After a soft fiscal 2018, temporary staffing companies saw an uptick in associate headcount addition in the June quarter. TeamLease Services Ltd’s total associate headcount grew 17% from a year earlier to 137,735 at the end of June quarter. During the same span, Quess Corp Ltd’s employee headcount was over 272,000, with y-o-y growth of 39%.

However, both companies disappointed on operating margin. Ebitda (Earnings before interest, tax, depreciation and amortization) margin of TeamLease Services Ltd’s expanded by 50 basis points (bps) y-o-y to 2%, below the Street’s expectation. One basis point is one hundredth of a percentage point.

Salary revisions for its own employees and new contracts signed at lower pricing weighed on margin growth. In a post earnings conference call with analysts, the TeamLease management said the company is focusing on new deal wins, and will not shy away from taking contracts with pricing lower than existing contracts, as long as the contract adds to overall margins.

While the company remains confident of margin improvement on a y-o-y basis for FY19, analysts caution that the impact of lower realisations will continue in the September quarter as well.

Similarly, Quess Corp. Ltd’s operating margin eroded by 60bps y-o-y to 5.2% in the June quarter.

“Margin in the June quarter took a hit mainly due to seasonality factor in some of our acquired assets such as Conneqt. Also, recently acquired Monster and Digicare are yet to start contributing to margins, we are yet to see a turnaround there. We expect H2FY19 to be better in terms of margins. For FY19, we are targeting operating margin growth of more than 6%. We have also tied-up with Accenture and one of objectives is to find ways to boost margin growth. Going ahead we aim to touch 8% operating margin growth," said Subrata Nag, group CEO, Quess Corp Ltd.

Worried over near-term pressure on profitability, a slew of brokerage houses have trimmed earnings estimates on these stocks.

Motilal Oswal Securities Ltd has revised its margin assumption for TeamLease Services Ltd downward by 10bps for FY19. Kotak Institutional Equities Ltd has tweaked margin estimates for the associate staffing segment, resulting in a 1-2% earnings per share cut over FY2019-20.

Edelweiss Securities Ltd has revised its target price on the Quess Corp Ltd to 1,300 from 1,315. Similarly, UBS Securities India Pvt Ltd has cut the stock’s target price to 1,345 from 1,360.

Motilal Oswal Securities Ltd has downgraded Quess Corp Ltd to “neutral" rating stating that the company’s recent acquisitions have been larger in size, of debatable health and perhaps unrelated. “They may reduce the potential of seamless integration, and negatively influence the financial performance in the near term, capping upside from a one-year perspective," it said in a report dated 26 July. In short, although the outlook on employee addition is upbeat, investors should beware of near-term margin headwinds and rich valuations.

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