Near-term headwinds likely to keep staffing solution companies muted

But valuations have turned attractive after sharp corrections since January

Stocks of staffing solution companies have underperformed the broader markets in November. While two of the leading companies in the space — Quess Corp and TeamLease Services —are down 14-22 per cent, SIS is down 7 per cent during the period. A mixed set of September quarter results for the 2022-23 financial year (Q2FY23) and muted near-term outlook led to the decline.

While TeamLease’s performance was in line with estimates, operating performance of Quess and SIS disappointed the Street. TeamLease posted a 28 per cent growth, led by a 20 per cent year-on-year (YoY) rise in headcount and wage inflation, while growth for Quess stood at 32 per cent. SIS posted a 14 per cent YoY growth.  

Though Quess’ revenue growth was robust, Vidit Shah of IIFL Securities says that the company’s financial performance surprised negatively as margins of its biggest contributing segment — workforce management — was weighed down on account of investments made in US staffing and a slowdown in IT hiring. TeamLease’s margins, at 1.6 per cent, too missed Street estimates due to flattish pricing per associate per month (PAPM) and one-off impact (reclassification of skills business) of Rs 4 crore.

SIS’ topline was in line with Street estimates though its operating margins lagged given pressures in its international business which saw a decline of 170 basis points on a sequential basis, given the wage hike in Australia. The domestic security business reported its highest quarterly revenue with growth at 22 per cent. This was driven by a headcount growth of 13 per cent and revenue per headcount growth of 6 per cent. A key worry for the sector is the muted near-term outlook and cautious stance of managements given the headwinds for the technology sector. 

TeamLease has indicated a soft quarter going ahead and this is expected to impact hiring — both in the general and specialised staffing.   

Garima Mishra and Shubhangi Nigam of Kotak Institutional Equities highlight that TeamLease has not been able to increase PAPM, despite a rise in proportion of self-sourced employees. It needs to make an entry into the manufacturing sector to benefit from employment growth in that sector, but has so far found the same challenging. 

The specialised staffing segment may see tepid volume growth due to slower IT sector hiring. The brokerage has revised down its FY23-25 earnings estimates by 2-9 per cent on lower margin forecasts.

Given the uncertain environment, multiple moving parts and a disappointing Q2FY23, IIFL Securities has cut Quess Corp’s FY23-25 earnings estimates by 10-21 per cent.

The brokerage expects the company to report a fall in net profit in FY23 but sees a strong rebound in FY24/FY25.

While Q2 numbers for SIS are on expected lines, B&K Securities points out that the increasing competitive intensity in the space which is visible in the operating cash flow generation. The company has to choose between growth and cash flow generation timeliness. Even as it pursues growth, investors would increasingly worry over working capital investments, should the same continue to balloon, says the brokerage.

However, what works in favour of the staffing companies is the sharp correction in the stock prices and thus attractive valuations on the back of near-term growth worries.

Commenting on TeamLease, Alok P Deshpande and Aadil Khan of Nuvama Research say that the stock has derated(down 40 per cent year-to-date), especially after Q2FY23 results as the headcount growth built in by Street took a hit. The stock is now trading at an attractive 25 times its FY24 estimated earnings. If general staffing growth holds up even moderately, it leaves room for an upward re-rating, says the brokerage.

Quess Corp, which is down 50 per cent this year is also trading at a reasonable valuation of 17 times its FY24 earnings estimates while SIS, which has shed 14 per cent during this period is available at 16 times.