Teamlease stock up nearly 4% on better prospects for margin improvement1 min read . Updated: 03 Aug 2020, 02:50 PM IST
- Its strict cost rationalisation measures and exit from subdued businesses are expected to give its margins a shot in the arm
- it said the June quarter saw maximum impact of the lockdown and subsequent quarters will be better
MUMBAI: Shares of temporary staffing company Teamlease Services Ltd rose nearly 4% intraday on the National Stock Exchange to ₹1,914 on Monday. The company reported weaker-than-expected June quarter earnings with revenue declining on a year-on-year basis, in both its key general staffing and human resource services segments.
But the Street is rewarding the stock for improving prospects on operating margins. The company’s strict cost rationalization measures and exit from subdued businesses are expected to give its margins a shot in the arm.
In the June quarter, its EBITDA margin expanded 35 basis points on a year-on-year basis, to 2.2%. Ebitda is short for earnings before interest, tax, depreciation and amortisation.
The company’s management, however, said nearly 75-80% of the cost savings achieved in Q4FY20-Q1FY21 will be retained as offices open, but general focus on productivity and margins remains. The company maintained that the June quarter saw maximum impact of the lockdown and subsequent quarters will be better. TeamLease is targeting taking its EBITDA margins back up to FY2019 levels of 2.1%.
Further, its decision to exit two poor performing business segments has cheered investors. The management said it has been looking to exit the government training business and has substantially reduced headcount for the same. It is preparing for a phased exit by fiscal year 2022. Secondly, Teamlease will exit the permanent hiring business owing to the reduced demand as clients aren’t currently looking to hire. Impact of the shutdown of this business will be felt in 2QFY21 as well, after which it will be completely removed from the portfolio, the management said.
“The Government Training & Development and Permanent Recruitment segments have been a drag on margins, receivables, and cash conversion for some time. In this context, restructuring in these businesses is a key positive and should unlock management bandwidth," Motilal Oswal Securities Ltd said in a report on 3 August.
According to analysts at Kotak Institutional Equities Ltd, the company’s general staffing headcount may remain flattish in 2Q, but it expects demand revival starting in the second half of this fiscal year from sectors such as e-commerce, ed-tech, FMCG and pharma. “We modestly tweak estimates as we bake in lower revenues but assume higher margins," it said in a report on 3 August.