TeamLease Services Ltd. (TL) (NSE: TEAMLEASE, BSE: 539658) is one of India’s largest “people supply chain” companies with an estimated ~6% market share in India’s flexible staffing industry. The company provides general staffing solutions which involves matching hiring requirements of customers (companies) with the right human resources (associates). TL currently manages ~2.27 lakh associates for 3,500+ customers at 7,000+ locations across industries in India. The company also offers recruitment, regulatory compliance, payroll and skill enhancement services.
Investment Thesis
To give an idea on the opportunity set, India’s working age population consists of ~60% of its ~1.2 billion people, yet only 10% of the workforce forms a part of the formal economy (although a majority of the informal sector includes agricultural employment). Additionally, complex labor laws have hampered a faster transition to more formal and permanent employment. In fact, more than 70% market share in the temporary staffing industry is estimated to be in the informal sector.
Globally, the flexi-staffing industry usually caters to seasonal variations in demand. However, many non-core requirements in India are almost permanently outsourced rather than building headcount in-house. Search and recruitment costs are high. You may have a talent pool of engineers in a state down south, but a client may require 100 engineers of a specific type on the east coast, where finding and recruiting such talent may be more difficult. Additionally, regulatory compliance is quite cumbersome with regard to headcount. This is best handled by someone else, or a company could waste many man-hours for the 100 or 200 employees it seeks to add to headcount.
From the point of view of first-time jobseekers, the flexi-staffing industry has quite a compelling value proposition. One, wages and benefits are provided in line with all statutory requirements. Two, there’s always the potential for conversion to permanent headcount.
India is the second largest labor market, yet the penetration of formal flexi-staffing in the country is low. The reason it appears so low is because the majority of this industry, which comprises 0.3% of the workforce, also operates in the shadows. According to some estimates, about 75% of this industry is informal in nature. However, industry executives and different statistics suggest the number may be as high as 90% or 95%. The formal section of this industry comprises 5 or 6 large players, one of them being TeamLease Services.
Another key reason the unorganized sector in this industry did well is because they utilize the traditional regulatory arbitrage it offered. On the one hand, first-time jobseekers have been desperate for work. India needs to find as many as one million jobs per month, and these unorganized players have gotten away with depriving new labor market entrants from statutory benefits that would otherwise accrue to them. On the other hand, these participants pay no service taxes to the government, so they can offer clients their services at lower prices than the organized sector could. This dynamic has allowed the informal sector to flourish in terms of flexi-staffing.
However, one critical aspect is these entities find it difficult to scale beyond their particular regional footprint and especially beyond a particular scale because they are forced to continually fly below the radar. However, since the introduction of GST, the number of entities registered to pay these taxes has grown almost 50% in one year. Given the tax liabilities they now have, companies expect service providers to give them the input tax credits to set off against the services they use or products they buy. Unorganized flexi-staffing agencies are unregistered and are typically unable to pass on these benefits to customers.
In addition, there was one-time shocks like demonetization, which more or less crippled the ability of flexi-staffing informal participants to keep their operations running because they were heavily dependent on cash payments to associates, among other things.
All put together, the flexi-staffing industry stands to be one of the major beneficiaries of these transitions.
Financial and Operational Performance
90% of the company’s revenue is derived from the general staffing segment. Here the company is more or less a price-taker, with cost and realization largely market-determined. As per the management, there are only two ways to improve realization. One is improving the spread between what you pay associates and what you charge clientele. This can be done by continually improving the skill sets of your associate pool, which allows them to have high realization in the marketplace. The second is using technology and processes to have highly streamlined operations because this allows operating leverage to kick in meaningfully as the business scales in terms of headcount.
|
Mar-15 |
Mar-16 |
Mar-17 |
Mar-18 |
Mar-19 |
|
|
Operating Revenue (INR Cr.) |
2,007.07 |
2,504.92 |
3,041.29 |
3,624.12 |
4,447.60 |
|
ROCE (%) |
24.51 |
15.99 |
15.06 |
18.44 |
20.43 |
|
ROE (%) |
23.07 |
10.77 |
17.07 |
18.45 |
20.28 |
|
Operating Margin (%) |
1.77 |
1.65 |
1.93 |
2.33 |
2.53 |
|
Net Margin (%) |
1.53 |
0.98 |
1.88 |
2.02 |
2.20 |
|
Debt to Equity |
-- |
0.06 |
0 |
0.02 |
0.02 |
7.7% of the revenue comes from specialized staffing. The share of this segment in the total revenue stood at 2.9% in FY17. This business has a significantly higher-margin profile since the employees hired and placed are more skilled in niche domain applications, for example, telecom or IT. EBITDA margins for specialized staffing stood at 6.5% for 9MFY20.
The final piece comes from a host of different HR services the company offers, examples including regulatory compliance and payroll.
The company’s operating revenue has grown at a CAGR of 22% over the last 5 years.
The productivity of associate headcount has been continually improving from about 154 associates per core employee in FY14 to almost 266 in December 2019.
One of the key observations in this industry is small participants often want to sell their businesses because they find they lack the management depth and width to scale beyond a particular associate headcount. They may have regional strengths but not the bandwidth to build a national footprint. These are ideal situations for TeamLease to go in and acquire. The management realized early on it was difficult to build presence in specialized segments in terms of headcount with new clients as it takes time. Thus, the company had an opportunity to acquire a business which may have built these headcounts but had difficulty scaling beyond a particular headcount.
TeamLease has also been proactive in its approach to technology, for example, building small stakes in online learning courseware companies. These can be all laid on the complete associate headcount to improve skill sets and employability across client requirements or sectors. This thinking is evident in the investment in online courses provider School Guru, which can be leveraged across the whole TeamLease University platform.
The other progressive move was taking a 30% stake in Freshersworld, an online jobs portal. As per management commentary, 10% of the hiring is now coming in from the website. It is thus widening the sourcing funnel on the supply side of the platform and being able to add headcount with first-time jobseekers.
The company 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 recently acquired 72% stake in India-based IMSI Staffing. MSI offers services in IT, Professional Staffing and Business Process Outsourcing (BPO) and call centers. This is in line with the company’s strategy to increase its revenue share from the specialized staffing segment.
Impact of COVID-19 & Outlook
With economic activity coming to a virtual standstill during the lockdown period and fading expectations of an immediate recovery post that, the staffing requirement came down drastically, leading to deferment/complete halt on any fresh hiring activity and reduction in pre-crisis contracted staff levels.
While staffing companies may attempt to redeploy a portion of their associate staff from severely affected sectors to essential services companies in e-commerce, health and logistics sectors, there will be a significant temporary blip in associate strength. They may also have to increase funding exposure to certain clients to arrest any immediate net reduction. However, the impact on margins is likely to be limited to the loss of operating leverage in case of staff reduction/change in contracts.
Post-crisis, there would be a pent-up demand for associates as affected companies would prefer to use temporary staff over permanent while ploughing the business back to normal. A consolidation in the highly fragmented and unorganized staffing industry is expected which would benefit larger, diversified and strong balance sheet companies like TeamLease.
While barriers to entry here are low, the barriers to success are incredibly high, especially at scale. The company has till date given employment to over 1.7+ million people with an aim to hire millions more.
TeamLease comes out as a company with a low risk business model (not outcome based) and strong balance sheet backed by high management pedigree and favorable industry tailwinds with a keen focus on India. The company has been taking all the right decisions in the right directions, which gives a long-term investor sufficient margin of safety to enter at the current valuation. Margins are expected to improve as the company continues its cost cutting initiatives, improving productivity and changing product mix.
The company is currently available at a CMP of INR 1,599.50 (as on May 02, 2020) at a PE of 30.27, which is well below its 3-year median PE of 51.04. Promoters held 40.03% stake in the company as of Dec 2019, which decreased from 40.27% in September 2019. The Indian promoter’s percentage of pledged share stood at 0.49% on December 2019.
Team 3C Capitals
Sources
