Q3FY24 Review: Quess Corp: Margin improvement brisk; tax dispute a risk

6 Feb 2024 , 01:57 PM

Quess Corp’s Ebitda margin expanded ~50bps YoY in Q3 due to improvement in margins of OAM and GTS segments, and lower losses at foundit. Ebitda grew 24% to Rs1.81bn Ebitda (vs. analysts of IIFL Capital Services est. of Rs1.74bn). Dispute with the I-T department on 80JJAA benefits led to qualified audit opinion. On the call, management highlighted the growth opportunity from manufacturing and construction verticals, focus on cost-saving initiatives and operating leverage in GTS segment and found it. Analysts of IIFL Capital Services expect Quess to benefit from formalisation and industry consolidation and maintain estimates. Ebitda break-even at foundit, coupled with depressed PAT margin in FY23, should drive 2.5x EPS jump between FY23 and FY26. The stock trades at ~20x 1YF PE. Analysts of IIFL Capital Services SoTP-based TP rises from ₹620 to ₹640 (27% upside) on roll-forward to Mar-25. 

Ebitda beat: 

Quess Corp’s reported Ebitda of Rs1.81bn grew 24%. Quess’ focus on higher margin contracts across segments limited overall revenue growth to 8%. Reported PAT declined 28% to Rs634mn. Adj. PAT (after removing exceptional items from both the quarters) grew 90% YoY. The exceptional loss of Rs199mn in pertains to impairment loss due to internal restructuring of Heptagon Technologies, a subsidiary. 

Optimistic management commentary: 

Key takeaways from earnings call: 1) BFSI, Retail and Manufacturing verticals saw healthy growth; 2) Quess won 32 new contracts in OAM with ACV of Rs820mn, with the key wins coming in Infra, Industrials and Healthcare; 3) IT staffing weakness persists; 4) the focus on higher-margin non-voice BPO services continues in the GTS segment; 5) margin expansion was driven by lower loss at foundit, and efficiency improvements especially in OAM; 6) during Q3, NFRA made certain observations on applicability of Sec.80JJAA; while this order was subsequently stayed by Delhi High Court, this led to qualified opinion by the auditors; and 7) Net cash increased by Rs610mn from end-FY23 level wdue to WC management. 

Maintain estimates:

Analysts of IIFL Capital Services maintain estimates for Quess as higher margins offset the lower revenue growth assumptions. In Q3, the company received an order from the IT department on disallowance of Sec.80JJAA for FY21 (earlier received for FY18-20). The company continues to maintain its stand on the matter; it has provided Rs1.59bn as contingent liability toward the demand and interest.