Quess Corp: Diversified player with improving profitability

19 Dec 2023 , 10:17 AM

Recommendation: Buy; Target Price: Rs 620

Analysts of IIFL Capital Services initiate coverage on Quess Corp with a BUY reco and Rs620 TP. Quess is India’s leading Business Services provider, with a well-diversified business mix. Higher thrust on manufacturing, opportunities in Tier II and II cities and expansion of commercial Real Estate are the key growth drivers. In most of the company’s businesses, its large size and scale should enable it to benefit from formalisation and industry consolidation. FY23 profitability was largely impacted by Rs0.95bn Ebitda loss in its jobs platform foundit (formerly Monster). Analysts of IIFL Capital Services expect foundit to turn Ebitdaneutral in FY25. This, coupled with depressed PAT margin in FY23, should drive 2.5x EPS jump between FY23 and FY26. The stock trades at ~23x 1YF PE. Capital allocation has improved in the past three years and analysts of IIFL Capital Services do not see any significant M&A activity in the foreseeable future. 

General staffing on a strong wicket; IT staffing may see near-term headwinds: 

General staffing should benefit from formalisation as well as the capex and manufacturing push driven by China +1 and PLI. Quess’ recent increase in focus on manufacturing and construction is timely and will further diversify its client mix. While IT staffing will continue to be impacted by near-term IT weakness, rapid growth of Global Capability Centres (GCCs), higher IT hiring requirements for non-IT companies and recent foray into the higher-margin US market are long-term positives for Quess. 

Improving outlook for other businesses: 

The higher-margin Global Technology Solutions (GTS) segment should continue growing at a decent clip. Operating Asset Management (OAM) segment saw margin pressure in FY23, due to lower pricing in a large contract; but the segment should see gradual margin recovery. Within Product Led Business (PLB), foundit has had a mixed track record. In a bid to become India’s #2 job portal (after Naukri), foundit incurred Rs950mn Ebitda loss in FY23, as it beefed up investments. Quess has guided to Ebitda break-even at foundit by Q4FY24.

Analysts of IIFL Capital Services expect 2.5x EPS jump over FY23-26: 

FCF generation should stay robust. RoE (ex goodwill) should improve further from ~18% in FY23. A key risk is the I-T dispute on 80JJAA: An adverse outcome could result in Rs2.25bn provision, but no cash flow hit because MAT credit and tax refund should offset any payout. Future ETR could rise to ~25% from 15-20% now.