With contract labour growing by leaps and bounds in India, it’s no wonder that investors are betting on temporary staffing firms. Quess Corp Ltd’s stock touched a lifetime high of Rs1,232.45 on BSE on 8 May this year. Since its listing in July 2016, the stock has given massive returns of around 250%.

The question for investors is: after this steep rally in a relatively short span of less than two years, is there more steam left in the stock?

Bloomberg data shows that 10 broking houses track this stock and out of those seven have a “Buy" rating on it (see chart).

In reaction to the company’s March quarter earnings, a slew of these brokerage firms increased the target price on the stock and the upside that they see hovers in the 15-20% range. For instance, Edelweiss Securities Ltd has revised its target price on the stock from Rs1,300 to Rs1,315. Motilal Oswal Securities Ltd too has raised the target price from Rs1,300 to 1,350. Similarly, brokerage house Sharekhan Ltd in its report dated 18 May said it sees upside of 18-20%. Shares of Quess Corp ended Wednesday’s session at Rs1,119.80 apiece on BSE.

As for the company’s financial performance, net profit doubled in the March quarter. Robust performance of its people and services business, i.e. general staffing segment, aided revenue growth. Also, the company gained market leadership in this business by adding around 43,000 employees during fiscal year 2018 (FY18).

The spike in profit was also aided by a lower tax rate due to section 80JJAA of the Income Tax Act, 1961. This section rewards firms aiding job creation in the formal sector and allows them tax benefits.

Though Quess Corp managed to sustain revenue growth improvement in the people and services business, margins contracted. Similarly, the global technology services segment also saw some margin erosion, but that was offset by expansion in integrated facility management and industrials staffing segments. Consequently, overall operating margin was a bit below analysts’ estimates.

Interestingly, the recent acquisition of Monster.com has been now classified in a new segment–internet.

“It (Monster.com) was a loss making business when we acquired it, the loss was around Rs4 crore, but we are revamping the product and have appointed new teams as well. We are aiming to break-even in FY19. This is a high-margin business and we are expecting this entity to start contributing to our overall margins from Q3 or Q4 of FY19 onward," Subrata Kumar Nag, group chief executive and executive director of Quess Corp, said in an interview.

Shares of Quess Corp are trading at a one-year forward price-to-earnings multiple of 38 times, lower than peer Teamlease Services Ltd’s 43 times. The rich valuations indicate the high hopes investors have on the growth of contract labour.

But while the outlook for the Indian staffing sector remains rosy, the upside in this stock is limited. On the flip side, failure to successfully integrate acquired firms remains a key risk for the company.

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