Temporary staffing companies: Outlook positive; valuations rich

What gives Quess Corp an edge over rival TeamLease Services is its diversified portfolio, comparatively higher operating margin growth, analysts say


Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Demonetization has led to mayhem on the Street, causing many stocks to bleed. But not all have lost—there are some companies that have benefited from the move. A case in point is recruitment firms like Quess Corp. Ltd. The currency exchange process has led to a spike in the demand for temporary staff, particularly from banks, which is likely to continue for a few more months.

Before we talk about what lies ahead for them, here’s a recap. Both TeamLease Services Ltd and Quess Corp. made their stock market debut this year on 11 February and 12 July and their offer price was Rs840 and Rs317, respectively.

The business models of both these players are quite similar, but Quess Corp.’s portfolio of services is more diversified with significant exposure to IT staffing—a higher margin business than general staffing. Recently, TeamLease too made a foray into the IT staffing business with two acquisitions—ASAP Info Systems and Nichepro Technologies, and is looking for more buyouts in this vertical.

While the first half of the year was a little tepid for TeamLease, it is hopeful of clocking a better performance in the second half.

The second half of the fiscal year generally generates 60% of the total business, its management had said in a post-Q2FY17 earnings conference call. Q3 is a seasonally strong one and demonetization would give a further boost to hiring.

Peer Quess Corp. posted impressive earnings in the September quarter buoyed by the performance of its global technology solutions and industrial asset management verticals.

It also announced three new acquisitions—Singapore-based Comtel Solutions Pte Ltd, and domestic firms—Terrier Security Services (India) Pvt. Ltd and Simpliance Technologies Pvt. Ltd. The company’s management expects margins to rise above 6%, aided by these acquisitions.

Quess Corp.’s strategy has been to grow via acquisitions and TeamLease has started following in its footsteps. Successful integration of acquisitions is one of the key risks that come along with the spree of buyouts, failing which their balance sheets could be adversely impacted, cautioned some analysts.

Since demonetization, the Quess Corp. stock has risen 12.16% while TeamLease has fallen 13.03%. On the valuations front, the former is trading at a one-year forward price-to-earnings of 62.35 times, much higher than the 36.58 times of the latter.

As per some analysts, what gives Quess Corp. an edge over rival TeamLease is its diversified portfolio and comparatively higher operating margin growth. The pressure on the TeamLease stock has to do with worse-than-expected Q2FY17 earnings and expensive valuation that it had been trading at in the recent past, they added.

Going ahead, these companies are also poised to benefit from Goods and Services Tax (GST) since a shift from the unorganized to the organized sector would help them gain market share from firms in the unorganized sector. But while the outlook for these companies is positive, valuations look rich.

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