TeamLease Services Ltd (TSL) is one of India’s leading providers of human
resource services in the organized segment. It’s staffing business accounts for
98.8% of the revenues while HR services accounts for the balance. It has a market
share of ~6% in the Indian Flexi-staffing Industry. It delivers staffing services
across industries like banking, manufacturing, retail, telecom, etc. The company
has shown significant growth over FY2011-15, posting a revenue CAGR of 30.7%
and after posting losses till FY2013, the company has since turned profitable and
reported net profit of ~`30cr in FY2015 vs. a net loss of ~Rs16cr in FY2012.
Lower penetration levels suggest huge growth potential: The flexi-staffing industry in
India as of FY2014 was valued at around Rs180-220bn and the penetration level of
the industry in India at ~0.4% is lower than in developed regions where the
penetration level is between 1.5-3.0%. Going forward, as per industry reports, Flexistaffing
industry is expected to report a CAGR of 25-30% and be around Rs610-640bn
by FY2019 and the penetration level is expected to improve to 1.0% over the same
period on back of increasing number of enterprises turning formal, skill development
in the country, and regulatory amendments in favour of formal employment.
Focus on improving operating margins: The HR services business, which commands
higher margin, accounts for a very small portion of company’s overall top-line. HR
services offers recruitment services, regulatory services, skills and development
corporate training, and payroll services. The company is now focusing on such higher
margin businesses apart from its regular staffing business. It is also looking for
opportunities in the IT vertical and improving employee productivity.
Intense competition and lack of pricing power: The flexi-staffing industry is highly
fragmented with intense competition. Almost 70-80% of the industry is unorganized
consisting of smaller players and balance comprising of major players like Adecco,
Randstad, Quesscorp, etc. TSL faces stiff competition from these companies as well as
other small players, thus leading to lack of pricing power.
Outlook Valuation: TSL being leading staffing company in India and has the potential
to further increase its market share. However, although the company has shown good
growth momentum, it operates in an industry characterised by intense competition,
lack of pricing power, low entry barriers and high degree of fragmentation which
renders limited scope for margin improvement.
On the valuation front, at the upper end of the price band, the pre-issue P/E works out
to 60.6x its 1HFY2016E annualised earnings. In comparison, its global peer Adecco is
trading at 12.9x 9MCY2015 annualised earnings and has a better margin and ROE
profile. Further, post the IPO, TSL’s ROE is not expected to improve significantly in the
near term. Considering the above mentioned business concerns and expensive
valuation, we recommend a Neutral on the issue.

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