On a year-on-year basis, Quess Corp’s operating margin narrowed primarily due to losses at its recent acquisition, Monster.com
TeamLead's Ebidta margin was below analysts’ estimates
Temporary staffing companies Quess Corp Ltd, TeamLease Services Ltd, and Security and Intelligence Services (India) Ltd (SIS India) reported decent employee additions in the December quarter. However, operating profit growth lagged due to various factors.
Even though these companies have an upbeat outlook on employee additions, analysts say revival in margins is important for these stocks to regain their lost charm.
On a year-on-year basis, Quess Corp’s operating margin narrowed primarily due to losses at its recent acquisition, Monster.com. In a post-earnings conference call with analysts, the company’s management said it expects to double Monster’s revenue over the next 15-18 months and make it profitable. It maintained the medium-term target of 8% Ebitda margin, which is higher than the margin of 5.4% in the December quarter. Ebitda stands for earnings before interest, tax, depreciation and amortization.
While TeamLease saw its Ebitda margin expand in the December quarter from the year-ago period, it was below analysts’ estimates. Margins were impacted by one-off provisions in its human resource services segment. For SIS India, although operating margin contracted more than expected in the December quarter, analysts said margins are treading back to normal after one-offs in the first half of fiscal year 2019.
Given the higher reliance of these companies on inorganic growth, risk to margin improvement also emanates from any unreasonable acquisition or a failure to efficiently manage any acquired business. What could also make it difficult for these stocks to stage a massive comeback is the subdued investor sentiment towards mid-cap firms.
Once large outperformers, these stocks were beaten down in the mid-cap carnage last year. Consequently, their one-year forward price-to-earnings multiples have also moderated. As the alongside chart shows, only TeamLease has outperformed the Nifty 500 index in FY19. After all, it was the only firm that hasn’t reported a drop in margins.