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TeamLease Services

Asset-light model enables RoE trajectory

March 21, 2018

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

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rt Madhu Babu

[email protected] +91-22-66322300

Rating Accumulate

Price Rs2,111

Target Price Rs2,450

Implied Upside 16.1%

Sensex 32,997

Nifty 10,124

(Prices as on March 20, 2018)

Trading data

Market Cap. (Rs bn) 36.1

Shares o/s (m) 17.1

3M Avg. Daily value (Rs m) 99

Major shareholders

Promoters 43.71%

Foreign 24.64%

Domestic Inst. 15.94%

Public & Other 15.72%

Stock Performance

(%) 1M 6M 12M

Absolute (1.8) 31.4 118.1

Relative 0.3 29.6 106.4

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2019 55.3 60.5 -8.6

2020 70.0 86.5 -19.1

Price Performance (RIC: TLSV.BO, BB: TEAM IN)

Source: Bloomberg

0

500

1,000

1,500

2,000

2,500

3,000

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

(Rs)

Flexi staffing business in India appears to be in a sweet spot led by multiple dynamics playing in favour of the sector. Scope for increase in formal employment in the country (currently at 14% of overall employee base) as well as increased share of outsourced employee base within the formal employee base are the key macro drivers. While increased hiring of contract employees in select industries (BFSI, Retail, eCommerce, Logistics, Telecom) has been the key growth driver for flexi staffing companies over FY13-FY17, we believe FY18-FY20E could see a pick-up in Manufacturing vertical as well. Implementation of GST would be the key driver for traction of organized flexi staffing companies in the Manufacturing vertical (owing to ability to take input tax credit). GST implementation would also reduce the pricing advantage of unorganized players and hence result in market share gains for organized staffing companies.

TeamLease is the leader in flexi staffing business in India and competes neck-to-neck with Quess Corp. TeamLease’s associate count in general staffing stands at 171,000 as on Q3FY18 (v/s Quess’ general staffing headcount at ~150,000). Led by market share gains in favour of organized players, we expect TeamLease to deliver 16/36/22% Revenues/EBITDA/PAT CAGR over FY17-FY20E. We estimate EBITDA margins at 1.8/2.1/2.3% for FY18/FY19/FY20E. Productivity improvement (Associate/Core employee ratio) and improving mix of business would drive margins. Margin improvement over FY18-FY20E would be the key driver for earnings trajectory. Our EPS estimates are at Rs42/55/70sh for FY18/FY19/FY20E. Owing to higher share of business from general staffing, TeamLease’s business remains asset-light. Debtors (including unbilled revenue) for TeamLease stand at 28 days for FY17 (v/s 73 days for Quess Corp and 68 days for SIS India). Hence, despite lower margins (v/s Quess and SIS), TeamLease has a similar ROE profile as its peers owing to lower WC cycle. Teamlease currently trades at 30x FY20E EPS. We value TeamLease at 35x FY20E EPS (v/s 31x Sep 19E EPS earlier). Our TP has been increased by 30% to Rs2450/sh led by P/E upgrade. Retain “Accumulate”.

Key financials (Y/e March) 2017 2018E 2019E 2020E

Revenues (Rs m) 30,418 35,959 41,468 47,668

Growth (%) 21.4 18.2 15.3 15.0

EBITDA (Rs m) 442 641 861 1,110

PAT (Rs m)* 663 722 945 1,196

EPS (Rs) 38.8 42.2 55.3 70.0

Growth (%) 167.4 8.9 31.0 26.5

Net DPS (Rs) — — — —

* Nil tax rates owing to Section 80JJAA benefits led to higher PAT

Profitability & Valuation 2017 2018E 2019E 2020E

EBITDA margin (%) 1.5 1.8 2.1 2.3

RoE (%) 19.1 17.3 18.9 19.7

RoCE (%) 19.2 17.5 18.9 19.7

EV / sales (x) 1.1 1.0 0.8 0.7

EV / EBITDA (x) 77.9 54.0 39.6 29.9

PE (x) 54.4 50.0 38.2 30.2

P / BV (x) 9.5 8.0 6.6 5.4

Net dividend yield (%) — — — —

Source: Company Data; PL Research

March 21, 2018 2

TeamLease Services

HR Solutions market at a mature state in Developed economies: Flexi staffing

business has reached a mature stage in developed economies (US, UK, France,

Germany) growing at 1.5-2x the GDP of the respective countries. While

developed countries (US, UK, Germany) have a GDP growth of 2-3%, flexi

staffing majors in these countries grew at 4-6% organically. Organic revenue

growth of Adecco Group (largest company in the industry) stood at 6/4/4% for

CY17/CY16/CY15, respectively. The Adecco group derives 85% of business from

developed countries. As on CY17, the largest companies in the global flexi

staffing business are Adecco Group (Headcount of 7,00,000 employees with core

employee headcount at 34,000), Randstad (699,000 associate employees with

core headcount of 38,000 employees) and Manpower Group (Associate count at

6,00,000 employees with core employee strength at 28,000). While global

companies had EBITDA margins in the range of 3.8-4.5%, their ROE stands in the

band of 15-20%. Funding of salaries of associates is a characteristic of this

business with most of global players having receivable days of 48-55 days.

Global companies also have leveraged balance sheets with Net Debt/EBITDA in

the range of 0.8 to 1x for CY17. Owing to slower revenue growth, these

companies have been rewarding shareholders with higher dividends as well as

buybacks.

India remains in a sweet spot for Flexi staffing business: Unlike developed

economies, flexi staffing appears to be in a sweet spot in India as growth is likely

to be driven by multiple catalysts - Increasing share of formal employment (14%

as on FY17) and market share gains of organized flexi staffing companies. Clients

across verticals have increased focus on compliance post implementation of GST

(As service taxes need to be remitted to government for clients to take input tax

credit). Unorganized staffing companies are currently 20-40% cheaper than

organized companies owing to non-compliance (Service tax and Statuary

deductions like PF, ESIC are not remitted properly to government). GST

implementation would partially close the loophole which would reduce the

pricing advantage of unorganized players. Organized flexi staffing employee

strength in India stands at 1.8mn as on FY17 and is expected to reach 4.5mn by

FY21 which represents 25% CAGR over FY17-FY21. Leading players in the pack

like Quess Corp, TeamLease, Adecco India, Randstad India and InnovSource

would be the key beneficiaries and are poised to deliver double-digit revenue

growth over FY18-FY20E. We expect TeamLease to deliver 16% revenue CAGR

over FY17-FY20E led by market share gains from unorganized companies.

ROE remains the key focus metric in this business: TeamLease/Quess/SIS have

EBITDA margins of 1.6/5.4/4.9%, respectively, as on FY17. Debtors, including

unbilled days for TeamLease/Quess/SIS, stand at 28/73/68 days, respectively,

for FY17. Despite higher margins of Quess/SIS (v/s TeamLease), ROE profile of all

the three companies remain in a similar band owing to lower working capital

cycle of TeamLease. TeamLease is predominantly focussed on General Staffing

(92% of total revenues) and has very low funding exposure in its staffing

business (~28% of employee salaries in General staffing is funded). Hence,

despite TeamLease’s EBITDA margins being lower than peers, ROE profile of

March 21, 2018 3

TeamLease Services

TeamLease remains in-line with peers owing to leaner balance sheet. For FY17,

TeamLease, Quess Corp, SIS have an ROE of 19/19/18.3%. We believe that ROE,

ROCE and Receivable management (Any spike in bad debts from funding

business can be a very big risk in this business) are key metrics in the business

and TeamLease scores well on all the fronts.

Growth trajectory enables Indian Flexi Staffing companies trade at significant

premium: Global staffing companies (Adecco, Randstad, Manpower) have

delivered tepid absolute returns over the past three years. These companies

trade at 12-14x CY20E EPS with a ROE profile of 15-20%. On the contrary, Indian

Staffing had a dream run on the bourses and with P/E multiples overshooting to

new highs. TeamLease, Quess Corp, SIS stocks are up 117/50/42% over the past

one year. TeamLease trades at 30x (FY20E EPS based on our estimates) almost

at par with Quess Corp (trades at 28x FY20E EPS based on Bloomberg

estimates). Promise of secular revenue growth has aided re-rating. We note that

Section80JJAA of Income tax act have enabled these companies to enjoy almost

negligible tax rate over FY18-FY20E and hence, aiding earnings and ROE

trajectory. Our view is that stringent and archaic labour laws have hampered job

creation in India and hence labour reforms can be the next catalyst for traction

in the sector. We like TeamLease owing to its leadership position in General

staffing, asset light model, strong Technology platform which aids in non-

linearity (Associate/Core employee ratio). Retain Accumulate with target price

of Rs2,450/sh (35x FY20E EPS).

March 21, 2018 4

TeamLease Services

Industry Structure

Market share gains in favour of organized players to remain key growth driver

Overall labour force in India is expected to grow from 450mn in FY17 to 500mn in

FY19 which represents 5.4% CAGR. Of the total 450mn workforce in India, only 60mn

are in the formal sector (13.3% of total workforce). The remaining 390mn labour

force is in the informal sector. We note about 85% of India's workers are in the

informal sector with particularly high levels of informal workers evident in the

Manufacturing and Construction industries.

We see scope for higher growth in formal employment over FY17-FY20E with labour

reforms, increased compliance driving Industries towards formalization. Organized

flexi staffing industry has ~1.8mn employees as on CY17. This is expected to reach

4.5mn employees by CY20 led by increased acceptance of flexi staffing and market

share shift in favour of organized players. Key drivers for revenue growth for

organized flexi staffing companies are market share gains from unorganized players

and GST implementation reducing the price differential between organized and

unorganized players.

Exhibit 1: Trends in Labour force in India

Source: Company Data, PL Research

March 21, 2018 5

TeamLease Services

“Globally about 5% to 15% of a country's workforce tends to get outsourced and

100% of that is in the formal space. In the Indian context, while a larger

percentage, nearing 30% is outsourced, only 1.5% of that is in the formal space

that players like us are in, where all compliances are comprehensively driven. So

there is a large element of outsourcing that happens through informal small

players across the country. So, I think, clearly, where we are coming at it is in

saying that, with the various government policies of labour laws becoming simpler,

the element of enforcement becoming better, coming online and so on, will drive

the element of formalization. So, even if we look at the growth of the last few

years for us, it doesn't reflect the element of the economic growth rate or the

element of job creation at those rates. It's a combination of new industries coming

in, existing companies increasing the share of outsourcing, the aspect of some

element of formalization happening with the outsourcing that various companies

have” TeamLease CEO Mr Ashok Reddy in Q3FY18 concall.

“I mean working population is about 480mn people and if we look at all of us in the

organized staffing space account for about 12 lakh to 15 lakh. So we are like a

sliver on the overall opportunity at this point in time. I mean 1.5% of the

outsourcing is in the formal space, 98.5% is in the informal space” TeamLease CEO

in Q3FY18 concall.

India has the second largest labour market in the world but has the lowest

penetration for organized flexi staffing. Formalization of workforce and increased

traction of organized flexi staffing companies would drive volume growth (employee

addition). We expect organized flexi staffing employee base to reach 4.5mn by FY20

from 1.6mn as on FY17.

Exhibit 2: Flexi staffing employees in India

1.2

1.6

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

FY12 FY17 FY20E

(mn

peop

le)


March 21, 2018 6

TeamLease Services

According to Indian Staffing Federation (ISF), Maharashtra is likely to be country’s

leading state in generating flexi jobs in FY18. This would be followed by Karnataka

and Tamil Nadu.

Exhibit 3: Geographical Breakup of Flexi Staffing Headcount in India

Maharashtra 17.7%

Karnataka 11.3%

Tamil Nadu 10.2%Uttar Pradesh

7.9%

Haryana 7.2%

Telengana 6.8%

Delhi 6.0%

Gujarat 5.2%

Andhra Pradesh 5.1%

West Bengal 4.3%


Major Industries of operation

Retail, Manufacturing, BFSI and Telecom are the major verticals which deploy flexi

staffing employees. New sectors such as e-commerce and logistics have created

fresh demand for flexi staffing in India. However, post GST implementation,

manufacturing (which has large proportion of unorganized players) is likely to show

higher adaption of flexi staffing.

Exhibit 4: Vertical Break up of Flexi Staffing Headcount

Retail & Cons24.3%

Mnaufacturing 19.5%

Others 19.3%

BFSI9.0%

Telecom & ISP 6.8%

FMCG6.1%

Agri/Dairy 5.4%

IT4.7%

Auto 3.9%

E-comm 1.0%


March 21, 2018 7

TeamLease Services

Flexi Staffing Industry remains fragmented in India

Flexi Staffing Industry is fragmented, with top players having only 20% market share.

Remaining 80% is fragmented with small and mid-sized companies which are

predominantly regional players. As on Q3FY18, Quess Corp is the largest player in the

Flexi staffing Industry with associate Headcount of ~240,000 employees. The largest

players on the associate count front in staffing are Quess Corp, TeamLease, Adecco,

Randstad and InnovSource.

Exhibit 5: Associate Headcount of Global companies

243,000

178,915

85,000 65,000 65,000 58,000

-

50,000

100,000

150,000

200,000

250,000

300,000

Quess Teamlease Adecco India Randstand (India)

Manpower India

InnovSource

Associate Headcount

Source: Company Data, PL Research, Quess headcount includes Facility management, IT staffing

Dynamics of Flexi staffing Industry

In the flexi staffing employment model, people are hired by a staffing agency and

then hired out to perform work under the supervision of the user company. The flexi

staffing industry operates on the basis of a tri-party agreement between the staffing

intermediary, flexi-worker and client/user organisation. The flexi-workers are hired

by the flexi staffing agencies, work in the facility and under the direct supervision of

the client companies, but receive salary from the flexi staffing agencies. In this

model, the hired flexi-staff remains in the employment of the staffing agency and no

direct employment relationship between the flexi-staff and the user company is

created.

March 21, 2018 8

TeamLease Services

Exhibit 6: Flexi Staffing Industry Model


Exhibit 7: Flexi Staffing Model Frame work at Teamlease


March 21, 2018 9

TeamLease Services

Services provided in the Staffing Industry value chain

The staffing solution company helps companies across to outsource activities that

are non-core to their business function. Functions outsourced include Recruitment,

Payroll, Benefits Management, HR Compliance etc.

Exhibit 8: HR Solution industry structure


Flexi staffing companies offer a range of services which include HR Consulting, Flexi

Staffing and Permanent Recruitment. Teamlease is the largest player in General

staffing with ~178,000 employees as on Q3FY18 and is well poised to ride the growth

potential in organized flexi staffing Industry.

HR Solutions industry

Permanent recruitment

Search

Recruitment

BPO

Temporary staffing

Professional IT

General

Other HR solutions

Others include - Payroll &

compliance, training jobs, portals, etc

March 21, 2018 10

TeamLease Services

Investment Thesis

Implementation of GST to drive market share for organized players

Indian Flexi staffing industry is fragmented with unorganized and small and regional

players having ~80% of the market. The largest players in the General staffing

business are TeamLease, Quess corp, Addeco India, Randstad India, InnovSource, etc.

which together account for only 20% of the total market.

The unorganized staffing companies are 20-35% cheaper compared to organized

flexi staffing companies owing to non-remittance of services taxes (collected from

clients) and non-remittance of statuary deductions (PF, ESIC etc). Our channel checks

suggest rampant presence of regionalized unorganized players which offer staffing

services 20-40% cheaper compared to organized players.

Exhibit 9: Per month Salary structure of an associate in a Organized staffing company and Unorganized Staffing company (Pre and Post GST)

Fig in Rs Organized Staffing Unorganized Player

Pre GST Post GST Pre GST Post GST

Amount Billed to Client per month per employee (Rs) 21,974 22,035 15,700 18,652

Services Tax (Pre GST 15%, Post GST-18%) 3,296 3,361

2845

Amount available with Staffing Company (Net Revenue of staffing company) 18,678 18,673 15,681 15,807

Mark up per associate per month (3.5% of Gross Salary) 632 631 530 535

Gross Salary paid to the Employee per month 18,046 18,042 15,151 15,272

Break-up of Gross Salary

a) Basic Salary ( 40% of Gross) 7,218 7,217

PF Employee Contribution (12% of Basic) 866 866

Still can evade

PF Employer contribution (12% of Basic) 866 866

Still can evade

b) Total PF 1,732 1,732

ESIC

Contribution by company ( 4.8% of gross salary) 866 866

Still can evade

Contribution by employee ( 1.8% of gross salary) 325 325

c) Total ESIC 1,191 1,191

d) Others Allowance( HRA, Medical, Allowances, Statutory Bonus) 7,904 7,902

Take Home Salary Per month of the employee ( a+ d) 15,123 15,119 15,151 15,272

Take Home Salary of employee as a % of amount billed to client 68.8% 68.6% 96.5% 81.9%


Implementation of GST would has reduced the attractiveness of unorganized players

as these companies would have to remit GST to government in order for the clients

to avail input tax credit. Hence, this has partially reduced the pricing advantage

enjoyed by unorganized players. For eg: An unorganized staffing company can

operate at 28% lower billing rate to client (compared to organized player) and still

promise the employee a relatively higher salary in the pre-GST era. Post GST, the

March 21, 2018 11

TeamLease Services

pricing discount (Unorganized v/s Organized) would reduce to 15% as these

companies would have to remit GST.

However, we believe that unorganized players still are at a pricing advantage owing

to non-payment of statuary deductions (PF, ESIC etc). India has a high amount of

statutory deductions as a percentage of CTC for employees at the lower end of the

salary band. We believe that government reducing the mandatory deductions can

be a shot in the arm for the organized staffing sector.

While the average monthly salary for employees staffed by TeamLease is ~Rs21,500

per month, company makes a mark-up of 3.5% which translates to Rs755 per month

as on Q3FY17. TeamLease mark-up per associate came at Rs755 per employee as on

Q3FY18 (v/s Rs691 per employee in Q3FY17). Management guided that mix shift of

business has been aiding the mark-up improvement.

Exhibit 10: Mark-up realization per associate per month (Rs) of Teamlease

657665

680688

712 712

691

710

729735

755

630

650

670

690

710

730

750

770

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18


We believe that General staffing business has low pricing power owing to

fragmented nature of the industry.

“We are price takers given that 98.5% of our market is informal and kind of has

hidden revenues, with which they can play to the client mandate. But having said

that, if we look at what we said in the past and continuing to stay on track for, our

average realization has improved about 5-6% YoY. A combination of some

renegotiation, some of this being on variable pricing models and hence, when CTC

goes up, you get a little uptick on realization, some of them being new contracts.

So combination of multiple things that has been driving that 5-6%. And I think, we

will continue to at least make our plans at this point in saying that we continue to

drive that 5-6% realization growth, and then play to volumes and productivity to

improving the margins.” TeamLease CEO in Q3FY18 concall.

March 21, 2018 12

TeamLease Services

Labour reforms could be the biggest catalyst for formalization of workforce

India's notoriously rigid labour laws are the leading cause for a large presence of

Informal employment in the country. Labour falls under the concurrent list of the

constitution, which implies that both the Centre and the States can form laws on it

and neither has been miserly about this. When combined, each state ends up with

over 200 different labour laws. These disincentivise firms from growing beyond a

certain employee count.

For instance, the Trade Unions Act of 1926 requires firms with seven or more

workers to form trade unions. The Factories Act of 1948 mandates

manufacturing units with 10 or more workers to have several working hour

limits and workplace conditions that become stricter with more workers.

The most burdensome of all is the Industrial Disputes Act (IDA) of 1947, which

covers all industrial disputes and makes it almost impossible for firms with 100

or more workers to fire anyone. Establishments require permission from the

labour department to lay anyone off and such permissions are rarely given

even if the firm is unprofitable.

Therefore, firms with six or less employees have the most labour flexibility. As

expansion of firms comes with high legislative costs in India, it is rational for

them to remain small. This is why 84% of manufacturing employment is

restricted to micro and small enterprises in stark contrast with other developing

countries (46% for South Korea and Thailand, 27% for Malaysia and 25% for

China).

We believe implementation of labour reforms are the key to drive growth in the flexi

staffing sector. Consolidation of 44 labour laws into four laws is still pending owing

to opposition in the parliament.

http://www.business-standard.com/search?type=news&q=employment

March 21, 2018 13

TeamLease Services

Exhibit 11: Labour laws impact on India job creation


Exhibit 12: Labour laws which require reforms


March 21, 2018 14

TeamLease Services

To protect the interest of stakeholders and to provide security to labour, there are

many labour laws in India. After repealing four labour laws, the Centre was working

on amalgamating 38 more outdated Acts into four codes to bring in simplicity and

rationalism in their implementation.

Labour Code on Wages: This code will supercede following four Acts-

The Minimum Wages Act, 1948

The Payment of Wages Act, 1936

The Payment of Bonus Act, 1965

The Equal Remuneration Act, 1976

Labour Code on Industrial Relations: It will supercede following three labour laws-

Trade Union Act, 1926,

the Industrial Employment (Standing Order) Act, 1946; and

The Industrial Disputes Act, 1947

Labour Code on Social Security: This code will be in place of 15 labour Acts-15

Labour Laws including EPF Act, ESI Act, Maternity Benefit Act, Payment of Gratuity

Act, Employees Compensation Act, Unorganised Social Security Act and various

Welfare Cess /Fund Acts).

Labour Code on occupational safety, health and working conditions: Rest 16 Acts

will be repealed by this Act, which can be listed out after the bill comes.

We believe that government’s ability to drive labour reforms would be the key to job

creation in India. With Automation posing challenge to low-end jobs, India stares at

a risk of high unemployment unless it acts swiftly. In the recent budget, the

government also aims to extend Fixed Term Contract employee hiring to various

other sectors.

March 21, 2018 15

TeamLease Services

Teamlease’s growth trajectory remains strong over the medium term

Among the organized General staffing business, TeamLease remains the largest

player with Quess Corp being the nearest competitor. As on Q3FY18, TeamLease has

171,373 employees in the General staffing business (includes NETAP). Quess Corp is

the second largest player in the General staffing business with ~145,000 employees

as on Q2FY18.

Exhibit 13: TeamLease Associate count in General staffing

49,82061,021

72,49181,022

94,647

120,434

149,902

171,373

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

3Q

FY

18

Source: Company Data, PL Research* Includes NETAP

Exhibit 14: Quess Corp Associate strength in General Staffing

1531331128

44146 4665263541

82170

110000

150000

020000400006000080000

100000120000140000160000

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

3Q

FY

18


Exhibit 15: TeamLease YoY growth in General staffing revenues

21.0%

11.1%

25.1%

19.0% 20.4%18.2%

7.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18


Exhibit 16: Quess Corp YoY growth in General staffing business

48.7%

29.3%

8.1% 5.8%9.2%

17.2%

25.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

Quess YoY revenue growth


March 21, 2018 16

TeamLease Services

Aided by strong demand from end user clients in Retail, BFSI, e-commerce,

Logistics, TeamLease Associate count has grown at a solid 20% CAGR over FY11-

FY17. Over the same period, Quess corp has grown at 38% CAGR over FY11-

FY17. We believe Quess Corp has shown higher aggression on the growth front

(v/s TeamLease). Quess also has a higher exposure to funding in the General

staffing business.

NETAP driving overall Associate count for TeamLease

We note that TeamLease Associate headcount in General staffing(ex-NETAP) grew a

modest 5.7% YoY in Q3FY18. We believe that this is owing to insourcing in select

clients and GST-led disruption weighing on hiring by select clients. Select top

accounts have also seen significant weakness on a sequential basis. While General

staffing Headcount has been modest, TeamLease has seen a strong surge in NETAP

headcount. Company also mostly doubled the NETAP headcount on a YoY basis. As

on Q3FY18, NETAP headcount stood at 40,423 employees (v/s 19,427 employees in

Q3FY17).

Exhibit 17: Associate count in General Staffing (Ex-NETAP)

10

0,8

88

10

5,0

59

10

8,6

30

10

8,8

60

11

3,7

13

11

5,3

97

12

3,9

46

12

6,4

63

12

9,7

87

12

7,8

84

13

0,9

50

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

1Q

FY

16

2Q

FY

16

3Q

FY

16

4Q

FY

16

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18


Exhibit 18: YoY growth in General Staffing Headcount

12.7%9.8%

14.1%16.2%

14.1%

10.8%

5.7%

0.0%

5.0%

10.0%

15.0%

20.0%

1Q

FY

17

2Q

FY

17

3Q

FY

17

4Q

FY

17

1Q

FY

18

2Q

FY

18

3Q

FY

18

YoY growth in General staffing Headcount


Exhibit 19: Headcount of TeamLease

Q1FY17 Q2FY17 Q3FY17 Q4FY17 1QFY18 2QFY18 3QFY18

General Staffing 113,713 115,397 123,946 126,463 129,787 127,884 130,950

Netap 14,155 17,787 19,427 23,439 28,051 32,615 40,423

Specialized Staffing Associate count - 1,103 1,261 1,251 1,423 1,631 5,910*

Total Outsourced 127,868 134,287 144,634 151,153 159,261 162,130 177,283

Core Employees 1276 1386 1406 1436 1467 1466 1632

Total Headcount 129,144 135,673 146,040 152,589 160,728 163,596 178,915

Source: x, Company Data, PL Research * Evolve acquisition added 4100 employees

We would like to keenly watch the Headcount addition trends of TeamLease over

the next few quarters to gauge the volume growth momentum in the business

March 21, 2018 17

TeamLease Services

Home-grown companies perform better in India (v/s MNC staffing majors)

The major players in developed countries in the organized staffing business are

Adecco, Manpower and Randstad. However, TeamLease and Quess Corp enjoy the

pole position in Indian Flexi Staffing business.

Large organized staffing players continue to enjoy robust growth aided by share

gains from unorganized players. Acquisitions also continue to be a key driver for

revenue growth in the sector. For eg: Quess revenues have grown at 32% CAGR

(FY11-FY17) aided by solid acquisition strategy.

Exhibit 20: YoY consolidated Revenue growth of listed peers

0.0%

50.0%

100.0%

150.0%

200.0%

FY13 FY14 FY15 FY16 FY17

Teamlease Quess Corp SIS

Source: x, Company Data, PL Research, Acquisitions have led to steep spike in Quess Revenue growth in FY15.

Exhibit 21: YoY revenue growth of Staffing majors in India

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY13 FY14 FY15 FY16

Randstand Adecco G4Secure Solutions Innov source

Source: , Company Data, PL Research* Randtstand India and Adecco India growth is represented in the above graph

Exhibit 22: Associate Headcount of staffing companies

243,000

178,915

85,000 65,000 65,000 58,000

-

50,000

100,000

150,000

200,000

250,000

300,000

Quess Teamlease Adecco India Randstand (India)

Manpower India

InnovSource

Associate Headcount

Source: x, Company Data, PL Research, Quess Headcount includes facility management, IT staffing and Industrial asset

March 21, 2018 18

TeamLease Services

Technology platforms can be a differentiator to drive non-linearity

Investments in Technologies remain crucial in the Staffing Business and this drives

non-linearity in the model and improve associate to Core Staff ratio. This helps the

business scale and drive non-linearity. For eg: TeamLease has developed in-house

software tools such as Associate Life Cycle System (ALCS), Candidate Life Cycle

System (CLCS) and Regulatory Life Cycle System (RLCS) platforms to manage

activities and processes relating to staffing business, permanent recruiting business

and regulatory consulting business, respectively. Associate to core employee ratio

stands at 203 for FY17 which is a marked improvement over FY16. TeamLease has

core employees at 1632 employee as on Q3FY18, of which, employees focused in

General staffing stand at 718 employees. Hence, with core strength of 718

employees, TeamLease is managing an Associate strength of 171,373 (General

staffing+ NETAP). This indicates a core employee productivity of 219 as on Q3FY18.

Exhibit 23: Associate to Core Employee ratio of TeamLease

149.0 151.0 152.0 154.0

165.0 166.0

203.0

100.0

120.0

140.0

160.0

180.0

200.0

220.0

FY11 FY12 FY13 FY14 FY15 FY16 FY17


TeamLease’s Technology department has 60 employees and they focus on

continuously producing upgrades to various software applications and platforms.

Associate Lifecycle System (ALCS): ALCS is a Microsoft systems based technology

platform that drives TeamLease staffing business. ALCS platform provides

automation to the entire associate lifecycle process from onboarding Associate

Employees, to requesting relevant monthly information from clients, such as

incentives payable and leave of absences, to raising invoices, billing clients and

making collections to releasing monthly salary payments to our Associate

Employees.

March 21, 2018 19

TeamLease Services

Candidate Lifecycle System (CLCS): CLCS was developed principally for permanent

recruiting business. CLCS is a Microsoft systems based platform that automates the

candidate lifecycle from processing job requirements provided by clients, to

registering mandates, searching for matching candidates in database using artificial

intelligence, to sending profiles to clients, processing client shortlists of candidates,

tracking interviews and raising invoices in the case of permanent recruitment

candidates or migrating them to the ALCS system in the case of temporary staffing

candidates.

Regulatory Lifecycle System (RLCS): RLCS is a Microsoft systems based technology

platform designed for regulatory consulting business. The system has an embedded

store of all relevant labour laws in India and is designed to accept inputs of client

data, perform automatic audits of clients' regulatory compliance status and generate

reports.

Technology plays a key differentiator when managing operations in scale and we

believe large companies like TeamLease, Quess Corp, Adecco India are better

preferred on this front. We believe that non-linearity in Associate to core employee

ratio would be the key driver in margin expansion for TeamLease.

March 21, 2018 20

TeamLease Services

Margin Expansion remains a focus area for TeamLease

TeamLease has been showing a steady margin expansion over the past few

quarters led by expansion into Specialized Staffing (IT staffing and Specialized

Telecom staffing). While General staffing has low EBITDA margins (~2%), IT

staffing and Specialized Telecom staffing businesses have higher EBITDA

margins (10-12%). Management guided that key drivers for margin expansion

are higher value added services, mix shift to variable structure and traction in

specialized staffing and IT staffing business. TeamLease’s value-added services

include Self Service app which offers service which include attendance, sales

reporting, asset tracking, training and HRIS module.

Exhibit 24: EBITDA margin of TeamLease

0.7%

1.0%

1.7%1.5%

1.7%1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1QFY17 2QFY17 3QFY17 1QFY18 2QFY18 3QFY18

EBIDTA margin (%)


Exhibit 25: Segmental margins of TeamLease

1.4% 1.7% 2.1%

16.2%14.2%

10.1%

4.8%

-2.2%

3.7%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2QFY17 2QFY18 3QFY18

General Staffing Specialized Staffing HR Services


March 21, 2018 21

TeamLease Services

For Q3FY18, TeamLease derived 92% of total revenues from General staffing, 6% of

revenues from Specialized Staffing Services and 2% of revenues from HR services.

The Specialized staffing business of TeamLease was scaled up by TeamLease through

acquisitions in FY17 and FY18 (Keystone, ASAP Infosystems and NichePro in IT

staffing and Evolve in Telecom Staffing Services). TeamLease has acquired Evolve

Technologies, a specialized player in staffing for Telecom vertical. The acquisition

would be consolidated effective November 2017. We believe that margin expansion

would be the key driver for earnings trajectory of Teamlease.

Exhibit 26: Revenue Break up of TeamLease as on Q3FY18

Staffing and allied services

92%

Specalized Staffing Services

6%

Other HR

Services

2%


March 21, 2018 22

TeamLease Services

Low working capital compared to peers enables steady ROE

Margin trajectory of staffing companies remain company specific. Mix of business is

a key factor which is a determinant for the margins. Segments like IT staffing, Facility

management services, Industrial asset management enjoy have much higher margins

as compared to General staffing. Quess Corp enjoys superior margins (v/s

TeamLease) considering its revenue mix which includes IT staffing, Facility

Management Services, Industrial Asset management. General staffing contributes to

46% of total revenues to Quess Corp (v/s 92% of revenues derived from General

staffing for TeamLease). We note select players continue to remain loss-making at

the EBITDA level (Randstad India).

Exhibit 1: EBITDA margin of major players in the sector

FY12 FY13 FY14 FY15 FY16 FY17

TeamLease -2.2% -0.8% 0.78% 1.19% 1.02% 1.45%

Quess 4.19% 4.3% 3.96% 5.08% 4.78% 5.36%

SIS NA 4.7% 4.8% 4.5% 4.4% 4.9%

Unlisted FY12 FY13 FY14 FY15 FY16 FY17

InnovSource 4.43% 2.71% 3.27% 3.52% 4.45% NA

G4 Secure 5.9% 4.79% 4.85% 4.15% 3.32% NA

Adecco India 1.19% 0.68% 1.46% 1.33% 2.84% NA

Randstad -1.7% -0.7% -1.5% -2.2% -1.1% NA


TeamLease has relatively lower working capital cycle: TeamLease’s Debtor

(Including unbilled) stands at 28 days for FY17. However, Quess Corp’s Debtor

(Including Unbilled) stands at 73 days for FY17. TeamLease’s business mix is

predominantly in general staffing and hence, less working capital intensive.

However, with acquisitions over the past one half year focused on specialized

staffing, the company has seen a gradual increase in its working capital cycle.

Specialized staffing segments enjoy a higher EBITDA margins at ~10-14% as

compared to General staffing EBITDA margins of 1.5-2%.

Exhibit 27: TeamLease Working Capital Cycle

FY13 FY14 FY15 FY16 FY17

Debtors 18 14 15 18 22

Unbilled 6 4 3 9 6

Total Debtors Including unbilled 24 18 18 27 28

Payable days 16 11 10 17 16

WC cycle 8 7 8 10 12


March 21, 2018 23

TeamLease Services

Exhibit 28: Quess Working Capital Cycle

15MFY15 FY16 FY17

Debtors 42 43 39

Unbilled 27 31 34

Total Debtors+ Unbilled 69 74 73

Payable days 12 20 19

Working capital cycle 57 54 54


ROE Metrics of staffing Companies: Despite TeamLease having much lower EBITDA

margins in comparison to Quess Corp and SIS, all the companies have a similar ROE

profile as on FY17. This is owing to lower working capital cycle of TeamLease

compared to peers. We note that ROE profile has remained at a narrow range

across vendors. Lower effective tax rates owing to section 80JJAA benefits is

boosting ROE trajectory for companies. Our view is that ROE, ROCE and ROIC are

the key metrics to watch in the staffing business.

Exhibit 29: ROE Profile of Staffing Companies

23%

11%

19%

30.8

%

29.1

%

19.0

%

16% 18

%

18.3

0%

0%

5%

10%

15%

20%

25%

30%

35%

FY15 FY16 FY17

Teamlease Quess Corp SIS


Exhibit 30: EBITDA margins of Staffing Companies

1.6

5.44.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Teamlease Quess SIS

EBIDTA margin for FY17


March 21, 2018 24

TeamLease Services

An Analysis of the Global Flexi Staffing Business

Globally Flexi Staffing Industry has shown cyclical swings

Staffing business growth rates are closely linked to GDP growth rates in the economy

in which they are operating. Adecco Group’s organic revenue growth is at 4/4/4% in

CY16/CY15/CY14, respectively, as it is predominantly present in developed markets.

We also note that Staffing business has seen significant volatility during the

recession phase. Revenues of the Manpower group had declined by 21% YoY in CY09

during the phase of the Lehman Crisis. Even Adecco’s revenues plunged by 26% YoY

during the Lehman crisis owing to retrenchment of temp staff.

Exhibit 31: Manpower Group USD revenues and Constant Currency Growth (%)

20.521.5

16

18.9

2220.7 20.3 20.8

19.3 19.7

9%

1%

-21%

19%

12%

-1% -2%

4%7%

5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

0

5

10

15

20

25

CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16

(US$

bn)

Manpower Group Constant Currency Growth (RHS)


Exhibit 32: Adecco Group Revenues (USD) and YoY growth (%)

25.87

19.11

24.1826.65 26.65 25.35 26

28.6 29.51

-5.2%

-26.1%

26.5%

10.2%

-4.0%-1.0%

4.0% 4.0% 4.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

0

5

10

15

20

25

30

35

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16

(USD

bn)

Adecco revenues Adecco (Revenue Growth) (RHS)


March 21, 2018 25

TeamLease Services

Global Staffing majors operating at 3-5% EBITDA margin

Indian Staffing companies (both domestic and well as MNC arms in India) are

operating at 1.5-5% EBITDA margin based on the revenue mix of the business. This is

similar to global players which have reported EBITDA margin trend of 3-5%.

Exhibit 33: EBITDA margin of Manpower and Adecco Global

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16

Manpower Global margins Adecco Global


Case study of the Adecco Group

Adecco Group is one of the largest HR solutions providers in the world with presence

in temporary staffing, permanent placement and recruitment process outsourcing.

Adecco, headquartered in Switzerland, has its presence globally across 60 countries.

This group has 7,00,000 associate employees and 33,000 core employees. Given

below are the financial data of the Adecco Group:

Exhibit 34: Adecco revenues (EUR bn) and revenue growth (%)

2119.9

14.7

18.620.5 20.5 19.5 20.0

22.0 22.7

-5.2%-26.1%

26.5%

10.2%

-4.0% -1.0%4.0% 4.0% 4.0%

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0

5

10

15

20

25

CY7

CY8

CY9

CY10

CY11

CY12

CY13

CY14

CY15

CY16

Revenues (EUR bn) Organic Revenue growth (%) (RHS)


March 21, 2018 26

TeamLease Services

Exhibit 35: Adecco EBITDA Margins

5.5%5.0%

3.4%

4.6% 4.5%4.0%

4.4%4.8%

5.2% 5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CY7

CY8

CY9

CY10

CY11

CY12

CY13

CY14

CY15

CY16


Exhibit 36: Snapshot of Adecco groups key metrics

Adecco group CY12 CY13 CY14 CY15 CY16

Associate Employees 700,000 650,000 650,000 700,000 700,000

Core Employees 32,000 31,000 31,000 32,000 33,000

Revenues (EUR bn) 20.5 19.5 20.0 22.0 22.7

Organic Revenue growth (%) -1.5% 4.0% 4.0% 4.0%

Gross Profit Margins 17.9% 18.3% 18.5% 19.0% 18.8%

EBITDA Margins (Ex –one off) 4.0% 4.4% 4.8% 5.2% 5.0%

DSO 54 54 53 52 52

CFO (EUR mn) 579 520 785 799 687

CAPEX (EUR mn) 88 81 80 97 76

FCF (EUR mn) 491 439 705 702 611

ROE(%) 10.05 15.3 17.2 0.2* 20.5

ROCE(%) 7.6 10.9 12.4 0.2 13.6

Source: Company Data, PL Research * Goodwill amortization has led to tepid reported PAT and hence a huge drop in ROE of Adecco in CY15.

Adecco Group has been generating a strong free cash flow over the past few years.

Hence, company has a steady dividend payout ratio of 56/54% for CY16/CY15. Apart

from dividend, Adecco Group has also been doing steady buybacks which have

aided EPS growth and ROE improvement. However, Flexi staffing companies are on

a strong growth footing In India and hence, dividend payout has taken a backseat.

March 21, 2018 27

TeamLease Services

Earnings and Financial Outlook

Revenue growth to remain strong over FY18-FY20E

TeamLease’s consolidated growth trajectory remains solid with revenues growing at

25% CAGR (FY13-FY17). Over the same period, Associate headcount grew by 15%

CAGR (FY13-FY17). We believe that revenue growth momentum could continue over

the medium term led by market share gains from unorganized sector. GST is a key

catalyst for organized players to gain market share. We believe TeamLease revenues

can grow at 16% CAGR over FY17-FY20E.

Exhibit 37: Consolidated Revenues (Rs mn) and revenue growth (%)

12

,50

7

15

,29

6

20

,07

1 2

5,0

49

30

,41

8

35

,95

9

41

,46

8

47

,66

8

35.1%

22.3%

31.2%

24.8%

21.4%

18.2%

15.3%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

10,000

20,000

30,000

40,000

50,000

60,000 FY

13

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Revenues (Rs mn) Growth (%) (RHS)

Source: Company Data, PL Research.

We have estimated for a gradual improvement in EBITDA margins over

FY18/FY19E/FY20 which would drive earnings momentum. Mix shift in favour of high

margin business (Specialized Staffing) and core employee productivity improvement

can drive margin trajectory.

Exhibit 38: EBITDA Margins of TeamLease

-2.2%

-0.9%

0.8%1.2% 1.0%

1.5%1.8%

2.1%2.3%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E


March 21, 2018 28

TeamLease Services

Asset-light model to aid FCF generation (ex- acquisition spends)

We believe TeamLease has a low working capital requirement owing to its focus on

General staffing business as well as only modest funding exposure (28% as on

Q3FY18). Debtors including unbilled stand at 28 days as on FY17. However, going

ahead, we expect the working capital cycle to increase slightly due to IT staffing

services. Core capex in business is also modest. Hence, TeamLease’s free cash flow

(excluding acquisition capex) remains strong. FCF/EBITDA stood at 50% for FY17.

Exhibit 39: Core capex of TeamLease

46.2

16.9

28.9

37.8

46.7

18.5

0

10

20

30

40

50

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

(Rs

m)


Exhibit 40: Free Cash flow (Excluding acquisitions)

-444

-110

135

304

-150

314

-500

-400

-300

-200

-100

0

100

200

300

400

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

(Rs

m)


Exhibit 41: Consolidated Cash flow summary

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Cash flow from Operations (77) (397) (93) 164 342 (103) 332

Capex (158) (46) (17) (29) (38) (47) (18)

FCF (235) (444) (110) 135 304 (150) 314

Acquisitions 0 0 0 0 0 0 (885)

FCF post acquisitions (235) (444) (110) 135 304 (150) (571)


However, after including the impact of acquisitions, TeamLease’s FCF remains

negative in FY17 and is likely to remain negative in FY18.

March 21, 2018 29

TeamLease Services

Section 80jjaa benefits aided ROE trajectory

Exhibit 42: Dupont Analysis- ROE breakup

FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Net Profit Margin (%) 1.16 1.53 0.99 2.18 2.01 2.28 2.51

Asset Turnover 6.6 7.2 5.6 4.8 4.8 4.9 4.9

Revenues 15,296 20,071 25,049 30,418 35,959 41,468 47,668

Avg Total Assets 2332 2777 4456 6,354 7,426 8,428 9765

Financial Leverage Ratio 2.14 2.08 1.94 1.83 1.78 1.68 1.61

Avg Total Assets 2332 2777 4456 6,354 7,426 8,428 9,765

Avg Total Equity 1092 1334 2302 3,463 4,172 5,006 6,076

ROE (%) 16.3 23.1 10.8 19.1 17.3 18.9 19.7


TeamLease’s ROE has seen a strong uptick in FY17 led by Section 80JJAA benefits

which have boosted the reported net margins of the company. We have modelled

negligible tax rate for TeamLease over FY18-FY20E owing to continuation of Section

80JJAA benefits. Hence, TeamLease’s ROE trajectory would remain at 18-20% over

this period.

Acquisitions to boost further growth of revenue and margins

TeamLease has raised Rs1500mn from the fresh issue of shares in its IPO in February

2016. Majority of the issue proceeds have been utilised for expanding into IT staffing

and specialized Telecom staffing. Both these segments have much higher EBITDA

margins (10-14%) as compared to General staffing (~2%- EBITDA margin). IT staffing

has helped in margin expansion strategy for TeamLease over the past few quarters.

Net cash on the balance sheet stands at Rs1000mn as on Q3FY18. We believe

TeamLease will continue to focus on acquisitions in the specialized staffing services.

The company could also raise debt or issue fresh equity for the same.

Exhibit 43: Acquisitions done by TeamLease

Vertical Annual Revenues (Rs mn) Amount paid (Rs mn) Associate headcount Core employees Year of

acquisition ASAP IT staffing 635 670 1000 171 Jul-16

Nichpro IT staffing 260 295 150 30 Sep-16

Keystone IT staffing 75 82 NA Jan-17

Evolve Specialized Telecom 1086 367 4000 150 Nov-2017

Source: x, Company Data, PL Research

“I think we have about Rs100 crores of free cash flow at this moment available

with us. If bigger deals came in, we are not constrained by that Rs100 crores as a

deal size. But we would be happy to raise money, if required, and we are zero debt

also. So whether it is debt or equity to deal that makes sense for TeamLease and

for the longer term path, we'd be open to exploring larger deals” TeamLease CEO

in Q2FY18 concall .

March 21, 2018 30

TeamLease Services

Valuations and View

TeamLease stock has seen a sharp appreciation with stock up 150% over the past

one year. We believe GST would drive share gains in favour of organized players

(from unorganized players) which would drive revenue growth for organized staffing

companies. TeamLease believes that migration in favour of organized players would

only be gradual as compared to pent‐up demand.

Post the strong rally over the past one year, TeamLease is currently trading at 40x

one year forward EPS basis (v/s 23x one year forward earnings traded one year ago).

Incremental re-rating on the multiple appears modest as most of the positives are

priced. Retain “Accumulate” with TP of Rs2450/sh (35x FY20E EPS).

Exhibit 44: TeamLease one year forward PE chart

16

20

24

28

32

36

40

44

48

52

Mar

-16

Apr

-16

May

-16

Jun

-16

Jul-

16

Aug

-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Apr

-17

May

-17

Jun

-17

Jul-

17

Aug

-17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb-

18

Mar

-18

P/E Mean Mean + Std Dev Mean - Std Dev


March 21, 2018 31

TeamLease Services

Comparative Valuation Table

Indian Staffing companies are trading at much higher P/E multiples (v/s Global peers)

owing to higher revenue growth outlook. However, ROE profile remains in a similar

band for Indian staffing companies v/s Global peers.

Exhibit 45: Global Staffing majors

Revenue (USD mn) EBIDTA (USD mn) EBIDTA margin (%) PAT (USD mn)

Mcap

(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Adecco 15.7 26,729 30,380 31,309 1,402 1,586 1,649 5.2% 5.3% 5.4% 1,008 1,022 1,057

Randstad 13.4 26,290 30,187 31,263 1,304 1,525 1,619 5.0% 5.1% 5.2% 762 1028 1088

Manpower 8.0 21,034 22,992 24,301 898 967 1,050 4.3% 4.2% 4.3% 487 607 609

P/E EV/EBIDTA ROE (%) Dividend Pay-out Ratio (%)

Mcap

(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

Adecco 15.7 13.5 12.0 11.4 9.64 8.7 8.3 21.04 21.6 20.8 58.0 58.0 58.0

Randstad 13.4 14.3 13.0 12.3 11.2 9.8 9.2 15.9 18.9 17.9 62.0 56.0 56.0

Manpower 8.0 17.4 13.5 13.2 9.6 8.7 8.0 21.2 19.2 17.9 22.8 23.0 23.0


Exhibit 46: Indian Staffing majors

Mcap (USD bn) Revenue (USD mn) EBIDTA (USD mn) EBIDTA margin (%) PAT (USD mn)

FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

TeamLease 0.55 468 553 638 6.8 9.9 12.8 1.5% 1.8% 2.0% 10.2 11.1 13.9

Quess 2.32 620 954 1255 34 57 83 5.4% 6.0% 6.6% 17 47.8 68

P/E EV/EBIDTA ROE (%) Dividend Payout Ratio (%)

Mcap(USD bn) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

TeamLease 0.55 54.1 49.7 39.7 77.3 53.6 40.7 19.1 17.3 18.9 0% 0% 0%

Quess 2.32 108.1 47.5 35.0 56.1 39.6 27.2 19.2 22.0 20.0 0% 0% 0%

Source: Company Data, PL Research * Quess , Adecco, Randstad, Manpower estimates are based on Bloomberg estimates

March 21, 2018 32

TeamLease Services

Company Profile

TeamLease Services established in 2002 is one of India’s leading people supply chain

company in the organized segment. The company has its presence in 150 locations,

with 2200 corporate clients and 1800 employees across the country. The company

started with Temporary Staffing and then after adding Permanent Recruitment in

2004, further expanded its portfolio to incorporate Payroll Outsourcing, Labour

Compliances and Training Services to become a one-stop solution for Staffing & HR

Services to various industries offering diverse functional roles. TeamLease focuses on

its vision of 3 E’s – Employment, Employability and Education.

TeamLease, in partnership with the Government of Gujarat, set up TeamLease Skills

University (TLSU), India’s first vocational university, at Vadodara. In FY2015,

TeamLease rolled out NETAP (National Employability through Apprenticeship

Program) to provide on-the-job training to apprentices. The company at present has

about 178,000 associates/trainees spread across the country and have till date given

employment to 1.7 mn people.

Employment

Match the requirements of customers with the right human resource

Access to a better quality workforce through its expanded foothold across the

HR Services value chain

Education

TeamLease Skills University prepares people to enter the workforce by

equipping them with vocational skills

Corridor effect from certificate to degree programs

Employability

Apprenticeship program assists in making up for any skill deficit of the associate

employees

Training interventions to make the candidate pool employable

March 21, 2018 33

TeamLease Services

Exhibit 47: TeamLease Evolution


2002

Incorporated the company with operations beginning in four offices,

20 clients and 40 employees

2004

Started permanent recruitment business for one client

2005

Strengthened technology infrastructure with centralizing

operations in head office at Bengaluru. Published the first labour

report

2007

Started new service offerings

2008

Initiated discussions for the apprenticeship revamp and made compliance a seperate strategic

business unit

2009

Made the first inorganic acquisition of IIJT education which is into retail

and institutional training

2011

Signed a MOU for setting up India's first skills university with State

Government of Gujarat. Founding members of Indian Staffing

federation

2016

Listed on NSE and BSE with IPO over subscribed 67x

2017

Acquired ASAP Infosystems, Nichepro technologies and Keystone business solutions adding IT staffing

as a new service offering

March 21, 2018 34

TeamLease Services

Key Management Team

Manish Sabharwal - Co-Founder and Executive Chairman: Mr Manish provides

leadership at the Board level and drives strategy. In 1996, he co-founded India Life

Pension Services, a payroll and pension services company that was acquired by

Hewitt Associates in 2002. Consequently, he was Chief Executive Officer of Hewitt

Outsourcing (Asia) based in Singapore for two years. He is an alumnus of The

Wharton School, University of Pennsylvania, Shri Ram College of Commerce, Delhi

and Mayo ‎ egllCoC ,remCA.

Mr Ashok Reddy - Co-Founder, Managing Director and Chief Executive Officer: Mr

Ashok oversees operations and represents the company in forums with major

clients. He holds a bachelors degree in commerce from Shri Ram College of

Commerce, Delhi and a Diploma in Management from Indian Institute of

Management, Bengaluru. Prior to his current position, he was a co-founder and

Director of India Life Services, a pension and provident fund asset management

company.

Ms Rituparna Chakraborty - Co-Founder and Executive Vice President: In her

current role, she is responsible for Staffing and also drives our NETAP initiative.

N. Ravi Vishwanath - Chief Financial Officer: Mr Ravi brings in 30 years of

experience in the finance sector. Prior to joining TeamLease, he worked at Sun

Microsystems India. He holds a bachelor’s degree in commerce from Bangalore

University and is a fellow of the ICFAI.

Shareholding Pattern

Exhibit 48: Shareholding pattern as on 3QFY18

Promoters 43.1%

Gaja Capital8.0%

Goldman Sachs 7.4%

HDFC Asset management

9.0%

T Rowe4.4%

FIL Investments4.4%

FID funds 3.1%

Reliance capital 2.6%

Others 18%

Source: Company Data, PL Research* We note that HDFC MF has trimmed its stake recently through multiple block deals

March 21, 2018 35

TeamLease Services

Exhibit 49: Consolidated Model Sheet of TeamLease

Fig in Rs mn FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Consolidated Revenues ( Rs mn) 15,296 20,071 25,049 30,418 35,959 41,468 47,668

Growth (%) 22.3% 31.2% 24.8% 21.4% 18.2% 15.3% 15.0%

EBITDA 120 241 258 442 641 861 1110

EBIT 101 213 228 400 553 767 1015

PAT 178 308 248 663 722 945 1196

EBIDTA Margin (%) 0.8% 1.2% 1.0% 1.5% 1.8% 2.1% 2.3%

EBIT Margin (%) 0.7% 1.1% 0.9% 1.3% 1.5% 1.8% 2.1%

PAT Margin (%) 1.2% 1.5% 1.0% 2.2% 2.0% 2.3% 2.5%

Reported EPS 11.6 20.1 15.9 38.8 42.3 55.3 69.9

Growth (%) NA 73.3% -20.7% 143.8% 8.9% 30.8% 26.5%

P/E 181 105 132 54 50 38 30

EV/EBITDA 260 129 130 77 54 39 30

ROE(%) 16.3% 23.1% 10.8% 19.1% 17.3% 18.9% 19.7%

ROCE (%) 14.9% 22.2% 10.6% 19.2% 17.5% 18.9% 19.7%

Consolidated Balance Sheet (Rs mn)

Networth 1180 1488 3116 3811 4533 5478 6674

Net Cash on Balance sheet 905 1199 2639 1744 1622 2162 3015

Net cash per share 59 78 154 102 95 126 176

Net Cash as a % of stock 2.8% 3.7% 7.4% 4.9% 4.5% 6.0% 8.4%

Debtor days 14 15 18 22 23 24 24

Unbilled Days 4 3 9 6 6 6 6

Payable Days 11 10 17 16 16 16 16

Working Capital Cycle 7 8 10 12 13 14 14

Consolidated Cash flows (Rs mn)

Cash flow from Operations 164 342 (103) 332 322 581 895

Capex 29 38 47 18 25 30 30

Acquisition

884.7 400

Capex+ Acquisition 28.9 37.8 46.7 903 425

Free Cash flow 135 304 (150) (571) (103) 551 865

FCF yield(%) 0.4% 0.8% -0.4% -1.6% -0.3% 1.5% 2.4%

Source: Company Data, PL Research * Low effective tax rates owing to Section 80JJAA benefits is also driving PAT growth over FY17-FY19.

March 21, 2018 36

TeamLease Services

Income Statement (Rs m)

Y/e March 2017 2018E 2019E 2020E

Net Revenue 30,418 35,959 41,468 47,668

Cost of employee salaries 29,377 34,464 39,664 45,619

Gross Profit 1,041 1,495 1,803 2,050

Other costs — — — —

Other Expenses 599 854 942 939

EBITDA 442 641 861 1,110

Depr. & Amortization 43 88 94 96

Interest expense 11 18 12 12

Other Income 224 194 200 205

Profit before Tax 613 729 955 1,208

Total Tax (50) 8 10 12

Profit after Tax 663 722 945 1,196

Ex-Od items / Min. Int. — — — —

Adj. PAT 663 722 945 1,196

Avg. Shares O/S (m) 17.1 17.1 17.1 17.1

EPS (Rs.) 38.8 42.2 55.3 70.0

Cash Flow Abstract (Rs m)

Y/e March 2017 2018E 2019E 2020E

C/F from Operations 332 322 581 895

C/F from Investing (169) (425) (30) (30)

C/F from Financing (411) (18) (12) (12)

Inc. / Dec. in Cash (249) (121) 539 853

Opening Cash 496 247 126 665

Closing Cash 247 126 665 1,519

Key Financial Metrics

Y/e March 2017 2018E 2019E 2020E

Growth

Revenue (%) 21.4 18.2 15.3 15.0

EBITDA (%) 71.6 44.9 34.3 29.0

PAT (%) 167.3 8.9 31.0 26.5

EPS (%) 167.4 8.9 31.0 26.5

Profitability

EBITDA Margin (%) 1.5 1.8 2.1 2.3

PAT Margin (%) 2.2 2.0 2.3 2.5

RoCE (%) 19.2 17.5 18.9 19.7

RoE (%) 19.1 17.3 18.9 19.7

Balance Sheet

Net Debt : Equity (0.4) (0.3) (0.4) (0.4)

Valuation

PER (x) 54.4 50.0 38.2 30.2

P / B (x) 9.5 8.0 6.6 5.4

EV / EBITDA (x) 77.9 54.0 39.6 29.9

EV / Sales (x) 1.1 1.0 0.8 0.7

Earnings Quality

Eff. Tax Rate (8.2) 1.0 1.0 1.0

Other Inc / PBT 36.6 26.7 20.9 17.0


Balance Sheet Abstract (Rs m)

Y/e March 2017 2018E 2019E 2020E

Shareholder's Funds 3,811 4,533 5,478 6,674

Total Debt — — — —

Other Liabilities 48 48 48 48

Total Liabilities 3,860 4,581 5,527 6,722

Net Fixed Assets 77 81 87 93

Goodwill 952 1,286 1,216 1,144

Investments 103 103 103 103

Net Current Assets 2,680 3,064 4,074 5,335

Cash & Equivalents 1,696 1,574 2,113 2,967

Other Current Assets 4,151 4,841 5,563 6,253

Current Liabilities 3,063 3,248 3,500 3,781

Other Assets 149 149 149 149

Total Assets 3,860 4,581 5,527 6,722

Quarterly Financials (Rs m)

Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18

Net Revenue 8,169 8,530 8,756 9,181

EBITDA 147 130 151 179

% of revenue 1.8 1.5 1.7 1.9

Depr. & Amortization 13 20 20 24

Net Interest 3 2 3 8

Other Income 57 58 44 42

Profit before Tax 189 166 172 189

Total Tax (196) 2 (1) 5

Profit after Tax 385 164 174 184

Adj. PAT 385 164 174 184


March 21, 2018 37

TeamLease Services

Notes

March 21, 2018 38

TeamLease Services

Notes

March 21, 2018 39

TeamLease Services

Notes

March 21, 2018 40

TeamLease Services

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

45.0% 44.2%

10.9%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

BUY : Over 15% Outperformance to Sensex over 12-months

Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months

Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month

Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

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