IPO watch: TeamLease may not be a good buy for retail investors

Retail investors may give a miss to the initial public offering ( IPO) of TeamLease, which opens on February 2. It is seeking valuation, which is at par with global peers, but does not reflect its lower margin profile and limited pricing power.

Financials: The company’s revenue grew at annualised rate of 30% in the past four years to Rs 2,018 crore in FY15. In the first half of FY16, revenue grew 25% to Rs 1,215 crore, while profit declined 36% to Rs 10.97 crore. The operating margin has been improving over the past five years. It was 1.8% in FY15.

Industry & Objectives: The flexistaffing industry is expected to grow at an annualised rate of 20-25% between 2014 and 2019. The company’s margins are expected to improve as it enters the IT, healthcare and hospitality segments.

Risks: Temporary workforce demand hinges on the pace of the economic activity. In addition, the Indian industry is largely unorganised, with small and medium players accounting for nearly 70-80% of the overall industry.

Valuation: At the higher end of Rs 785-850 price band, it is trading 49X (on diluted equity) of the FY15 earnings, which is significantly expensive to the global peers that are trading around 11-33 times, according to Bloomberg. Based on Enterprise value to sales ratio, company is asking for comparable valuation to global peers while its margins are inferior.