Q4FY23 Review: Quess Corp: Margin recovery appears near

19 May 2023 , 12:55 PM

While Q4 revenue and Ebitda were largely in line with estimates; PAT missed estimates due to sequential increase in depreciation and finance costs. On account of this, analysts of IIFL Capital Services cut their FY24/25 EPS estimate by 12-15%. They also change their valuation methodology from SOTP to 15x 1YF PE, as rent paid by the fast-growing CLM business is reported below Ebitda, per Ind-AS.

Headwinds appear to be subsiding: 

While General Staffing headcount grew ~2% QoQ, revenue of the business was flat sequentially. A large part of the headcount growth was back-ended, indicating that Q1 should see an improved revenue performance. Although IT Staffing demand has not yet recovered, clients have stopped downsizing headcount. Industries such as Manufacturing, Auto Engineering Electronics, Consumer Durables and BFSI — are showing green shoots.

North America venture dents margin recovery: 

Despite improving efficiency ratios and a focus on reducing SG&A costs, margin recovery was subdued and impacted by investments in North America. Losses are currently at ~Rs30mn per quarter, but the business is expected to break even from H2FY24. The company has started billings in Q4 (one new customer) and has also won two Fortune 500 customers in Q1FY24. 

Valuations comforting: 

Analysts of IIFL Capital Services believe that while margins are likely to remain under pressure in near term, recovery is close as the US Staffing business breaks even and cash burn in Monster eases. While there are a few moving parts in the business — should US Staffing and Monster achieve scale — there could be significant upside risk to our estimates. Analysts of IIFL Capital Services believe valuations of ~19x/12x FY24/25 PE are very reasonable, given the long-term formalisation opportunity in India. Issue with the IT department regarding 80JJAA is ongoing; should the company fail at all its appeals, their estimates could be cut by ~10- 12%.