Buy TeamLease Services, target price Rs 1,890: JM Financial

JM Financial has given a buy rating to TeamLease Services with a revised target price of Rs 1,890 (earlier Rs 2,700) over 12 months .

The brokerage has revised its FY20/21/22 EPS estimates downwards for Teamlease by 5 per cent/34 per cent/31 per cent factoring in a severe impact on the staffing industry due to the ongoing Covid-19 crisis and the resultant lockdown.

With economic activity coming to a virtual standstill during the lockdown period and fading expectations of an immediate recovery post that, the staffing requirement is expected to come down drastically, leading to deferment/complete halt on any fresh hiring activity and reduction in pre-crisis contracted staff levels.


While staffing companies may attempt to redeploy a portion of their associate staff from severely affected sectors to essential services companies in e-commerce, health and logistics sectors, there will be a significant temporary blip in associate strength. They may also have to increase funding exposure to certain clients to arrest any immediate net reduction. However, the impact on margins is likely to be limited to the loss of operating leverage in case of staff reduction/change in contracts by the clients as the staffing companies would pass on the impact to their associates.

The share price of the services company moved up by 2.72 per cent from its previous close of Rs 1529.50. The last traded price is Rs 1571.10. Incorporated in 2000, TeamLease Services has a market cap of Rs 2623.24 crore.

Investment Rationale

The brokerage has cut its average annual associate estimates for the company (all businesses) by 21 per cent/9 per cent over FY21/22 on account of the near term challenges (severe impact in 1QFY21 followed by a gradual improvement till FY22), leading to a 15 per cent/17 per cent decline in our revenue estimates. It has also lowered the EBITDA margin estimate over FY21/22 by 40bps/30bps assuming loss of operating leverage.

Post-crisis, there would be a pent-up demand for associates as affected companies would prefer to use temporary staff over permanent while ploughing the business back to normal. A consolidation in the highly fragmented and unorganised staffing industry is expected which would benefit larger, diversified and strong balance sheet companies like TeamLease.

Finally, assuming that the crisis is largely contained by June 2020, the brokerage says the recent correction in the stock is overdone after factoring in severe cuts in its estimates and a lower price to earning ratio of 30 times versus 31 times earlier. It is positive for the company as steady growth and margin expansion are expected post-crisis.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1351.40 crore, up 6.59 per cent from last quarter sales of Rs 1267.80 crore and up 15.28 per cent from last year's same quarter sales of Rs 1172.23 crore. The company reported net profit after tax of Rs 25.89 crore in the latest quarter.