29 July 2020
1QFY21 Results Update | Sector: Others
Quess Corp
Estimate change
TP change
Rating change
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CMP: INR344
TP: INR480 (+40%)
Buy
Likely to benefit from near-term uncertainty in job market
Company-level improvements continue!
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Financials & Valuations (INR b)
Y/E Mar
2020 2021E
Sales
109.9 106.2
EBIT Margin (%)
Adj. PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
Ratios
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
3.7
2.6
18.3
4.3
200.8
10.4
15.4
0.0
18.8
1.7
7.8
0.5
3.4
1.6
11.4
-37.5
215.1
6.9
8.9
0.0
30.1
1.6
8.7
0.5
QUESS IN
147
50.7 / 0.7
639 / 165
-20/-37/-21
116
2022E
133.0
4.0
3.5
24.8
117.1
246.4
13.5
13.7
0.0
13.9
1.4
6.5
0.4
Quess Corp (QUESS)’s 1QFY21 results were largely in line with estimates.
Adjusted for businesses that remained completely closed (e.g., Excellus) and
one-off COVID-19-related costs, underlying revenue, EBITDA, and recovery
trends were reasonably resilient. Good cost rationalization, net debt
reduction (by INR1b), healthy cash conversion (OCF/Ind-AS adjusted EBITDA
= 152%), and the simplification of Terrier’s holding structure are key micro-
level positives.
Recent unemployment data (e.g., CMIE) and hiring outlook surveys hint at
quick and strong recovery in the job market. However, the back and forth on
lockdowns across cities would mean some amount of uncertainty in the job
market. Based on our learning in the immediate aftermath of GFC and the
demonetization, this uncertainty would likely lead to the conversion of some
otherwise permanent roles into temporary ones, consequently benefitting
staffing firms.
Operationally, our earnings estimate over FY21–22E remains largely
unchanged. However, we increase our FY21E ETR to 23% (from 13%), with
no bearing on cash tax outflow. Over the medium term, we expect QUESS to
be the biggest beneficiary of the recently announced labor law reforms
(refer to our earlier
note).
Reiterate
Buy.
Quess Corp reported revenue/EBIT/PAT growth of 1%/-23%/-62% YoY (v/s
est. of 0%/-35%/-63% YoY).
Sequentially, overall headcount declined ~13% and general staffing
headcount ~15%, in line with our expectations.
Revenue decline (~20% QoQ) was in line with estimates. Sequentially,
revenue decline was led by General Staffing (22%), BPO (25%), and Facilities
Management (21%).
Notably, despite the sharp decline in General Staffing revenue, the company
did not lose any major customer in this segment.
Closure of IT offices during the quarter led to a strong impact on the Facility
Management and Security Services businesses.
Reported EBITDA was ~8% ahead of our estimates. Sequentially, a sharp
drop in the revenue run-rate led to a proportionate impact on EBITDA (even
as EBITDA margins remained largely stable).
From Mar’20 levels, indirect costs were stated to have declined by ~20%.
The EBITDA decline in General Staffing (~21% QoQ) was more or less in line
with revenue decline.
Businesses such as training and development (Excelus) and break-and-fix
(Digi Care) remained an overhang on reported EBITDA for the quarter.
Despite the bench costs incurred in some parts of the business, sequential
EBITDA margin expansion in Tech Services and Operating Asset Management
was a key surprise.
In-line results; debt reduction / healthy cash generation key positives
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Jun-20 Mar-20 Jun-19
55.3
54.9
71.4
15.7
16.6
6.2
14.0
14.6
14.0
15.0
13.9
8.4
FII Includes depository receipts
Sudheer Guntupalli – Research analyst
(Sudheer.Guntupalli@MotilalOswal.com); +91 22 5036 2749
Research analyst: Mohit Sharma
(Mohit.Sharma@MotilalOswal.com) /
Heenal Gada
(Heenal.Gada@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.