Quess Corp’s debt woes weigh on its valuations vis-à-vis TeamLease

Quess Corp Ltd is taking corrective measures to allay investors’ concerns about its debt position and cash flows.

The stock had caught investors’ attention when it hit the bourses in 2017, as it was the first of its kind to be listed from the temporary staffing sector. However, the company’s debt-funded inorganic growth strategy made investors uncomfortable. From a net cash position of ₹70 crore at the end of FY18, Quess Corp became a company with a net debt of ₹350 crore by end of FY20. This was due to its aggressive acquisitions of loss-making entities and in-turn higher working capital needs, says an analyst requesting anonymity.

In a post-earnings conference call, the Quess Corp management said that its net debt reduced by ₹100 crore in the June quarter to ₹250 crore. Also, the company expects a 20% year-on-year (y-o-y) improvement in its cash flows aided by better working capital and cost reduction measures. Further, the management said the company’s guidance for reaching 20% return on equity by 2023 remains unchanged. But these measures will take a while for them to reflect in its valuations. The Quess Corp stock is trading at a one-year forward price-to-earnings (PE) multiple of 16 times. This is a steep discount to peer TeamLease Services Ltd, which is trading at a PE multiple of 27 times.

According to analysts, the prospects for margin improvement are brighter for the latter given its recent exit from two low-margin businesses. As for Quess Corp, its management expects margins to remain under pressure in the near term, although it is working towards reducing exposure to segments fetching lower margins. Also, the working capital cycle of TeamLease is better than that of Quess Corp, analysts said. Compared to their pre-covid highs, shares of Quess Corp have dropped 41%, while TeamLease shares have fallen at a lower rate of 26%.

As per analysts, given the back-and-forth on regional lockdowns, some of the otherwise permanent roles could be fulfilled through flexi-staffing as firms look to curtail costs. This would aid temporary staffing companies to see increased hiring in the immediate term. That said, this factor alone may not lead to a sharp recovery in the Quess Corp stock.