teamlease services buy -...

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Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

TeamLease Services Ltd. (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 85bps. 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, Freshersworld and telecom staffing

company, Evolve). We initiate coverage with a BUY rating valuing the stock at 35x FY20e EPS

and PEG of 1.35 (in-line with global flexi-staffing companies) to arrive at our TP of INR 2700.

A market leader in a large, unorganised market: 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 35mn in FY16 to 50mn 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.

Beneficiary of scale and operational excellence: The associate base registered a 6-yr 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 ~INR 6.9bn in FY11 to ~INR 30.4bn 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. This is seen in the

sharp rise (23% YoY) in TEAM’s ratio of associates to core employees – from 166 in FY16

to 203 in FY17 – indicating improving operational efficiency.

Newer avenues of growth: TEAM is fast expanding its footprint by acquiring companies

that add specific value. Acquisition of the online jobs portal Freshersworld with a

database of 10mn+ resumes has created a vast talent pool to augment its services. Its

acquisition of telecom staffing company Evolve extends its presence in specialised areas.

Operating profit to triple in three years: Consequently, TEAM’s operating profit registered

a 3-yr CAGR of 58% and stood at INR 400mn in FY17. It is expected to nearly triple in the

next three years, with margin expanding 85 bps from 1.3% to 2.1% by FY20. Entry into

specialized staffing and a lean business model should further enhance its return profile.

BUY, TP of INR 2700: TEAM currently trades at 32x/25x on FY19/20E EPS. Given its long-

term growth potential, stable management and strong balance sheet, we assign TEAM a

multiple of 35x on FY20E EPS (and a PEG of 1.35) to arrive at our TP of INR 2700.

Vaikam Kumar S [email protected] | Tel.: (91 22) 6630 3018

Suhas Harinarayanan [email protected] | Tel: (91 22) 6630 3037

Pankaj Kapoor [email protected] | Tel: (91 22) 66303089

Recommendation and Price Target

Current Reco. BUY

Previous Reco. BUY

Current Price Target (12M) 2,700

Upside/(Downside) 37.8%

Previous Price Target 0

Change NA

Key Data – TEAM IN

Current Market Price INR1,959

Market cap (bn) INR33.5/US$0.5

Free Float 49%

Shares in issue (mn) 17.1

Diluted share (mn) 17.1

3-mon avg daily val (mn) INR50.0/US$0.8

52-week range 2,190/828

Sensex/Nifty 33,679/10,390

INR/US$ 64.7

Price Performance % 1M 6M 12M

Absolute 20.0 71.7 133.1

Relative* 16.2 54.5 79.0

* To the BSE Sensex

TeamLease Services | BUY

27 November 2017 India | Business Services | Initiating Coverage

Right place at the right time

Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E

Net Sales 25,049 30,419 36,997 44,235 52,901

Sales Growth (%) 24.8 21.4 21.6 19.6 19.6

EBITDA 258 443 733 933 1,179

EBITDA Margin (%) 1.0 1.5 2.0 2.1 2.2

Adjusted Net Profit 248 663 797 1,047 1,331

Diluted EPS (INR) 14.5 38.8 46.6 61.3 77.8

Diluted EPS Growth (%) -75.9 167.5 20.2 31.4 27.1

ROIC (%) 28.2 29.4 25.6 26.9 28.1

ROE (%) 10.8 19.2 18.9 20.4 21.1

P/E (x) 135.1 50.5 42.0 32.0 25.2

P/B (x) 10.7 8.8 7.3 5.9 4.8

EV/EBITDA (x) 119.9 71.6 43.4 33.8 26.2

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0

Source: Company data, JM Financial. Note: Valuations as of 24/Nov/2017

TeamLease Services 27 November 2017


Investment thesis

Formalisation to boost growth trajectory

A confluence of favourable macroeconomic factors is expected to directly benefit the

organised flexi-staffing industry in India. TEAM, which has emerged as the market leader

among organised general staffing companies, is at the forefront of seizing this

opportunity.

It currently enjoys a 5-7% market share of the overall market. However, the fragmented

and mostly unorganised nature of the industry (unorganised market share is estimated at

80%) previously restricted the ability of the organised players to grow.

The Government’s recent reforms towards formalisation of the economy are expected to

directly benefit the incumbent organised players who until now had to fend aggressive

pricing cuts from unorganised peers.

Clients are likely to push their existing unorganised vendors towards formalisation or

engage more with formal flexi-staffers. Either way, the move will benefit the likes of

TEAM by reducing the pricing differential.

The proposed simplification and consolidation of 44 labour laws into four labour codes

should enable better enforcement, thereby reducing the regulatory arbitrage that

smaller, unorganised players were able to leverage thus far.

Even in the absence of this shift, TEAM managed to grow its associate count, posting a

nearly 17% CAGR over FY11-FY17, a testament to the quality of service TEAM offers

even while expanding its reach.

Strong fundamentals backed by a seasoned management team

Lean business model

Staffing companies tend to benefit from operating on a very asset-light model (ROIC of

~30%) and high FCF conversion. TEAM has consistently grown its business without ever

stretching its book by making the best use of available resources. The conservative approach

is reflected in a net cash-to-equity ratio of 0.4x, in contrast to its peers that have fuelled their

growth with a mix of leverage and equity dilution.

Diversified portfolio

TEAM currently caters to nearly 50 diverse sub-industries with a strong presence in consumer

durables (18%), retail (7%) and telecom (7%). This has provided TEAM the flexibility to tide

over the vagaries of business cycles achieving YoY growth of at least 12% over the last six

years. The management’s stated focus on higher value jobs is reflected in relatively higher

growth in niche segments. The newer segments also provide fresh legs to drive growth.

Banking, for instance, has registered a 5-yr CAGR of 46% since FY12. Such diversification

provides scope for future growth and acts as a buffer during a slowdown in certain sectors.

Stable management and focused strategy

One of the key reasons behind TEAM’s growth so far has been its consistency in strategy and

execution. This has emerged from TEAM having a stable management with defined roles. The

founders continue to run the company. The wealth of experience and knowledge gained over

the last decade and a half has benefited TEAM immensely, especially in client management, a

critical aspect of the staffing industry. The client retention ratio has averaged 93% over the

last three years.

~38% of India’s workforce is employed as

either casual or contract labour

TEAM is the largest flexi-staffing company in

the organised space and has an overall market

share of 5%

Associate count registered a 6-yr CAGR of

17% over FY11-FY17

TEAM caters to nearly 50 diverse sub-

industries. Associate count in banking

registered a 5-yr CAGR of 46% (FY12-FY17)

The founders leverage the wealth of

experience gained from running the company

for over 15 years



Operational improvement and specialised staffing to aid margin expansion

Economies of scale

Smaller staffing companies operate at sub-optimal productivity due to the lack of sufficient

scale. Larger players such as TEAM stand to gain from their scale in a multitude of ways.

Firstly, it allows operations to be centralised thereby providing comprehensive and cost-

effective solutions to a diversified client base across sectors with a short turnaround time. It

also enables them to diversify their exposure to sectors and clients which, as discussed later in

the reading, is of utmost importance in the staffing business. It lends the flexibility to counter

economic downturns while also seizing newer opportunities when they arise.

Investment in technology

Apart from economies of scale, margin expansion depends on the extent of operational

efficiency. The utilisation of technology has become critical in providing the necessary

impetus. In the past five years, TEAM has invested about INR 115mn in new technology. Its

continued investment in technology is beginning to yield results, with the ratio of associates-

to-core employees in general staffing recording a 23% YoY rise, from 166x in FY16 to 203x

in FY17. As existing technology gets upgraded further, the company anticipates significant

gains on the operational front. Being a frontrunner places TEAM at a considerable advantage

in the adoption of advanced systems and technologies. An analysis of the possible impact of

a further increase in the associate-to-FTE ratio on EBIT margin and CAGR is illustrated in

exhibit 1. A 10-point annual increase in the ratio from the current level could result in

additional margin expansion of 16bps with the 3-yr EBIT CAGR rising from 42% to 46%.

Entry into specialised staffing

With the large-scale adoption of newer technologies such as IoT and increasing share of

captive centres, the need for a flexible IT workforce is on the rise. In FY17, TEAM acquired

three subsidiaries in the IT staffing space, each catering to a different sub-segment. Given

that the gross margin in IT staffing ranges at 16%-40% compared with ~4% in general

staffing, the move should fuel further margin expansion. IT staffing is also expected to be a

revenue driver with increased outsourcing of labour by both MNCs and large Indian IT

majors.

All these factors are expected to boost operating profit, which could nearly triple in the next

3 years – from INR 0.4bn in FY17 to INR 1.2bn in FY20 – with margin expanding 85 bps from

1.3% to 2.1%. TEAM enjoys healthy operating cash flow generation (OCF/EBITDA expected

to rise from 15% in FY17 to 49% in FY20), reflecting efficient management of challenging

working capital requirements. TEAM has managed to sustain its debtor days at 16-18 in its

general staffing business. With a top-line CAGR of 20%, operating margin expansion of

85bps and tax benefits under section 80JJAA, earnings are estimated to register a CAGR of

26% over FY17-20. At the CMP of INR 1959, the stock is trading at 32x/ 25x FY19/20E EPS.

Its closest competitor in India – Quesscorp – trades at 32x/21x FY19/20E EPS. It is important

to note that Quesscorp’s presence in managed services has aided better return ratios. At the

same time, it has also increased the company’s risk profile. With an established track record,

stable management, unlevered balance sheet and a clear growth trajectory, we assign a

conservative multiple of 35x on FY20E EPS (and a PEG of 1.35, in-line with global flexi-

staffing peers such as Adecco and Manpower) to arrive at our TP of INR 2700.

Scenario analysis: Impact of annual increase in associate-to-FTE ratio on EBIT Exhibit 1.FY17-20 No change +10 +20 +30

EBIT margin expansion (in bps) 85.9 102.2 114.9 125.0

EBIT CAGR 42.2% 45.7% 48.2% 50.2%

Source: JM Financial

Scale allows TEAM to centralise operations

thereby providing comprehensive and cost-

effective solutions

Ratio of associates-to-core employees in

general staffing rose 23% YoY from 166x in

FY16 to 203x in FY17

Gross margin in IT staffing ranges at 20%-

40% compared with ~4% in general staffing



Focus charts

India’s contribution to global temp workforce is merely 5% Exhibit 2.

Source: Frost & Sullivan, JM Financial

Indian staffing market is expected to reach INR 1tn by 2021 Exhibit 3.


Increased adoption of flexi-stffing by Indian manufacturers.. Exhibit 4.

Source: ASI, JM Financial

..has coincided with increased productivity Exhibit 5.


IT staffing market to register 20% CAGR over CY16-21.. Exhibit 6.


..as Indian IT majors such as TCS increase contract labour Exhibit 7.

Source: TCS, JM Financial

36%

20%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

USA China India

385

1,087

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Temporary & general staffing (in INR bn)

16.6%

35.3%

15%

20%

25%

30%

35%

40%

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Contract Workers as a % of total workers

0.2

0.9

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Millions

NVA per worker

52

419

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Professional IT staffing market (in INR bn)

3.4%

6.9%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

1Q

11

2Q

11

3Q

11

4Q

11

FY11

1Q

12

2Q

12

3Q

12

4Q

12

FY12

1Q

13

2Q

13

3Q

13

4Q

13

FY13

1Q

14

2Q

14

3Q

14

4Q

14

FY14

1Q

15

2Q

15

3Q

15

4Q

15

FY15

1Q

16

2Q

16

3Q

16

4Q

16

FY16

1Q

17

2Q

17

3Q

17

4Q

17

FY17

1Q

18

2Q

18

Subcontractor costs as % of sales

(IN

R m

n)



TEAM’s SA revenue registered a 6-yr CAGR of 28%.. Exhibit 8.

Source: Company, JM Financial

..driven by a 17% CAGR in associate base Exhibit 9.


Investment in technology has led to productivity gains Exhibit 10.


Diversified associate portfolio provides flexibility Exhibit 11.


Higher value industries lead growth in associate base Exhibit 12.


Recently acquired IT staffing subs. enjoy superior margin Exhibit 13.


6,859

29911

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17

Revenue

20

40

60

80

100

120

140


Th

ou

sands

General staffing associate count

149 151 152

154

165 166

203

140

150

160

170

180

190

200

210


General associate-to-FTE

23%

24%

20%

19%

9%

7%

21%

Retail & cons. Manufacturing Others BFSI Telecom FMCG, agri, IT, auto, & ecomm

46%

28%

24%

23%

23%

23%

22%

21%

20%

19%

15% 20% 25% 30% 35% 40% 45% 50%

Banking

Durables/Home Appliances

Environment / Health / Safety

Security Services

EPC

Electrical & Electronics

Goods/Machine MFC

PowerGen&Transmission

Courier/Logistics

Advertising

CAGR (FY12-17)

83.7%

77.6%

60.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ASAP Infosystems Nichepro Keystone

FY17 employee cost a % of revenue



Company Overview

TeamLease Services Limited, incorporated in 2002, is one of India’s leading staffing and HR

services companies, offering a range of solutions and services. It was co-founded and

promoted by Mr. Manish Sabharwal, Chairman and Mr. Ashok Kumar Nedurumalli,

Managing Director and Chief Executive Officer. It currently operates across 29 states in India

with a client base of over 1900. TEAM operates in two broad segments: a) staffing and allied

services (99%) and b) other HR services (1%).

TeamLease - Business segments Exhibit 14.


Stable management with a vision

Despite having multiple reported suitors in the past, the founders have retained their

ownership, valuing the opportunity to tap the immense potential of their business more than

short-term gains. This has meant a stable management at the helm with continuity of

strategy and key personnel. In a fragmented and highly unorganised industry, TEAM has

benefited from long-term strategic planning and execution. This is best illustrated in their

endeavour to offer services across the entire supply chain of human resources in India

covering employment, employability and education. The experience and knowledge that gave

TEAM its market leadership continues to drive its growth engines.

a) Staffing and allied services

The staffing and allied services segment is the primary source of revenue for TEAM with a

contribution of 98.5% in FY17. It includes the staffing business (both general and IT),

temporary recruitment and payroll processing.

General Staffing

General staffing is the core service offered by TEAM. The number of associates and NETAP

trainees stood at nearly 0.15mn at end-FY17, making it the largest provider of outsourced

labour in the organised sector. Till date, TEAM has placed 1.567mn people. It is pertinent to

note that the growth has been almost entirely organic, reinforcing its ability to source and

deploy the right talent at the right place. TEAM employs nearly 1500 people to manage the

general staffing and NETAP business.

TeamLease

Staffing and allied services

Staffing Operations

Temporary Recruitment

Payroll

Other HR services

Permanent Recruitment

Regulatory Compliance

Training Operations

Staffing contributes 98.5% to the top line.

TEAM has placed over 1.5mn people so far.



Associate portfolio

Unlike some of its peers, TEAM has firmly stuck to its core competence of staffing and allied

solutions. However, it has adopted a more diversified approach in its execution. This is

reflected in its prominent presence across sectors and geographies. Retail and manufacturing,

which constitute about 44% of associate employment, include multiple sub-industries. TEAM

has varying degrees of presence in nearly 50 sub-industries. The uniformity of the staffing

process makes diversification less tedious. Similarly, its geographical presence spans 29 states,

although 54% of the associates are placed in the top five states, which have a vibrant labour

market (exhibit 16).

Associate distribution (by sector) Exhibit 15.


Associate distribution (by geography) Exhibit 16.


Even more noteworthy is the pace at which newer segments have been growing. Banking

registered a 5-yr CAGR of 46% over FY12-FY17, increasing its contribution from 0.3% to

1.1%. This is also indicative of the overall trend in the services sector of utilising outsourced

labour. The diversified approach has provided TEAM the flexibility to tide over the vagaries of

business cycles, thereby achieving a CAGR of nearly 16% in the number of general associates

(ex-trainees) over the past five years. Its focus on high-growth industries – even while

maintaining a diversified presence across sectors – has ensured stability of growth.

Associate count in newer sub-industries has registered strong growth Exhibit 17.


Smart utilisation of its diversified portfolio has enabled TEAM to compound the average

revenue per associate at 10% annually since FY11. With its intended move towards higher-

value roles, growth in realisations is expected to sustain.

24%

20%

19%

9%

7%

21%

Retail & cons. Manufacturing Others BFSI Telecom FMCG, agri, IT, auto, & ecomm

18%

11%

10%

8%7%

46%

Maharashtra Karnataka TN UP Haryana Others

46%

28%

24%

23%

23%

23%

22%

21%

20%

19%

15% 20% 25% 30% 35% 40% 45% 50%

Banking

Durables/Home Appliances

Environment / Health / Safety

Security Services

EPC

Electrical & Electronics

Goods/Machine MFC

PowerGen&Transmission

Courier/Logistics

Advertising

CAGR (FY12-17)

TEAM operates across nearly 50 diverse, sub-

industries and 29 states in India

Associate count in banking registered a 5-yr

CAGR of 46% (FY12-FY17)



Client base

TEAM’s track record of strong regulatory focus has earned it a loyal client base, which has

risen sharply from about 1200 in FY15 to over 1900 in FY17. Its client retention ratio has

been strong 91-95% over the past three years. Being a market leader in the organised

staffing solutions industry, its client portfolio comprises several Fortune 500 companies as

well as several fast-growing SMEs. TEAM has managed to relatively de-risk its business by

spreading out the individual contribution of clients. The revenue contribution of its top five

and top ten clients averaged 13% and 18%, respectively, in FY17. In a market flushed with

flexi-staffing providers, bigger clients enjoy substantial pricing power and have multiple

vendors servicing them at any point in time. In case of a slowdown in a few sectors, the

concentration risk is bound to rise, which could test its agility

Operational efficiency

The Indian general staffing industry is highly fragmented with a majority of the unorganised

players operating at a small scale, focusing on particular geographies and sectors. The risk of

scaling up and losing the existing share deters most companies from leveraging economies of

scale. As a result, core employees operate at sub-optimal productivity, further denting their

growth potential. Larger companies such as TEAM stand to gain from their scale in a

multitude of ways. In addition to having a diversified portfolio, it allows centralised

operations. TEAM’s move from a distributed operational model to a centralised model during

2009-10 allowed it to achieve consistency in delivery and operational excellence.

FY17 saw a steep rise in general associate-to-FTE ratio Exhibit 18.


Sustained focus on training people, improving processes and updating technology has

drastically improved the productivity of its core employees. In the past five years, TEAM has

invested about INR 115mn in new technology. This is beginning to pay dividends, with the

ratio of general staffing associates to core employees rising from 149 in FY11 to 203 in FY17.

TEAM has developed in-house software tools such as Associate Life Cycle System (“ALCS”),

Candidate Life Cycle System (“CLCS”), Regulatory Life Cycle System (“RLCS”), Center

Operation Management System (COMS) to better manage its activities and processes. These

are technology platforms based on Microsoft systems intended to improve a certain aspect of

TEAM’s operations. For instance,

ALCS automates the entire associate lifecycle process from on-boarding, to raising

invoices and other monthly information, to releasing salary payments.

CLCS improves the recruitment process by automatically processing client

requirements and searching for matching candidates.

RLCS is designed for the regulatory consulting business.

COMS manages the franchise operations for the retail learning solutions business

149 151 152

154

165 166

203

140

150

160

170

180

190

200

210


General associate-to-FTE

23%

Client base comprises over 1900 companies,

including several Fortune 500 names.

Revenue contribution:

Top five clients – 13%

Top ten clients – 18%



Given TEAM’s continued focus on process improvement and the scope for utilising

technology, there could be further upside to the associate-to-FTE ratio. In 1HFY18, it has

already reached 210. An analysis of the impact of an increase in the ratio on EBIT is illustrated

in exhibit 19.

Scenario analysis: Impact of increase in associate-to-FTE ratio on EBIT Exhibit 19.FY17-20 No change +10 +20 +30

EBIT margin expansion (in bps) 85.9 102.2 114.9 125.0

EBIT CAGR 42.2% 45.7% 48.2% 50.2%


IT Staffing

General staffing is a low-margin business with an abundance of labour and service providers.

As a result, general staffing companies were limited in their ability to enhance profitability. In

the case of TEAM, employee expense had accounted for 96-98% of overall operational

revenue (exhibit 20). It has therefore had to rely predominantly on operational efficiency to

improve margins. TEAM had stayed away from the higher margin business of IT staffing

business, which has traditionally required the maintenance of a bench and a higher working

capital. With the acquisition of ASAP Info Systems, Nichepro Technologies and Keystone

Business Solutions in FY17, TEAM has expanded its services into IT staffing. At end-FY17,

there were nearly 1200 IT associates with core employee strength of about 180.

ASAP Info systems

ASAP Info Systems is a HR services company incorporated in 1998. It offers specialised

manpower services to leading CMM Level 5 companies in India and focuses on critical

Enterprise Application Security areas like SAP, Seibel, Peoplesoft, Oracle applications, etc.

Nichepro Technologies

Nichepro Technologies was incorporated in 2008 and is primarily engaged in the business of

IT and consulting and product development and other allied activities. The company was

acquired by TEAM’s subsidiary TeamLease Staffing Services Private Limited in October, 2016.

Keystone Business Solutions

Keystone started operations in 2009 as a Technology Boutique, specialising in delivering IT

Services to enterprise customers in Banking, Manufacturing, Retail and Healthcare Industries.

The company was founded by a team of senior Information technology executives, with a

wealth of experience in building start-up organisations and growing them into mid/large

organisations delivering sustained results through the right mix of process, technology and

people.

Gross margin in general staffing has avg 3% since FY11 Exhibit 20.


In IT staffing, it is considerably higher at 20%-40% Exhibit 21.


IT staffing entails greater complexity. Sourcing people with suitable technical skills and

proficiency is a key challenge and extends the duration of the placement process. It is

95.8%

97.5%

97.3%

97.0%96.9%

97.4%

96.6%

95.0%

95.5%

96.0%

96.5%

97.0%

97.5%

98.0%


Employee cost as a % of revenue

83.7%

77.6%

60.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ASAP Infosystems Nichepro Keystone

FY17 employee cost a % of revenue

Gross margin in the IT staffing subsidiaries

acquired ranged at 16%-40%

TEAM acquired 3 IT staffing subsidiaries in

FY17:

A. ASAP Info Systems,

B. Nichepro Technologies, and

C. Keystone business Solutions

Associate-to-FTE ratio is just 7 in IT staffing

compared with 200+ in general staffing



reflected in a significantly low associate-to-core employee ratio of just 7 in IT staffing

compared with 200+ in general staffing. Since IT staffing is 100% funded, it could marginally

impact the working capital cycle with debtor days increasing from ~20 currently to ~28 in

FY20. However, the greater effort translates to higher margins and enhanced profitability. As

illustrated in exhibit 21, the acquired companies enjoy much higher margins ranging 16%-

40%. Moreover, the IT segment is expected to drive flexi-staffing demand in the future with

the evolution of newer technologies and the expected increase in propensity of Indian IT

majors and MNC captives to outsource labour.

Specialised area of staffing

TEAM’s management indicated that its expansion into specialised areas of staffing will spread

to other sectors as well. The company has set its sights on the telecom sector next with the

announced acquisition of Evolve Technologies and Services Pvt. Ltd, a telecom staffing

company. Evolve started operations in Jan’10 and has over 4,000 consultants and 150 core

employees. Revenues registered a 2-yr CAGR of 62%, touching INR 1086.4mn in FY17. The

acquisition is expected to close by Nov’17 and will be financed through internal accruals.

Freshersworld to provide a fresh set of wings

In May’17, TEAM acquired a 30% stake in Cassius Technologies Private Limited

(Freshersworld/FW), a leading online job portal for entry level hiring in India. Ranked among

the top 5 hiring portals in the country, FW has ~4 million unique visits every month and a

database of 10 mn+ resumes with over 200,000 resumes added every month. It has over

60,000 registered employers/ recruiters with 4,000 subscribed customers and conducts 100+

virtual recruitment drives every month. Given TEAM’s associate base has 70% entry-level

jobs, FW is expected to accelerate growth by providing a rich talent pool.

Payroll processing

The TEAM payroll processing system currently handles the payroll of over 0.1mn associates in

over 1000 locations. It is designed with features that enable scale, speed, confidentiality and

accuracy. In addition to the core service, TEAM offers a multi-mode self-service suite

comprising of a 12 language call centre, a web-based client portal and a CRM-based client

interaction and engagement process. This suite provides measurable standards for

responsiveness and first-time resolution.

b) Other HR services

Other HR services offered by TEAM include permanent recruitment, regulatory compliance

and training operations.

Recruitment services

TEAM offers permanent recruitment solutions to over 500 active clients across the country.

Apart from an experienced team of recruitment professionals, with domain specialisation to

cater to specific industries, TEAM’s proprietary recruitment platform, Candidate Life Cycle

System (CLCS) raises the quality of the recruitment process.

Regulatory compliance

As one of India’s largest HR Services providers, TEAM has the domain expertise and

infrastructure to fulfil regulatory and labour law compliances. At an operational level, TEAM

has 150+ experienced professionals operating from 20 locations across the country. TEAM

works with more than 250 customers including leading names in BFSI, FMCG and Consumer

Durables, Retail, Telecom, IT, BPO and ITES, Automobiles, Services, Manufacturing,

Engineering and several other sectors. The suite of services offered includes: a) Consulting

and advisory services, b) Audit and assessment services, c) Maintenance services, and d)

Liaison services.

TEAM offers recruitment and regulatory

services to over 500 and 250 clients,

respectively



The three pillars of growth

I. Employment

TEAM has built its business on the foundation of 3Es: Employment, Employability, and

Education. We have thus far discussed TEAM’s role in employment generation. The Indian

staffing industry is structured differently compared with its developed market peers with a

significantly larger share of contract labour but a substantially lower market share for the

organised flexi-staffers. The requirement stretches beyond serving as a link between job

seekers and providers. Developing an influential presence in various stages of the

employment chain could prove vital in the long run.

II. Employability: NETAP

In order to promote its second pillar – employability – TEAM has joined hands with the Indian

Government, which is also focusing on skills development in the country. Consequently, the

NETAP, a Public Private Partnership between the Ministry of Skill Development &

Entrepreneurship, TLSU, CII, and NSDC under the National Employability Enhancement

Mission of the Ministry of HRD (AICTE), was formed. It is intended to help unemployed youth

build skills through ‘Learning by doing’ and ‘Learning while earning’ along with providing

them with access to practical skills. It is structured to overcome the current challenges of the

Apprenticeship Act. A NETAP apprenticeship would qualify for credit towards

certificates/diplomas/degrees offered online by TLSU. It has partnered with over 300

organisations for the deployment of the trainees. The NETAP trainee headcount more than

doubled in FY17 reaching 23,439 compared with 11.574 in FY16. As of FY17, it had

cumulatively trained over 53,500 trainees.

III. Education: TeamLease Skills University

Despite the progress made in education, India lags even other emerging markets. The Gross

Enrolment Ratio (GER) at the upper secondary level is just 56% compared with China’s 87%.

According to the Ministry of Skill Development and Entrepreneurship, only 4.69% of India’s

workforce has formal vocational skills as against 60-90% in developed countries. The

Government has recognised the need to narrow this skill gap in order to generate meaningful

employment. TLSU, India’s First Vocational Skills University, is a PPP between Department of

Labour and Employment, Government of Gujarat and TEAM. It is currently co-located within

the ITI Tarsali campus at Vadodara. It is intended to prepare people to enter the workforce by

equipping them with vocational skills.

India lags its EM peers in formal & vocational education Exhibit 22.

Source: UNESCO Institute of Statistics, BRICS Skill Development Working Group, JM Financial

Even in terms of literacy, India falls short Exhibit 23.

Source: UNESCO Institute of Statistics, BRICS Skill Development Working Group, JM Financial

TEAM has also forged key partnerships with several leading institutes such as ERASMUS and

UKIERI in Northern Ireland, Indian Institute in Vadodara, JBS Academy and Daily News

Analysis (DNA) in Ahmedabad, Model Career Center (MCC) in Vadodara, and Kailash Cancer

Hospital in Goraj. It works closely with the industry in designing a relevant curriculum that

enhances career opportunities for students.

93%

102%

56%

87%

93%

8%

52%

3%

46%

12%

0%

20%

40%

60%

80%

100%

120%

Brazil Russia India China South Africa

GER at Upper Secondary Level % of students enrolled in vocational courses

92.6

99.7

72.2

96.4 94.6

0

10

20

30

40

50

60

70

80

90

100

Brazil Russia India China South Africa

Literacy Rate

TEAM has built its business on the foundation

of 3Es: Employment, Employability, and

Education.

NETAP is an apprenticeship program to help

unemployed youth build skills by learning on

the job

TLSU, India’s First Vocational Skills University,

is a PPP between the Dept. of Labour &

Employment and Government of Gujarat



Industry Overview

Flexi-staffing in India

As Indian companies climb the value chain, they are following their global peers in

channelising resources more towards their core competence. Non-core activities such as

recruitment, payroll, compliance, and other HR services are increasingly getting outsourced.

Labour laws in India are perceived to be rather complex. Beyond the improved focus on profit

maximising activities, the option to outsource labour provides businesses the much-needed

flexibility to tide the vagaries of economic cycles and aid their bid to be more agile. As

companies grow, they seek the expertise of flexi-staffing companies to handle regulatory

complexities.

Global staffing market contribution Exhibit 24.


Globally, the HR solutions outsourcing market was estimated at nearly INR 31trn in 2015. The

staffing market contributes roughly 90% to the overall HR solutions industry. In India, the

staffing market (general and IT) was estimated at nearly INR 700bn, contributing 68% to the

overall HR solutions market. India accounts for just over 2% of the global staffing industry,

highlighting the extent of under-penetration. General staffing contributes ~75% to the

overall staffing industry in India and is expected to grow 16.8% annually and reach INR 1.1tn

by 2021.

Indian general staffing market to reach INR 1trn by 2021 Exhibit 25.


31.1%

11.6%

10.1%

2.10%

US UK Japan India

0%

5%

10%

15%

20%

25%

30%

35%

385

1,087

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Temporary & general staffing (in INR bn)

Indian staffing market is estimated to be

worth nearly INR 700bn, contributing just 2%

to the global staffing industry

India’s general staffing business is valued at

over INR 500bn and is expected to reach INR

1trn by 2021



Under-penetration of the organised sector

It was estimated that over 43mn people worked as temporary staff globally in 2015. The US

was the largest employer of temporary labour, with a contribution of 36%, followed by

China, which employed 20% of the global temporary workforce. Even though ~38% of the

employed people in India work as casual or contracted labour, its contribution is pegged at

just 5%, underlining both the under-penetration of the industry and the impact of the

unorganised sector. The unorganised sector accounts for ~80% of the flexi-staffing industry.

Major economies’ contribution to temporary staffing workforce globally Exhibit 26.


The aggregation of relatively accurate employment data in a country as large as India is an

exhausting yet necessary exercise. Finding meaningful employment for a growing labour

force is a challenge the Government has acknowledged. Increasing formal jobs, therefore,

becomes critical in overcoming these two challenges. The Government has expressed its

commitment to reform certain antiquated labour laws to promote the organised flexi-staffing

industry as a way to harness India’s human potential and sustain economic growth.

A more persistent concern has been the inability to uniformly execute regulatory measures.

Until now, several unorganised flexi-staffing companies could avoid or delay the payment of

taxes, placing them at a significant advantage. Transactions happen majorly in the form of

cash. Additionally, post-retirement and other benefits were usually not part of the employee

agreement. As a result, the unorganised players were in a position to pay a higher in-hand

salary to their associates compared with the organised flexi-staffers. The implementation of

GST should level the playing field with a gradual shift toward formalisation.

Tale of flexi-staffing and operational efficiency in Indian manufacturing

Flexi-staffing leads to increased productivity. The liberty to match the workforce with demand

helps achieve a higher value add per capita. Trimming unnecessary expenditure on fixed

human resources saves cost, which flows directly to the bottom-line. Increasing prominence

of the flexi staffing industry in India is best illustrated in the case of manufacturing, where

contract workers as a percentage of total workers steeply rose from 16.6% in FY98 to over

35% in FY15. This increased patronage of flexi-staffing has resulted in remarkable gains in

productivity. The net value added by a worker rose from 0.2mn in FY98 to 0.9mn in FY15, an

average increase of 8.5% annually. Such productivity gains have been noticed in industries

that have leveraged the flexibility of temporary staffing.

36%

20%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

USA China India

The global temporary workforce is estimated

to be over 43mn

The unorganised sector accounts for ~80% of

the flexi-staffing industry in India

Percentage of contract workers in Indian

manufacturing has more than doubled

from 16% in FY98 to over 35% in FY15

Productivity rose from INR 0.2mn to INR

0.9mn in the same period



Increasing share of contract workers in manufacturing.. Exhibit 27.


..has coincided with increasing productivity Exhibit 28.


IT staffing

The Indian IT industry is in a transformative phase with tougher outsourcing regulations in its

key markets, increased competition from other emerging countries and increased investment

by clients in captive IT teams. The pace of job creation has slowed from +20% prior to the

GFC to sub-5% in FY17. Project durations are shorter with an unprecedented pace of change

in technology. The challenges faced by the Indian IT industry present an exciting opportunity

for IT staffing companies. As a result, Indian IT majors are adopting a more agile model

inclined toward outsourced labour. The sub-contractor cost of TCS as a % of sales, for

example, has risen from ~3% in FY11 to ~7% in FY18. Infosys has significantly reduced its

trainee strength as a % of its overall workforce.

Trainees as a % of employees in Infosys Exhibit 29.

Source: Infosys, JM Financial

Sub-contractor cost as a % of sales in TCS Exhibit 30.

Source: TCS, JM Financial

The percentage of temporary manpower ranges at 10%-15% in leading Indian IT companies.

With the changing business environment, the ideal candidate profile for the industry is

tending more towards immediately deployable, domain expert who is willing to work on a

short-term basis. This is creating hiring demand for experienced IT professionals with niche

skills. Based on a contractual agreement, staffing companies screen, hire and deploy IT

professionals to the customer’s site. Growing demand for domain expertise and niche skill

sets should provide a boost to staffing firms that have access to a deeper resource pool of

candidates. The Indian IT staffing industry was valued at an estimated INR 170bn in 2016 and

is expected to reach INR 420bn by 2021, a 5-year CAGR of over 20%.

16.6%

35.3%

15%

20%

25%

30%

35%

40%

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Contract Workers as a % of total workers

0.2

0.9

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Millions

NVA per worker

6.6%

1.0% 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1Q

11

2Q

11

3Q

11

4Q

11

FY11

1Q

12

2Q

12

3Q

12

4Q

12

FY12

1Q

13

2Q

13

3Q

13

4Q

13

FY13

1Q

14

2Q

14

3Q

14

4Q

14

FY14

1Q

15

2Q

15

3Q

15

4Q

15

FY15

1Q

16

2Q

16

3Q

16

4Q

16

FY16

1Q

17

2Q

17

3Q

17

4Q

17

FY17

1Q

18

2Q

18

Trainees as a % of employees

3.4%

6.9%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

1Q

11

2Q

11

3Q

11

4Q

11

FY11

1Q

12

2Q

12

3Q

12

4Q

12

FY12

1Q

13

2Q

13

3Q

13

4Q

13

FY13

1Q

14

2Q

14

3Q

14

4Q

14

FY14

1Q

15

2Q

15

3Q

15

4Q

15

FY15

1Q

16

2Q

16

3Q

16

4Q

16

FY16

1Q

17

2Q

17

3Q

17

4Q

17

FY17

1Q

18

2Q

18

Subcontractor costs as % of sales

Indian IT staffing industry (estimated to be INR

170bn in 2016) is expected to reach INR

420bn by 2021, a 5-year CAGR of over 20%

Indian IT staffing industry (estimated to be INR

170bn in 2016) is expected to reach INR

420bn by 2021, a 5-year CAGR of over 20%

(IN

R m

n)



IT staffing is expected to grow faster than general staffing over the next 5yrs Exhibit 31.


Apprenticeship as a source of employment and learning

That India faces an employability problem is well established. UNESCO’s BRICS Skill

Development Working Group pegs India’s Gross Enrolment Ratio (GER) in the tertiary level at

24, nearly half of another emerging market - Brazil. A majority of India’s workforce is quite

simply deprived of formal education. A bigger chunk lacks the skills to be efficient in jobs.

While India has made substantial progress in widening the reach of education, a survey of

companies seems to suggest an actual degradation in the quality of workforce (exhibit 34).

The proportion of companies finding it difficult to fill vacant positions has increased from

16% in 2010 to 58% in 2015, which could imply a failure to keep pace with the ever

changing requirements of the job market. Apprenticeship provides people with an

opportunity to learn on the job while still earning a stipend.

Percentage of companies facing difficulties to fill jobs Exhibit 32.

Source: BRICS Skill Development Working Group, JM Financial

Culture of apprenticeship is yet to take off in India Exhibit 33.

Source: NETAP, JM Financial

Unfortunately though, India does not have a robust apprenticeship structure yet despite the

Government’s recent push. Compared with other major economies, India has very few

apprentices (estimated to be around 0.3mn), which presents an opportunity for organisations

involved in training and recruitment to grow their business. With companies exploring

different ways to have a flexible workforce, apprenticeship could prove to be a vital cog.

52

419

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2019e 2020e 2021e

Professional IT staffing market (in INR bn)

64%

16%

40%

16%

29%

14%

76%

61%

58%

24%

31%

46%

32%

83%

0% 20% 40% 60% 80% 100%

Brazil

India

China

South

Africa

Germany

USA

Japan

2015 2010

0.3

3

10

20

0

5

10

15

20

25

India Germany Japan China

No. of apprentices (in mn)

Even as Indian companies find it increasingly

difficult to find employable candidates,

apprenticeship as a tool to impart jobs skills is

grossly under used

20% CAGR



Key financial highlights

Revenue from standalone operations reached INR 30bn in FY17, a six-year CAGR of

28% over FY11-17. Staffing and allied services contributed 98.5% to the top-line.

The growth has been fuelled by an expanding associate base. The number of

general staffing associates has registered a CAGR of ~17% during the

corresponding period.

The average realisation per associate in general staffing has grown 10% annually

since FY11.

Standalone revenue CAGR of 28%.. Exhibit 34.


..driven by 17% CAGR in associate count Exhibit 35.


We estimate associate count and revenue to grow at a 3-yr CAGR of 14%/20%

respectively over FY17-20.

At the consolidated level, the contribution of IT staffing to the top line is likely to

sustain at 2.5% in the medium term.

Ever since TEAM turned operationally positive in FY14, SA Earnings Before Interest

and Tax (EBIT) has grown at an average annual rate of ~51% in the following three

years to touch INR 330mn in FY17.

Operating margin has gradually increased from 0.6% in FY14 to 1.1% in FY17 with

the benefits of economies of scale and improved operational efficiency kicking in.

TEAM is a beneficiary of section 80JJAA. Profit before tax (PBT) registered a 3-yr

CAGR of 42.4% over FY14-17.

After entering the IT staffing business, PAT contribution of the parent dropped from

98% in FY16 to 85% in FY17. With the full year impact of the subsidiaries being

considered from FY18, we expect the contribution to reduce further.

At a consolidated level, revenue reached INR 30.4bn in FY17 with general staffing

accounting for 98%. It is likely to sustain at that level with a strong growth in

associate headcount.

Earnings per share stood at ~INR 39 in FY17 and is estimated to register a 26%

CAGR over FY17-20 (double to ~INR 78)

The company has not paid dividends so far, preferring to fund expansion through

internal accruals.

TEAM is a net cash company with net cash-to-equity ratio of 0.4x in FY17.

Borrowings have tended to be short-term loans. Gross debt stood at INR 11mn. The

company holds INR ~1.6bn in cash and equivalents.

The company had issued 1.76mn shares of FV INR 10 during its IPO in FY16.

Additionally, it had also issued 148.21mn bonus shares of FV INR 1. The

consolidated share capital currently stands at INR 170.96mn and has no preference

shares.

6,859

29911

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


Revenue

20

40

60

80

100

120

140


Th

ou

sands

General staffing associate count



JMFe vs consensus Exhibit 36.

JMFe Consensus Difference (%)

(in INR mn) FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20

Revenue 36997 44235 52901 36606 44551 54102 1.1% (0.7%) (2.3%)

EBIT 675 911 1150 604 886 1190 10.5% 2.8% (3.5%)

EBIT margin (bps) 1.3% 1.8% 2.1% 1.7% 2.0% 2.2% (25.4%) (9.1%) (6.8%)

PAT 797 1047 1331 784 1066 1392 1.7% (1.8%) (4.6%)

EPS (INR) 46.6 61.3 77.8 45.1 62.9 82.4 3.2% (2.7%) (5.9%)

Source: Factset, JM Financial

Valuation

At the CMP of INR 1959, the stock is trading at 32x/ 25x FY19/20E EPS. Its closest competitor

in India – Quesscorp – trades at 32x/21x FY19/20E EPS. On an EV/EBITDA basis, TEAM trades

at 26x FY20E EBITDA compared with Quesscorp, which trades at 18x FY20E EBITDA. It is

important to note that Quesscorp’s presence in managed services has aided better return

ratios. At the same time, it has also increased the company’s risk profile. Discounting TEAM’s

CF and assuming steady state terminal growth of 9% yields a Mar’19 FV of INR 2700. With

an established track record, stable management, unlevered balance sheet and a clear growth

trajectory, we assign a conservative multiple of 35x on FY20E EPS to arrive at our TP of INR

2700. With an estimated 3-yr EPS CAGR of 26% over FY17-20, the PEG is pegged at about

1.35.

DCF assumptions Exhibit 37.Fair Value INR 2,663

Terminal Growth 9%

WACC 11.4%

Beta 0.8

Cost of equity 12.50%

Cost of debt 10%


Peer Comparison

Globally, Adecco is one of the leading flexi-staffing companies with more than 700,000

associates and operations across both general and professional staffing. It currently trades at

12x Dec, ‘19e EPS with a PEG of 1.2. Another leading flexi-staffer – Manpower Group –

trades at 15x Dec, ‘19e EPS with a PEG of 1.5.

Global peers Exhibit 38.

(Values in INR mn) CMP (INR) Market cap Turnover EBITDA PAT EPS (INR) RoE (%) Net debt LTM PE(x) PE1(x) PE2(x)

TeamLease 2,073 35,448 29,822 285 663 39 19 -1,685 33 42 32

Quess 853 1,18,007 41,574 2,239 1,135 9 19 2,708 47 40 32

Adecco S.A. 74 8,33,003 16,88,686 87,825 53,766 315 21 63,593 17 14 13

Manpower Inc. 128 5,48,021 13,20,500 56,175 29,811 425 18 15,424 18 18 17

Source: Bloomberg, Factset, JM Financial, CY for Adecco and Manpower

TEAM’s LTM P/E is 33x vs Quesscorp’s 47x



Risk Factors

High dependency on the level of economic activity

The key risk to TEAM’s future growth prospects is a sustained slowdown in India’s economic

activity across sectors. Although India’s institutional strength should help diffuse any major

bubble that could possibly lead to a slowdown, it still remains highly connected with other

major economies. Weak demand from developed markets will negatively impact Indian

exporters and their ability to employ people.

Highly competitive and fragmented industry with low barriers of entry

Contrary to the flexi-staffing industry in developed markets, India’s is highly fragmented and

unorganised with studies pegging the contribution of unorganised players at 70-80%. The

entry into the industry is largely unregulated and does not require much investment upfront.

People with some degree of connectivity and access to sufficient funds are well placed to

start an outsourcing venture of their own. Though scalability is a major obstacle, most such

smaller firms are content with a steady source of revenue.

Disruptive changes in a sector could affect its demand for flexi-staffing

While flexi-staffers generally try to diversify their exposure across sectors, they still depend on

the robustness of a few key sectors. Manufacturing, retail, and banking, for example, employ

a sizeable proportion of TEAM’s associates. Any disruptive change in the functioning of such

critical sectors could have a wide-ranging impact on their demand for outsourced labour. The

gaining popularity of e-retailing is bound to affect sales of brick and mortar stores and

subsequently their manpower requirements.

Ability to attract the right talent

In an otherwise commoditised business, one of the differentiating factors is the quality of

people companies are able to provide their clients. In India, temp staffing is still not a choice

candidates willingly make. The societal preference for a permanent job greatly reduces the

size of the talent pool available for flexi-staffers. Moreover, organised players such as TL who

provide post-retirement benefits are at a disadvantage to the unorganised ones in providing a

higher in-hand pay. The ability to continue attracting the right talent suited for the

requirements of clients will determine TEAM’s competitive advantage in the future.

Susceptibility to regulatory interference

Given the political significance of employment creation in the country, the recruitment and

staffing business is susceptible to direct regulatory interference. In the near term, the

Government’s possible move to set a national floor for minimum wages would diminish the

competitive advantage of organised players. On the other hand, some regulatory changes

have proved beneficial in the shift from the unorganised to the organised sector.



Financial Tables (Consolidated)

Income Statement (INR mn)

Y/E March FY16A FY17A FY18E FY19E FY20E

Net Sales 25,049 30,419 36,997 44,235 52,901

Sales Growth 24.8% 21.4% 21.6% 19.6% 19.6%

Other Operating Income 0 0 0 0 0

Total Revenue 25,049 30,419 36,997 44,235 52,901

Cost of Goods Sold/Op. Exp 0 0 0 0 0

Personnel Cost 24,391 29,377 35,550 42,523 50,873

Other Expenses 400 599 714 778 850

EBITDA 258 443 733 933 1,179

EBITDA Margin 1.0% 1.5% 2.0% 2.1% 2.2%

EBITDA Growth 7.2% 71.8% 65.5% 27.3% 26.4%

Depn. & Amort. 30 43 58 22 29

EBIT 228 400 675 911 1,150

Other Income 154 224 138 156 206

Finance Cost 4 11 1 1 1

PBT before Excep. & Forex 378 613 812 1066 1355

Excep. & Forex Inc./Loss(-) 0 0 0 0 0

PBT 378 613 812 1,066 1,355

Taxes 130 -50 15 19 24

Extraordinary Inc./Loss(-) 0 0 0 0 0

Assoc. Profit/Min. Int.(-) 0 0 0 0 0

Reported Net Profit 248 663 797 1,049 1,331

Adjusted Net Profit 248 663 797 1,047 1,331

Net Margin 1.0% 2.2% 2.2% 2.4% 2.5%

Diluted Share Cap. (mn) 17.1 17.1 17.1 17.1 17.1

Diluted EPS (INR) 14.5 38.8 46.6 61.3 77.8

Diluted EPS Growth -75.9% 167.5% 20.2% 31.4% 27.1%

Total Dividend + Tax 0 0 0 0 0

Dividend Per Share (INR) 0.0 0.0 0.0 0.0 0.0


Cash Flow Statement (INR mn)


Profit before Tax 378 613 812 1,066 1,355

Depn. & Amort. 30 43 58 22 29

Net Interest Exp. / Inc. (-) -95 -157 -137 -155 -205

Inc (-) / Dec in WCap. -173 -211 -644 -626 -474

Others -10 -82 -20 -61 -107

Taxes Paid -118 -140 -15 -19 -24

Operating Cash Flow 12 67 54 227 574

Capex -47 -968 -35 -38 -42

Free Cash Flow -35 -901 20 189 532

Inc (-) / Dec in Investments -1,244 520 62 -128 -507

Others 0 0 0 0 0

Investing Cash Flow -1,291 -448 27 -166 -549

Inc / Dec (-) in Capital 1,380 32 0 0 0

Dividend + Tax thereon 0 0 0 0 0

Inc / Dec (-) in Loans 194 -183 0 0 0

Others 1,149 -465 -5 223 689

Financing Cash Flow 2,722 -616 33 181 453

Inc / Dec (-) in Cash 1,443 -997 76 284 714

Opening Cash Balance 1,147 2,590 1,593 1,669 1,953

Closing Cash Balance 2,590 1,593 1,669 1,953 2,667


Balance Sheet (INR mn)


Shareholders’ Fund 3,116 3,811 4,608 5,656 6,987

Share Capital 171 171 171 171 171

Reserves & Surplus 2,945 3,640 4,438 5,485 6,816

Preference Share Capital 0 0 0 0 0

Minority Interest 0 0 0 0 0

Total Loans 194 11 11 11 11

Def. Tax Liab. / Assets (-) -45 -149 -301 -500 -752

Total - Equity & Liab. 3,264 3,673 4,319 5,167 6,245

Net Fixed Assets 111 1,029 1,006 1,022 1,035

Gross Fixed Assets 114 141 155 170 187

Intangible Assets 249 1,190 1,211 1,234 1,259

Less: Depn. & Amort. 252 302 360 382 411

Capital WIP 0 0 0 0 0

Investments 0 0 0 0 0

Current Assets 5,629 5,744 6,464 7,967 9,873

Inventories 2 2 2 2 2

Sundry Debtors 1,205 1,872 2,286 3,238 4,102

Cash & Bank Balances 2,590 1,593 1,669 1,953 2,667

Loans & Advances 164 267 267 267 267

Other Current Assets 1,668 2,010 2,239 2,507 2,835

Current Liab. & Prov. 2,476 3,101 3,151 3,822 4,663

Current Liabilities 138 148 169 191 219

Provisions & Others 2,339 2,953 2,982 3,631 4,444

Net Current Assets 3,153 2,643 3,313 4,145 5,211

Total – Assets 3,264 3,673 4,319 5,167 6,245


Dupont Analysis


Net Margin 1.0% 2.2% 2.2% 2.4% 2.5%

Asset Turnover (x) 9.4 7.7 7.8 7.6 7.3

Leverage Factor (x) 1.2 1.1 1.1 1.1 1.1

RoE 10.8% 19.2% 18.9% 20.4% 21.1%

Key Ratios


BV/Share (INR) 182.2 222.9 269.6 330.8 408.7

ROIC 28.2% 29.4% 25.6% 26.9% 28.1%

ROE 10.8% 19.2% 18.9% 20.4% 21.1%

Net Debt/Equity (x) -0.8 -0.4 -0.4 -0.3 -0.4

P/E (x) 135.1 50.5 42.0 32.0 25.2

P/B (x) 10.7 8.8 7.3 5.9 4.8

EV/EBITDA (x) 119.9 71.6 43.4 33.8 26.2

EV/Sales (x) 1.2 1.0 0.9 0.7 0.6

Debtor days 18 22 23 27 28

Inventory days 0 0 0 0 0

Creditor days 1 1 1 1 1




Appendix A

The structural opportunity

Demographic dividend: boon or bane?

In our recent thematic report on the job scenario in India, Strategy | Jobs I: What do I do with

my degree?, we dissected India’s much publicised demographic dividend, revealing the

importance of sufficiently utilising it. The youth population (in the age group of 10-24 years)

is all set to bottom out and rise at a CAGR of 0.5% during 2027-40. On the other hand, the

dependent population above the age of 60 years is expected to rise steadily at a higher CAGR

of 2.3% during the same period. Consequently, the youth/dependent ratio will fall from 3.51

in 2001 to 1.37 in 2040, exerting enormous potential on the social support system. With

advances in healthcare and birth control, the ratio could surprise on the downside.

India’s median age to be below other major nations Exhibit 39.

Median age (years)

1950 1980 2015 2030 2050 2100

World 24 23 30 33 36 42

China 24 22 37 43 50 51

Germany 35 36 46 49 51 51

India 21 20 27 31 37 47

UK 35 34 40 42 43 47

USA 30 30 38 40 42 45

Source: UN World Population Prospects 2015, JM Financial

Demographic dividend could become a bane Exhibit 40.

Source: India Census 2011, JM Financial

Labour demand: A growing economy and the huge employment opportunity

Despite recent setbacks, India remains one of the fastest growing economies in the world.

The Government’s structural reforms including the implementation of GST are expected to

aid strong growth for the foreseeable future. India’s GDP is forecasted to grow at nearly 8%

annually over the next five years making it the fastest growing major economy ahead of

China. Despite the drop in labour intensity owing to technological advancements and

productivity gains, the employment elasticity in sectors apart from agriculture remains fairly

high. Exhibit 42 illustrates the strong correlation between overall economic growth and

employment generation. A robust economy will provide newer avenues to productively

employ people to achieve the forecasted growth.

India’s GDP annual growth rate forecasted to be 8% Exhibit 41.

Source: OECD, World Bank, IMF, UN, JM Financial

Employment generation is strongly correlated to GDP Exhibit 42.

Source: CMIE, JM Financial

1.0

1.5

2.0

2.5

3.0

3.5

4.0

35

36

37

38

39

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

Youth(10-24 years) Youth/Dependent (RHS)(in mn)

8.2%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

E

20

19

E

20

20

E

20

21

E

20

22

E

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

0.0%

2%

4%

6%

8%

10%

12%

14%

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

GDP growth Employment in the organized sector (RHS)

India’s youth to dependent ratio is expected to

fall from 3.51 in 2001 to 1.37 in 2040

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/India%20Strategy_Thematic_WhatdoIdowithmydegree_21June2017.pdf

http://jmflresearch.com/JMnew/JMCRM/analystreports/pdf/India%20Strategy_Thematic_WhatdoIdowithmydegree_21June2017.pdf



Labour supply: Migration from agriculture

India’s shift from an agri-based economy to a service-based economy is well established with

their respective contributions tracing diametrically opposite paths (exhibit 43). Given the

substantial difference in productivity that still persists, the contribution gap is likely to widen

further. As a result, the migration of labour out of agriculture to other sectors will continue.

From employing over 62% of the workforce in 2000 to about 51% in 2012, agriculture has

witnessed a constant outflow of people. By closing out a traditional stream of employment,

the burden of absorbing a burgeoning workforce will shift more on the shoulders of services

and manufacturing.

As the GDP contribution of agriculture declines... Exhibit 43.


..migration of labour into other industries intensifies Exhibit 44.


Labour supply: A problem of riches

While many of its global peers are facing the consequences of a declining working

population, India lies on the other end of the spectrum with a growing youth population. In

fact, it is expected to benefit from a double whammy of i) a rising workforce and ii)

improving gross enrolment ratio (GER), which is currently well below the global average. The

early indicators are already evident with the number of students graduating with a degree

per year increasing from 7.1mn in 2010-11 to 8.8mn in 2015-16. Even assuming conservative

annual growth of 1% in the GER with the same pass-out percentage would result in about

12mn people graduating every year in 2040.

Annual outflow of degree holders ~9mn currently Exhibit 45.

Source: MHRD, JM Financial

..and is expected to reach 12mn by 2040 Exhibit 46.

Source: MHRD, JM Financial

68.2%

17.9% 19.6%

31.4% 24.3%

50.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

19

54

-55

19

56

-57

19

58

-59

19

60

-61

19

62

-63

19

64

-65

19

66

-67

19

68

-69

19

70

-71

19

72

-73

19

74

-75

19

76

-77

19

78

-79

19

80

-81

19

82

-83

19

84

-85

19

88

-89

19

90

-91

19

92

-93

19

94

-95

19

96

-97

19

98

-99

20

00

-01

20

02

-03

20

04

-05

20

06

-07

20

08

-09

20

10

-11

20

12

-13

Agriculture Industry Services

62% 58% 55% 51%

11% 12% 12% 13%

4% 5% 8% 9%

9% 9% 9% 9%

11% 12% 13% 13%

0%

20%

40%

60%

80%

100%

120%

Mar-00 Mar-05 Mar-10 Mar-12

Agri Mining & quarrying

Manufacturing Electricity

Construction Trade, hotels & restaurant

Transport, storage & communications other

5.5

6.2

5.9

6.3 6.3

7.4

8.3 8.2

8.8 8.8

5

6

7

8

9

2011-12 2012-13 2013-14 2014-15 2015-16

UG Total(in mn)

6

7

8

9

10

11

12

13

1.0

1.1

1.2

1.3

1.4

1.5

1.6

20

10

-11

20

12

-13

20

14

-15

20

16

-17

20

19

20

21

20

23

20

25

20

27

20

29

20

31

20

33

20

35

20

37

20

39

Pass-outs (RHS) India's population (over 15 years)

Annual outflow of degree holders set to reach

12mn by 2040. Migration of labour from

agriculture is expected to continue.



The employment challenge

What should ideally be viewed as a structural edge appears more of a brewing problem given

India’s track record in creating meaningful employment in the past. Consider the ratio of the

number of people graduating every year to the net jobs created: the accumulative ratio for

FY11-13 of 27x was over thrice that of the preceding three year period FY11-13 (exhibit 47).

With the traditional legs of employment waning, the demand-supply (of labour) gap is likely

to worsen.

Ratio of student-to-job has worsened in recent years Exhibit 47.


While it is evident that both the demand and supply side of the labour equation has

remained robust, India continues to battle structural unemployment. The absence of an

efficient bridge to connect job seekers and meaningful jobs has been the root cause of the

problem. The key challenges hindering the creation of an effective connecting platform can

be broadly categorised as hurdles presented by legislation, geography and employability. The

rising popularity of online job portals and organised flexi-staffers in the recent past

underscores our belief that the challenge of finding the right candidate for a job will directly

benefit players in the recruitment and staffing business.

Imperative to address hurdles affecting the demand and supply of labour Exhibit 48.


a) Geographical hurdle

The first hurdle in providing meaningful employment is the mismatch in the geographical

location of job seekers and providers. It is best illustrated if we consider number of factories

as a simple proxy for job opportunities and juxtapose it with India’s labour force. The top five

states with the highest proportion of the country’s labour force constitute over 46% of the

workforce resulting in a highly concentrated distribution of the employable set. A similar

Labour Demand Labour SupplyChallenges inemployment generation

Legislative hurdle

Geographical hurdle

Employability hurdle

Ratio of the number of people graduating

every year to the net jobs created has

worsened from 9x (FY11-13) to 27x (FY14-17)



trend arises in the case of the distribution of factories in India. The top five states have to

over 52% of the total number of factories. The real issue surfaces when we compare

individual state’s difference in contribution to the labour force and number of factories. Uttar

Pradesh, for instance, has the highest proportion of workforce (13.6%) while it has only

6.5% of the factories in the country. Tamil Nadu, on the other hand, tops the list of factories

with a contribution of 16.4% while having only 7.4% of the workforce. This geographical

mismatch is a key driver of both labour migration and structural unemployment.

Disparity in the geographical distribution of LF and jobs is a major hurdle Exhibit 49.

Source: Labour ministry, ASI, JM Financial

The marginal utility of either getting a new job or progressing in one’s career is greatly

reduced when it entails moving out of a familiar habitat. The compensatory premium

generally takes the form of a combination of better job profile, higher pay, and a better

standard of living.

b) Legislative hurdle

India has, over the years, gained an unflattering reputation for being rigid with its complex

labour laws. The Government has recognised the significance of easing labour laws without

compromising employees’ welfare in order to promote ease of business in India. One of the

definitive steps in that direction is a reduction in the multiplicity of labour laws - the proposed

rationalisation of 44 labour laws into just four simplified, broad heads: a) social security and

welfare, b) wages, c) industrial relations, and d) safety and working conditions. But it has

been in the works for a long time now, further delaying the efficient placement of people.

c) Employability hurdle

India has consistently ranked low in different surveys assessing the employability of its

workforce. According to the BRICS Skill Development Working Group, the issue has likely

worsened with 58% of companies in India expressing their difficulty in filling jobs in 2015

compared to just 16% in 2012. While the proportion of qualified people entering the

workforce has gradually gone up, companies have found it difficult to find candidates with

skills required to be productive at work.

Coupled with India’s economic growth, these hurdles provide a long-term business

opportunity for staffing companies. With an increasing supply of qualified labour, the

number of job seekers is only going to rise. The role of flex-staffers in managing the talent

pool and ever-changing client requirements will become even more critical. We expect the

traditional staffing business to transform in to more specialised areas of staffing along with

increased adoption of technology in every aspect of the business.

6.5%

12.4%

4.0%

16.4%

1.5%

13.6%

10.1%

8.0% 7.4% 7.2%

-7.1%

+2.3%

-4.0%

+9.0%

-5.7%

-10%

-5%

0%

5%

10%

15%

20%

Uttar Pradesh Maharashtra West Bengal Tamil Nadu Bihar

Factories % Overall LF% Differential

The hurdles to employment generation in India

reinforce the business potential staffing

companies are likely to benefit from.



Appendix B

TeamLease – Board of Directors Exhibit 50.

Name Designation Qualification

Manish Mahendra Sabharwal Co-founder & Executive Chairman Bachelor’s degree in commerce from the Shri Ram College of Commerce, Delhi University and master’s degree

in management from The Wharton School, University of Pennsylvania.

Ashok Kumar Nedurumalli Co-founder, MD & CEO Bachelor’s degree in commerce from the Shri Ram College of Commerce, Delhi University and a

diploma in management from Indian Institute of Management, Bengaluru.

Gopal Jain Non-executive Director Bachelor’s degree in electrical engineering from the Indian Institute of Technology, Delhi.

Latika Pradhan Non-executive Independent Director Qualified chartered accountant, cost and management accountant, company secretary and bachelor of laws

Narayan Ramachandran Non-executive Independent Director B. Tech from IIT, Mumbai and management degree from the University of Michigan, Ann Arbor,

V Raghunathan Non-executive Independent Director Title of fellow of the Indian Institute of Management, Calcutta, in the field of finance and control




APPENDIX I

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