TeamLease Services (TEAM), India’s largest organised flexi-staffer, is at the cusp of redefining its long-term growth trajectory with several favourable factors likely to play out over the next decade. Market leadership (5-7% share) with an established track record of operational excellence (associate-to-core employee ratio – 203x) gives it pole position to reap the benefits of the flexi-staffing industry’s imminent formalisation. Entry in the high-margin IT staffing business will further aid profitability. We estimate operating profit to triple in the next three years, with margin expanding 85 bps. A strong balance sheet (net cash-to-equity of 0.4x, strong cash conversion) and stable management strengthen TEAM’s ability to expand into specialised areas of staffing (acquisition of job portal, Fresher world and telecom staffing company, Evolve). We initiate coverage with a ‘BUY’ rating valuing the stock at 35x FY20e EPS and PEG of 1.5 (in-line with global flexi-staffing companies) to arrive at our TP of Rs 2,700.
The proportion of flexible labour in India’s workforce is currently pegged at 36%, easily among the highest in the world. However, organised, tripartite flexi-staffing accounts for just 2 %. Improved tax compliance after GST implementation and the government’s push to formalise the workforce (number of PF accounts has surged from 35million in FY16 to 50million in FY17) are likely to reduce pricing arbitrage and wrest the advantage with the organised sector. The industry’s shift towards the organised sector appears imminent. As the market leader with a share of 5-7% in the organised space, TEAM is best placed to seize this opportunity.
The associate base registered a 6-year CAGR of 17 % over FY11-FY17, even in the absence of the thrust towards formalisation. It has been instrumental in the top-line rising from Rs 690 crore in FY11 to Rs 3,040 crore in FY17, a CAGR of 28 %. In a largely commoditised industry, scale provides distinct benefits: a) centralised operations yield cost-effective and efficient solutions; b) a diversified portfolio balances risk and growth and c) the early adoption of latest technology.