Margin recovery on track in Indian business services sector: IIFL Capital Services

In this note, analysts of IIFL Capital Services review Q4FY23 performance of the three Business Services companies under their coverage. While the General Staffing business for QUESS and TEAM continued to impress with headcount additions, margins remain challenged. IT Staffing remains under pressure, but recovery is expected from H2FY24. SECIS’s domestic growth slowed down in Q4, but analysts of IIFL Capital Services believe that this was just a blip and momentum will likely normalise in FY24. QUESS and TEAM have impressed with cash generation in FY23; SECIS’s OCFto-Ebitda conversion was as per guidance.

Margin under pressure; recovery appears near: 

While all three companies improved margins sequentially, consolidated margins remain under pressure and sharply below the pre-Covid and peak levels. However, recovery appears to be near as QUESS expects the US Staffing foray to break even by the end of Q2; TEAM too expects the NETAP headcount loss to reverse by then. Additionally, the burn from Foundit at QUESS is likely to be allayed in FY24. SECIS too guided to margins normalising in FY24.

Cash generation remains strong across Staffing: 

Focus on collections and tax refunds have helped QUESS and TEAM generate impressive cashflows in FY23. However, SECIS’s cash conversion was muted as focus on growth led to an increase in working capitals. While QUESS targets a cash conversion of ~70%, SECIS guided to achieving 50%, going forward.

FY24 likely to witness robust bottom-line growth: 

Despite robust revenue growth across all three companies, margin pressures led to muted bottom-line growth in FY23. However, margins have likely bottomed out in FY23; analysts of IIFL Capital Services expect an improvement in FY24, on the back of increased cost efficiencies, reversal of near-term headwinds (for NETAP and IT industry) and improved profitability for US Staffing and Foundit (in QUESS).