While Q1 revenue grew ~4% QoQ (along the expected lines), Ebitda remained flat as the Workforce Management business witnessed a ~23bps reduction in margins. Growth was primarily driven by ~14,000 sequential headcount in General Staffing. Demand from the IT/ITeS industry remains subdued. Management continues to target RoE of ~20%, but stated that this will probably only happen post 2-2.5 years. Analysts of IIFL Capital Services cut their FY23-26 EPS by ~5-14%, as they trim their margin assumptions. Their TP, rolled forward to Sep’24, remains at Rs520 (15x 1YF).
Margins pressures intensify, but recovery getting closer:
Ebitda margins fell ~8bps QoQ, on the back of a ~23bps reduction in margins of WFM. WFM Ebitda fell ~3% sequentially, on account of ~30% reduction in revenue of the high-margin permanent recruitment business (due to slowdown in IT/ITeS) and front-ended costs in the North American staffing venture. While management acknowledged that the North American business is scaling up slower than expected, it maintained its guidance for the business breaking even in Q3FY24.
General Staffing growing as expected:
General Staffing business continued its impressive growth momentum, as it added ~14,000 new associates during the quarter. Management expects the momentum to continue all the way to the festive season; it has also ramped up its recruitment capabilities accordingly. Most new deals are coming either from the first-time clients or customers were previously doing business with local contractors – indicating the march towards formalisation remains slow but steady.
Valuations comforting:
Analysts of IIFL Capital Services believe that while margins are likely to remain under pressure in Q2, recovery is close as the US Staffing business breaks even and cash burn in Monster eases over the coming quarters. They believe valuations of ~24x/14x FY24/25 PE are reasonable, given the long-term formalisation opportunity in India. The issue with the I-T department regarding 80JJAA is ongoing; should the company fail at all its appeals, their estimates could be cut by ~10-12%.
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