Q4FY23 Review: TeamLease Services: Near term to remain challenged

TEAM grew Q4 revenue/Ebitda by ~1-6% QoQ, largely driven by growth in General Staffing associates (aiding revenue growth) and improving efficiency ratios (aiding margin improvement). While further exits of NEEM associates are expected to negatively impact margins, this will likely be offset by improving efficiency rations. Analysts of IIFL Capital Services cut their FY24-25 EPS estimates by ~1-3%. Their SOTP, rolled forward to Jun’24, increases to Rs2,430.

Exit of NEEM trainees impacting margin recovery: 

Exit of NEEM trainees is likely to impact Ebitda by ~Rs30mn per quarter from the upcoming quarter. Management expects this drag to reduce only from Q2FY23. However, the company has sharply improved its efficiency ratios in Q4. This, along with focus and cost reduction, will probably protect margins from declining further from Q4 levels. Changing customer mix has dented PAPMs by ~Rs15.

Headwinds continue in Specialised Staffing: 

While customers are not looking to downsize currently, hiring within IT/ITeS is currently on hold. Thus, the company has targeted improving its foothold in tech offerings to non-tech companies, and has even captured market share in this space. Management believes that margins of this segment have bottomed out.

Maintain REDUCE: 

Given the discontinuation of the NEEM scheme and headwinds in hiring across several industries (especially IT/ITeS), analysts of IIFL Capital Services believe visibility of margin improvement is bleak. Open positions in Specialised Staffing remain low with no signs of any rebound. The company has adopted a cautious stand and is trimming down on core employees until growth visibility improves. Analysts of IIFL Capital Services expect TEAM to deliver an EPS Cagr of ~29% over FY23 to FY26; but this is largely backended and dependent on a recovery in hiring. Given near-term challenges, they believe valuations are rich at ~29x FY24 PE.