TeamLease Services: Betting on GST for market share boost
Once the goods and services tax (GST) is implemented, reliance on organized staffing providers is poised to rise. To claim tax benefits under GST, businesses would prefer meeting their hiring needs via staffing firms registered under GST.
No wonder then that temporary staffing firm TeamLease Services Ltd sees GST as the most significant near-term trigger for itself. The anticipated shift from the unorganized to the organized sector would not only result in new clients but also more market share for the company.
TeamLease is GST-ready and expects to see a substantial change in manufacturing sector hiring, which is one of the largest sectors where informal staffing is rampant, the management said in a post-earnings conference call.
As for earnings, consolidated March quarter net profit surged more than 300% year-on-year to Rs38.4 crore. This spike was aided by benefits under section 80JJAA of the Income-tax Act, 1961, and deferred tax benefits from recently acquired subsidiaries. Excluding the 80JJAA benefit, year-on-year growth in profit after tax was 88%, the company said.
This section rewards firms aiding job creation in the formal sector and allows them to take the benefit of a deduction on 30% of the total incremental expense on new employees added during the year. Eligible firms can avail of this deduction for three years. TeamLease expects a low effective tax rate of 5-8% for fiscal years 2018 and 2019 (FY18 and FY19).
Some brokerage firms have raised their FY18 and FY19 earnings per share estimates for the stock after incorporating the aforementioned tax benefit. However, they cautioned that receipt of this benefit from the tax authorities will not be immediate, and receivables will accordingly rise.
Consolidated operating margin grew 50 basis points year-on-year to 1.8%. By FY21, the company aims for an Ebitda margin of 3.5%, which some brokerage firms find ambitious. Ebitda stands for earnings before interest, tax, depreciation and amortization.
“We remain conservative as margin expansion would not be a cakewalk considering TeamLease lion’s share of exposure is in general staffing business (~95.5% of total revenue) which typically is commoditized and has lower margins,” said a report by Prabhudas Lilladher Pvt. Ltd.
The firm has recently made three acquisitions in the high-margin IT staffing sector, but given the slowdown in the IT sector, analysts are sceptical if this would aid margins to a large extent.
Meanwhile, the Indian flexible staffing business is highly unorganized, with just 25-30% falling in the organized segment and TeamLease leads with 6% market share followed by Edco, Randstad India and Quess Corp, according to analysts.
Though GST implementation is a key catalyst, it should be noted that its positive impacts on TeamLease’s market share would only be gradual, they added. Of the four, TeamLease and Quess Corp are listed entities.
The TeamLease stock has seen a sharp run-up of 35% since its listing in February 2016. On the valuations front, the stock is trading at a one-year forward price-to-earnings multiple of 31 times, lower than peer Quess Corp’s 49 times.