (%) 2.0 2.2 2.3 2.5
Current Liabilities
Other Comprehensive Income - - - - ST Debt / Current of LT Debt 73 106 106 106
Total Comprehensive Income 738 984 1,243 1,524 Trade payables 176 280 280 280
Equity Shares O/s (m) 17 17 17 17 Other current liabilities 3,709 4,458 4,458 4,258
EPS (Rs) 43.1 57.6 72.7 89.2 Total Equity & Liabilities 8,861 10,895 12,138 13,463
Source: Company Data, PL Research Source: Company Data, PL Research

May 29, 2019 5

 TeamLease Services

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY18 FY19 FY20E FY21E Year
Y/e Mar FY18 FY19 FY20E FY21E

PBT 728 968 1,246 1,540 Per Share(Rs)

Add. Depreciation 92 105 127 126 EPS 43.1 57.6 72.7 89.2
Add. Interest 25 52 21 12 CEPS 48.5 63.7 80.1 96.5
Less Financial Other Income 156 181 80 160 BVPS 258.3 315.3 388.0 477.2
Add. Other (156) (181) (80) - FCF (0.7) 103.7 39.6 69.4
Op. profit before WC changes 688 945 1,314 1,678 DPS - - - -
Net Changes-WC (310) 862 (583) (447) Return Ratio(%)
Direct tax 9 16 (3) (15) RoCE 7.6 8.5 10.3 10.9
Net cash from Op. activities 387 1,823 728 1,216 ROIC 8.5 9.0 11.8 13.2
Capital expenditures (400) (50) (50) (30) RoE 18.3 20.1 20.7 20.6
Interest / Dividend Income 156 181 80 - Balance Sheet
Others (491) (621) - - Net Debt : Equity (x) (0.4) (0.2) (0.3) (0.4)
Net Cash from Invt. activities (735) (490) 30 (30) Debtor (Days) 23 22 22 22
Issue of share cap. / premium - - - - Valuation(x)
Debt changes 1,032 33 - - PER 69.1 51.8 41.0 33.4
Dividend paid - - - - P/B 11.5 9.5 7.7 6.2
Interest paid (25) (52) (21) (12) P/CEPS 48.5 63.7 80.1 96.5
Others 62 174 - - EV/EBITDA 71.6 52.6 37.2 31.6
Net cash from Fin. activities 1,070 156 (21) (12) EV/Sales 1.4 1.1 0.9 0.8
Net change in cash 722 1,488 737 1,174 Dividend Yield (%) - - - -
Free Cash Flow (13) 1,773 678 1,186 Source: Company Data, PL Research
Source: Company Data, PL Research

Quarterly Financials (Rs m)

Y/e Mar Q1FY19 Q2FY19 Q3FY19 Q4FY19
Net Revenue 10,213 10,907 11,722 11,634
YoY gr. (%) 19.7 24.6 27.7 19.0
Raw Material Expenses 9,683 10,244 11,083 10,961
Gross Profit 530 663 639 673
Margin (%) 5.2 6.1 5.5 5.8
EBITDA 202 240 245 257
YoY gr. (%) (11.3) 19.1 2.0 4.9
Margin (%) 2.0 2.2 2.1 2.2
Depreciation / Depletion 27 29 25 25
EBIT 175 211 220 232
Margin (%) 1.7 1.9 1.9 2.0
Net Interest 11 14 13 14
Other Income 52 40 36 52
Profit before Tax 217 238 243 270
Margin (%) 2.1 2.2 2.1 2.3
Total Tax (3) (12) (9) 8
Effective tax rate (%) (1.2) (5.2) (3.7) 2.9
Profit after Tax 219 250 252 262
Minority interest - - - -
Share Profit from Associates (1) (1) - (2)
Adjusted PAT 218 249 252 260
YoY gr. (%) 32.8 43.1 37.0 22.6
Margin (%) 2.1 2.3 2.2 2.2
Extra Ord. Income / (Exp) - - - -
Reported PAT 218 249 252 260
YoY gr. (%) 32.8 43.1 37.0 22.6
Margin (%) 2.1 2.3 2.2 2.2
Other Comprehensive Income - - - -
Total Comprehensive Income 218 249 252 260
Avg. Shares O/s (m) 17 17 17 17
EPS (Rs) 12.8 14.6 14.8 15.2
Source: Company Data, PL Research

May 29, 2019 6

 TeamLease Services

Price Chart Recommendation History

(Rs)
No. Date Rating TP (Rs.) Share Price (Rs.)
3250
1 10-Jul-18 Hold 2,940 2,940

2646 2 25-Jul-18 Hold 2,740 2,672

3 5-Oct-18 Hold 2,740 2,219
2042
4 7-Jan-19 Hold 2,740 2,884
1438 5 5-Apr-19 Hold 3,203 3,031

835
May - 16

May - 17

May - 18

May - 19
Nov - 18
Nov - 16

Nov - 17

Analyst Coverage Universe

Sr. No. CompanyName Rating TP (Rs) Share Price (Rs)
1 Cyient Accumulate 621 579
2 HCL Technologies BUY 1,186 1,087
3 Hexaware Technologies Reduce 325 333
4 Infosys Accumulate 782 748
5 L&T Technology Services Accumulate 1,835 1,691
6 Larsen & Toubro Infotech BUY 1,981 1,678
7 Mindtree Reduce 873 972
8 Mphasis Accumulate 1,090 975
9 NIIT Technologies BUY 1,539 1,268
10 Persistent Systems Hold 618 636
11 Redington (India) BUY 114 99
12 Sonata Software Accumulate 400 346
13 Tata Consultancy Services BUY 2,312 2,013
14 TeamLease Services Hold 3,203 3,031
15 Tech Mahindra BUY 847 770
16 Wipro Hold 247 281
17 Zensar Technologies Accumulate 260 246

PL’s Recommendation Nomenclature (Absolute Performance)

Buy : > 15%
Accumulate : 5% to 15%
Hold : +5% to -5%
Reduce : -5% to -15%
Sell : < -15%
Not Rated (NR) : No specific call on the stock
Under Review (UR) : Rating likely to change shortly

May 29, 2019 7

 TeamLease Services

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May 29, 2019 AMNISH

Digitally signed by AMNISH AGGARWAL
DN: c=IN, o=Prabhudas Lilladher Private Limited,
ou=organisation, cn=AMNISH AGGARWAL,
serialNumber=7a6f13691881d5a8af6353865a61b48b7040e72
8
AGGARWAL
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2.5.4.20=c9b37ca6a8c78a11d6c42a4b6014e984fdf135dc1449
611df0dc682d08443fc6, st=Maharashtra
Date: 2019.05.29 17:26:31 +05'30'