Primary Offer. TeamLease Services: Flexibility at a price

India’s large population and growing number of people joining the workforce each year presents a huge opportunity for staffing companies such as TeamLease.

The company is a leading player in the flexi (temporary) staffing industry, with over one lakh job-seekers or associate employees on board.

Growing number of enterprises transitioning to formal employment can increase the share of flexi staffing in the overall workforce, which holds significant potential for TeamLease.

But the asking price for the issue, which is on the high side, is a dampener.

Given that the company has turned profitable at the operating level only two years back (in 2013-14), the one-odd per cent operating margin, does not offer valuation comfort.

Investors can skip the offer. The consistency in earnings and scope for improvement in margins need to be watched in the coming quarters.

The growth in revenue has been a function of volume — number of flexi-employees and realisation. The number of flexi-employees has grown 17 per cent annually between 2010-11 and 2014-15.

These employees are on-boarded to TeamLease and deputed to the client’s location. Since they are on the payrolls of TeamLease, the company does the necessary statutory requirements such as contribution to Employees’ Provident Fund. The revenue for the company thus includes salaries due to the employees. Wage inflation hence impacts realisations, which also drives revenue growth.

TeamLease charges a service fee from its clients. Currently 72 per cent of its client base is charged a fixed service fee while 28 per cent pay a certain per cent of the employees’ salary. On an average, the company’s service fee works out to ₹650 per month per employee.

Since the majority of associate employees are first timers to the job market, the average wage is about ₹15,000. Hence, the business is primarily volume-driven.

Of about 450 million people in the Indian workforce, 129 million are outsourced by entities for reasons such as ease of operational execution and flexibility. But only 1 per cent of the outsourcing is in the formal sector; flexi staffing within the overall workforce is 0.4 per cent.

TeamLease has a market share of about 5 per cent in terms of number of associate employees as of 2014. This is higher than both Indian and global players. The company’s revenue has grown 30 per cent annually between 2010-11 and 2014-15.

While the company offers other human resource services such as training solutions, 98 per cent of its revenue is from temporary staffing.

On the operating level, global players such as Adecco, Manpower and Randstad operate at 5-6 per cent EBITDA margins. TeamLease in comparison has a very small operating margin of about 1.1 per cent (2014-15). Economies of scale are likely to come in as volume grows, but will be long drawn.

Valuations

The price band of ₹785-850 discounts the estimated 2015-16 earnings by 45-49 times, which is higher than the multiples of global players (12-15 times). Based on enterprise value to sales, the stock at about 0.5 times trades at par with global players. But weak margins do not support a comparable valuation.

The company also faces risk from competition from global players. The industry also remains highly fragmented and unorganised. TeamLease may have to look at inorganic ways to grow. Capital will have to be raised to fund acquisition and grow organically.

The current IPO is a combination of fresh issue of shares worth ₹150 crore and an offer for sale (OFS) for 3.22 million equity shares. Of the ₹150 crore raised, the company plans to use ₹80 crore for working-capital funding and about ₹25 crore for strategic acquisitions.

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