TeamLease Services: Pure play on Staffing services

21 Dec 2023 , 11:02 AM

Recommendation: Reduce; Target price: Rs 2550

 

Analysts of IIFL Capital Services initiate coverage on TeamLease with a REDUCE reco and TP of Rs2,550. TeamLease is India’s second largest General Staffing company and the market leader in Specialised Staffing. It is well placed to benefit from the shift towards formalisation, thrust on manufacturing, implementation of Labour Code, rapid growth of Global Capability Centres (GCCs) and growing importance of compliance. There are near-term headwinds due to weakness in the IT sector and discontinuance of NEEM Scheme. Analysts of IIFL Capital Services estimate 19% EPS Cagr over FY23-26. At 35.5x 1YF PE, the stock prices-in most of the positives in their view. It trades at a significant premium to peers, despite having a similar or slightly better return ratio profile. 

General Staffing is the key revenue growth driver: 

Staffing industry in India is expected to grow at ~20% Cagr in the foreseeable future, led by formalisation of workforce and introduction of the PLI scheme. Impending implementation of Labour Code is a long-term positive, especially for large, organised players like TeamLease. The hit from the Discontinuance of National Employability Enhancement Mission (NEEM) by the Ministry of Higher Education has been a drag in the past three quarters. Some pain, albeit to a lower extent, may continue for two more quarters after which, the upside from alternatives should kick in meaningfully (but to a lower extent than NEEM benefits). 

Higher margins in Specialised Staffing and Other HR services: 

The higher-margin Specialised Staffing has borne the brunt of IT slowdown, with headcount coming off by ~11% between end-FY22 and end-2QFY24. While IT staffing weakness may persist in the near term, ramp-up of GCCs augurs well in the long run. Other HR Services comprise EdTech (partnerships with universities), HRTech (digitisation of HR services) and RegTech (compliance solutions), and could see margin expansion as they scale up. 

19% EPS Cagr over FY23-26: 

Pricing pressure in General Staffing and IT spending weakness in Specialised Staffing have led to margins declining below the pre-pandemic levels. Some of these factors have reversed, while others may take a few more quarters. Increase in pricing and growth in higher-margin businesses, should drive margin expansion from the trough levels seen in H1FY24. Analysts of IIFL Capital Services expect ETR to remain low on 80JJAA benefits. FCF and return ratios should also witness steady improvement.