Shares of temporary staffing company TeamLease Services Ltd surged 8% intraday on BSE on Tuesday after Kotak Institutional Equities (KIE) upgraded the stock’s rating to “buy”. But even after this run-up, the stock is down 18% from its level of Rs1,122 seen in September. What went wrong? And why has the stock surged now?
As the chart shows, the stock has been under pressure since October. A combination of factors led to its fall from glory. Its September- quarter earnings were a miss on both the profit and operating margins front. Also, contribution from its IT acquisitions—ASAP Info Systems and Nichepro Technologies—had not begun to reflect in the balance sheet then. After a tepid first half, expectations were the second half of the year would be better. But in November, since demonetisation was announced, pressure on the stock increased, pushing it down 13% as the year came to an end. During the same period, peer Quess Corp rose 12%.
In the December quarter, TeamLease’s consolidated earnings exceeded Bloomberg estimates on the profit and revenue front a bit. However, in a post-earnings conference call, the management said its regulatory business, permanent hiring business and training business have seen delays in payments from clients. The company starts provisioning once 180 days of outstanding are exceeded, so it made provisions to the tune of Rs1.1 crore for the last quarter and Rs2.8 crore for the last nine months, although the management seems confident of recovering these dues going ahead. In the December quarter, foreign portfolio investors trimmed their holdings in the stock from 18.4% in September to 16.5%, said a different KIE report.
The current quarter is a weak one due to the high attrition rate; despite that, KIE expects TeamLease to perform well, stating that the company’s core temporary staffing business is on a solid footing, with practically no demonetisation impact. The brokerage house has March 2019E target price of Rs1,200. That’s quite a bit of ground for the stock to cover from its current level of Rs909.
What is fuelling this optimism? According to KIE, the company is poised to benefit from the implementation of the goods and services tax as the shift from unorganized to organized firms will aid TeamLease in gaining market share. Also, simplification of labour laws announced in the Union budget will have a positive impact.
Last but most important—what about valuations? The stock is trading at a one-year forward price-to-earnings multiple of 30 times. This is lower than that of Quess Corp (40 times), but it isn’t cheap.