TeamLease a good medium term structural growth story: PLilladher

Prabhudas Lilladher report on TeamLease Services IPOTeamLease (TL) is a provider of broad range of human resource services to various industries. It is the leader (5 percent market share by employees) in formal Flexi-staffing industry which is expected to grow by 25-30 percent over FY14-19E. TL’s FY11-15 revenue grew at a CAGR of 31 percent and has reported sharp improvement in EBITDA margins. The company, in our view, is well-positioned to maintain high revenue/EBIT/EPS growth driven by a) expected 25-30 percent industry growth and b) scope for margin improvement. Valuations may appear expensive at ~44x FY15 EPS but that is well supported by high revenue growth, margin expansion, low capex and working capital requirements, resulting in high FCF generation. We recommend “Subscribe”to TL IPO, leader in high growth industry.Valuation and viewTeamLease revenues have grown at 31 percent CAGR over FY11-15 along-with substantial margin improvement. It is the market leader in India with market share of ~5 percent in terms of number of associate employees. Crisil expects formal flex-staffing industry to grow at a CAGR of 25-30 percent over FY14-19. Given TL’s industry leadership and the past track record, revenue growth of 25-30 percent is likely over FY15-19. With increased scale, EBITDA margins should expand from 1.2 percent reported in FY15. This could result in EBIT/EPS growth in the range of 30-50 percent going forward. Company has an asset light model, with low capex and working capital requirement and consequently generates high FCF. Considering all the above factors, we believe TeamLease is a good medium term structural growth story and the stock can sustain high valuation multiples. Global peers trade at 12-13x forward EPS but they have much lower revenue (5-7 percent) and EBITDA (8-15 percent) growth profile. TeamLease tax rate will move from 5 percent in FY15 to ~34 percent in FY16 and hence, FY16 net profit growth may be adversely impacted, as reflected in 1HFY16 financials, however EBIT growth has been strong at 43 percent in 1HFY16.Disclaimer: The views and investment tips expressed by investment                   experts/broking houses/rating agencies on moneycontrol.com are their own,         and not that of the website or its management. Moneycontrol.com advises           users to check with certified experts before taking any investment                     decisions.

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