Temporary staffing firms seek rapid growth through a spree of acquisitions
Temporary staffing companies have been attracting investor attention on the grounds that the Indian flexible staffing industry is relatively under-penetrated and offers huge growth potential.
Reflecting this optimism, shares of Quess Corp. Ltd and TeamLease Services Ltd have been on a roll since they listed in 2016. To attain faster sector diversification and client penetration, both firms continue to rely on inorganic growth via spree of acquisitions.
The Quess Corp. stock surged nearly 10% intraday on Tuesday following the acquisition of a 51% stake in Tata Business Support Services.
This buyout fits into its global technology solutions segment—a high margin business—that contributes nearly 30% to total revenue. The segment already comprises of four IT staffing companies—Magna Infotech, Brainhunter, MFX and Comtel.
In October, TeamLease Services announced the acquisition of Evolve Technologies that provides temporary staffing services to clients in the telecom sector.
Recently, it announced acquisition of a 40% stake in Schoolguru—a technology-led academic services provider. TeamLease Services entered the IT staffing business in September 2016 and has made three acquisitions in this sector.
The India Staffing Federation foresees a growth of 14-16% per annum over 2017-2021 in the Indian IT staffing industry, adding that the size of technology staffing industry would double in five years.
According to analysts, while this bodes well for both companies, Quess Corp. is poised to benefit more than TeamLease Services given its higher exposure to IT staffing (see Chart).
In the September quarter, both the companies reported decent earnings. However, on a sequential basis, the associate headcount for Quess Corp. was higher than that of TeamLease Services.
The latter’s general staffing segment was impacted by goods and services tax (GST)-related uncertainty weighing on hiring in select clients and the subdued telecom sector. The company’s management expects softness in associate addition in general staffing to continue in the December quarter as well.
The second half of the fiscal year is comparatively stronger for the sector. It should be noted that in the December quarter last fiscal, both companies saw increased hiring in general staffing post-demonetization.
Meanwhile, on a year-to-date basis, the TeamLease Services stock has surged 108% while Quess Corp. gained 39%. Since listing, both stocks have more than doubled and continue to trade at rich valuations.
Since the Indian temporary staffing industry is highly unorganized, firms in the formal sector are poised to benefit from the anticipated shift to the organized sector in the GST era. But this will be a gradual process. On the flip-side, failure to successfully integrate acquired firms remains a key risk for both the companies.
To conclude, though staffing business remains a sweet spot, rich valuations and sharp run-up in both these stocks leaves limited scope for further upsides.