 "TeamLease Services IPO: Rich valuation")
TeamLease Services (TeamLease), engaged in providing flexi-staffing solutions across different industries and functional areas, enjoys highest market share of five to six per cent in the industry. Peers such as Adecco SA and Randstad Holding NV, though are not far behind with four to five per cent market share in India’s flexi-staffing industry.
Flexi-staffing services include making available temporary staff, both blue collar as well as white collar. Though low penetration of flexi-staffing in India provides a good opportunity to grow at a fast pace, intense competition and limited pricing power are key constraints for the company. This is also reflected in the company’s low single digit Ebitda (earnings before interest, tax, depreciation and amortisation) margins as well as a volatile earnings (see table). In this backdrop and given rich valuations, investors are better off avoiding the company’s initial public offering (IPO).
At the price band of Rs 785 to Rs 850 a piece and assuming a healthy 30 per cent growth in its net profit in financial year 2016 (FY16), the issue is valued at 41.2 to 44.3 times FY16 estimated earnings (on a post-issue basis). This is at a significant premium to peers such as Adecco SA and Randstad Holding NV which have a much superior margin profile besides being much larger in size at the global level. Notably, globally, Adecco as well as Randstad are trading at 12 times and 15 times their respective calendar year 2015 (CY15) estimated earnings.
TeamLease's IPO comprises of fresh issue worth Rs 150 crore with the rest (Rs 253 to Rs 274 crore) being offer for sale by promoter entities and other investors. After the issue, promoters will hold 45.6 per cent from about 52 per cent currently. Over half of the Rs 150 crore flowing into the company (or Rs 80 crore) will be for meeting its working capital requirements and Rs 25 crore for acquisitions in the Information Technology (IT) staffing segment. The rest of the money will be used for upgrading existing IT infrastructure and general corporate purposes.
The domestic industry was valued at around Rs 20,000-22,000 crore with very low penetration level of about half a per cent. This is a fraction of the 1.5 to three per cent penetration in developed global economies, indicating that potential for growth is huge in India.
Estimates suggest the domestic industry will grow at over 25 per cent annually till FY19-20 to emerge as a Rs 60,000 crore plus industry helping penetration levels scale towards one per cent mark. These targets look achievable given the country’s focus on skill development,
However, the company's margins in the staffing services segment are wafer thin. The risks also emanates as it's highly dependent on this business, which contributes about 97 per cent of revenues.
Going forward, the company aims to step up focus on high margin services such as recruitment services, regulatory services, skills development and corporate training, amongst others. However, it will be a gradual process and competition in most of these services will be a key monitorable. Among industries, the company intends to focus on hospitality, healthcare and provide services across the entire chain of human resource in India. It will also focus on employment, education and employability aspects going forward. Notably, the unorganised sector forms 70-80 per cent of the flexi-staffing industry and is highly fragmented. Client contracts are typically of a year and the company has increased realisations by six to seven per cent on an average in the past few years. However, given intense competition and lack of strong entry barriers, any player – including TeamLease – has limited pricing power.
