Q1FY24 Review: TeamLease Services: Margins disappoint

27 Jul 2023 , 11:24 AM

TeamLease grew Q1 revenue by ~7% QoQ. However, Ebitda declined ~22%, impacted by the loss of NEEM trainees, annual increments and a seasonal downturn in EdTech. Management guided to sequential growth in Ebitda in the subsequent quarters. Analysts of IIFL Capital Services expect the near term to remain challenged, due to further attrition in NEEM trainees and continued headwinds in IT Staffing. Ebitda growth is likely to revive in H2FY24. Analysts of IIFL Capital Services cut their FY25-26 EPS estimates by ~7-14%. Their SOTP, rolled forward to Sep’24, reduces to Rs2,390.

Margins deteriorate further: 

General Staffing margins fell by ~32bps sequentially, on the back of continued loss in NEEM trainees (Rs30mn) and salary increments (Rs27mn). While management expects the segment’s absolute Ebitda to improve sequentially, it stated that the pain from loss of NEEM trainees will continue in Q2. NETAP headcount is expected to grow sequentially from Q3.

IT demand remains subdued: 

Specialised Staffing continues to be impacted by the reduced demand from IT Services companies; the company has offset this by increasing its Global Capability Centre (GCC) and non-tech offerings. Corporate Training business (under other HR services) has also been impacted by the reduction in training budgets of IT companies. Management expects some recovery in H2, as utilisation levels of IT corporates is at ~85-90% and deal wins have been impressive over the past couple of months.

Valuations expensive:

Given the discontinuation of the NEEM scheme and headwinds in Specialised Staffing, analysts of IIFL Capital Services believe visibility of margin improvement in the near term is bleak. However, recovery should begin with the festive season in H2FY24. 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 ~26% over FY23 to FY26; but this is largely back-ended and dependent on recovery in the IT industry. Given the near-term challenges, analysts of IIFL Capital Services believe valuations are rich at ~25x FY25 PE.