TeamLease Services. Leader in a high growth industry. Key Highlights. Source: Company Data; PL Research

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1 IPO Note TeamLease Services Leader in a high growth industry February 01, 2016 Govind Agarwal govindagarwal@plindia.com Rating Price Band BUY Rs785-Rs850 TeamLease (TL) is a provider of broad range of human resource services to various industries. It is the leader (5% market share by employees) in formal Flexi-staffing industry which is expected to grow by 25-30% over FY14-19E. TL s FY11-15 revenue grew at a CAGR of ~31% 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% industry growth and b) scope for margin improvement. Valuations may appear expensive at ~44x FY15 EPS but that is wellsupported 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. Key Highlights IPO Fact Sheet Opening Date February 02, 2016 Closing Date February 04, 2016 BRLMs- IDFC Securities, Credit Suisse Securities and ICICI Securities Issue Size Rs 4,027mn Rs 4,237m Fresh Issue Rs1,500m Objects of the Issue Funding of working capital requirement: Rs800m Upgradation of IT Infrastructure: Rs150m Acquisition and other strategic initiative: Rs250m Balance proceeds will be used for general corporate purpose Issue Details Pre-issue equity (m shares) 15.3 Post-issue equity (m shares)* 17.1 Post-issue Market Cap (Rs bn)* 14.5 Flexi-staffing industry to grow at 25-30%: Flexi-staffing industry (headcount) in India is expected to grow at a 20-25% CAGR over FY14-19 as per CRISIL estimates. Industry growth in value terms will be higher at 25-30% CAGR over FY Industry growth will be driven by 9-10% growth in formal job market and increase in penetration of flexi-staffing from 0.4% to 1%. Penetration of flexi-staffing is expected to witness strong growth owing to a) increasing number of enterprises turning formal, b) skill development and c) regulatory amendments in favour of formal and flexi-staffing industry. Initiatives taken by the flexi-staffing industry, such as training services, are also likely to add to the industry growth over the long term. Industry is highly fragmented with top-10 player s market share at ~25%, providing immense scope for industry consolidation, which will benefit companies such as TL. Market leader with scope for margin improvement: TL has a market share of approximately 5% in terms of Associate Employees in It serves 1,252 clients across nine branches and had 104,946 employees as of November 30, Staffing business contributes ~98% to company revenues, while HR services business contributes ~2%. Company is able to differentiate itself by 1) scale (reach and employee headcount), 2) track record of adhering to labour laws and regulations and 3) technological and operational excellence. Company has been able to improve margins from negative 5% (FY11) to 1.2% (FY15) largely driven by scale benefits and reduction of losses in training business. Key financials (Y/e March) FY12 FY13 FY14 FY15 Revenues (Rs m) 9,258 12,507 15,296 20,071 Growth NA EBITDA (Rs m) (208) (111) PAT (Rs m) (165) (42) EPS (Rs)* (2.4) Share Holding (%) Pre-IssuePost-Issue* Promoters Public & Others *Equity issuance calculated on higher band price Profitability & Valuation FY12 FY13 FY14 FY15 EBITDA margin (2.2) (0.9) RoE (15.8) (4.2) FCF (450) (110) Working days Capital Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Issue details Issue Period Opening date: February 2, 2016; Closing date: February 4, 2016 Exchange Issuer Offer Type Listing on both NSE and BSE TeamLease Services Limited Initial Public Offering Offer Size including OFS Total 5 Million Equity Shares Face Value Price Band Bid Lot Issue Split (No. of shares) Rs.10/- Rs / share 15 equity shares and in multiples thereof QIB Portion: 75% of the issue Non-Institutional portion: Not less than 15% of the issue Retail Portion: Not less than 10% of the issue Current Shareholding Pre-Offer Post-Offer* Book Running Lead manager Source: RHP, PL Research Promoters 51.9% 45.6% Others 48.1% 54.4% IDFC Securities Ltd, ICICI Securities and Credit Suisse Securities *Equity issuance calculated on higher price band Exhibit 2: Utilization of Net Proceeds (Rs m) Utilization of Net Proceeds Total Funding of working Capital requirement 800 Upgradation of the existing IT infrastructure 150 Acquisition and other Strategic Initiatives 250 General corporate purpose 300 Total 1,500 Source: RHP February 01,

3 Investment Rationale Leader in the Flexi-Staffing Industry in India TL is the leader in India s Flexi-Staffing industry with a market share of 5% by number of associate employees (104,946 employees). Company has reported a steady growth in the associate employee strength with a CAGR of 17% over FY Aided by associate growth, wage inflation and improved realization per employee, TL has reported revenue CAGR of 30.7% over FY Exhibit 3: TL is the top player in the flexi-staffing industry (by headcount) 5% 5% 5% 3% 3% 3% 2% 2% 2% Teamlease Adecco Randstad Quesscorp Genuis Consultant Manpower Global Innov 75% Needs Manpower GI Staffing Others Source: RHP, Company Data; PL Research, Values approximated Strategies: TL s strategy is to achieve scale in staffing through five key elements like, 1) Technology 2) Operations 3) Compliance 4) Business Development and Brand Promotion and 5) Associate Employee Hiring. TL expects to grow through strategic acquisitions which will enable the company to leverage existing assets and offer clients more comprehensive and attractive services. Strengths: TL has strong functional knowledge and expertise across industry sectors. Staffing services across various industries include Consumer durables, Chemicals, Manufacturing, Media & Telecom, Retail, Banking, Financial services and Insurance (BFSI), e-commerce, Pharmaceuticals and Health care sectors. Asset-light model, high FCF generation TL operates an asset-light model with low capital expenditure, low working capital and consequently, high operating and free cash flow. Historically, the company s receivable days have been in the range of TL had EBITDA to FCF conversion of more than 100% for FY14 and FY15. February 01,

4 (million people) (Rs bn) (million people) TeamLease Services Flexi-staffing industry to grow at 25-30% CAGR Flexi-staffing industry s headcount is expected to grow at a CAGR of around 20-25% between FY14 and FY19, as per CRISIL research estimates; In India, as of FY14, this industry in value terms was around Rs bn. Over the next five years, the flexistaffing industry is expected to grow by 25-30% in value terms to attain a value of around Rs bn. Exhibit 4: Formal Industry Market size (excludes Agriculture) Exhibit 5: Penetration of Flexi-Staffing Industry % 1.00% 1.00% % 0.60% 0.40% 0.40% % E E 0.00% E E Source: RHP, Crisil Research, PL Research Exhibit 6: Total Flexi-Staffing Industry Size (number of people) Source: RHP, Crisil Research, PL Research Exhibit 7: Flexi-Staffing Industry Size E E P Source: RHP, Crisil Research, PL Research Source: RHP, Crisil Research, PL Research Penetration of flexi-staffing is expected to witness strong growth owing to various factors which include increasing number of enterprises turning formal, skill development and regulatory amendments in favour of formal and flexi-staffing industry. Initiatives taken by the flexi-staffing industry, such as training services, are also likely to add to the industry growth over the long term. February 01,

5 (Rs m) (Rs m) TeamLease Services Financial Highlights TL revenues have 30% over the past four years TL s financial performance has been robust with revenue CAGR of 30% over FY Company has also been able to improve its EBITDA margins from -5.6% (FY11) to 1.2% (FY15). EBITDA margin improvement was driven by scale efficiency and reduction of losses in the training business. Company was loss-making till FY13 and became profitable from FY14. TL has an asset-light model with very low capital expenditure and working capital needs. This is visible in the decline in the Net Fixed Assets and more than 100% conversion of EBITDA to FCF. Exhibit 8: Steady revenue growth over FY11-FY15 period Exhibit 9: Steady margin improvement Revenue from operations (Net) YoY gr. (RHS) EBITDA Margin PAT Margin 25,000 20,000 15,000 10,000 5, % 34.7% 31.0% 22.0% 20,071 15,296 12,507 9,258 6,868 FY11 FY12 FY13 FY14 FY % 30.0% 20.0% 10.0% 0.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% 2.0% 0.8% 1.0% 1.2% 0.0% -0.9% -2.2% -2.0% -5.7% -6.0% FY11 FY12 FY13 FY14 FY15 Source: RHP Exhibit 10: TL turned profitable in FY14 Source: RHP Exhibit 11: ROE has improved significantly (200) (400) (600) EBITDA Net Profit (42) (111) (208) (165) (390) (396) FY11 FY12 FY13 FY14 FY % 20.0% 10.0% 0.0% -10.0% -20.0% ROE 20.7% 15.1% -4.2% -15.8% FY12 FY13 FY14 FY15 Source: RHP Source: RHP February 01,

6 (Rs m) (Rs m) TeamLease Services Exhibit 12: Asset-light model Exhibit 13: FCF greater than EBITDA in FY14 and FY15 Capex Total fixed assets 400 FCF FY11 FY12 FY13 FY14 FY FY11 FY12 FY13 FY14 FY15 Source: RHP Source: RHP Valuation and view TeamLease revenues have grown at 31% CAGR over FY11-15 along-with substantial margin improvement. It is the market leader in India with market share of ~5% in terms of number of associate employees. Crisil expects formal flex-staffing industry to grow at a CAGR of 25-30% over FY Given TL s industry leadership and the past track record, revenue growth of 25-30% is likely over FY With increased scale, EBITDA margins should expand from 1.2% reported in FY15. This could result in EBIT/EPS growth in the range of 30-50% 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%) and EBITDA (8-15%) growth profile. TeamLease tax rate will move from 5% in FY15 to ~34% 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% in 1HFY16. Exhibit 14: Comparative Valuation (Global comparisons) Mcap (Rs bn) Sales (m) PE Ratio (x) EV/Sales CY16E RoE (%) EV/EBITDA (x) CY15E-CY17E CAGR (%) CY15E CY16E CY17E CY15E CY16E CY17E (x) CY15E CY16E CY17E CY15E CY16E CY17E Sales EBITDA Addeco SA-REG ,975 23,001 24, % 8% Ranstad Holding NV ,217 20,646 21, % 15% Source: Bloomberg, PL Research February 01,

7 Business Description TL s core business is providing staffing solutions (98.25% of revenues) across industry sectors and diverse functional areas. Majority of Associate Employees are engaged in sales, logistics and customer service functions. TL offers temporary staffing services under the staffing business. It is one of India's largest companies providing temporary staffing and payroll services in the organized sector by revenues and by the number of Associate Employees. TL provides businesses with rapid access to a highly qualified and productive pool of candidates to give them the flexibility. Temporary staffing business requires identification of Associate Employees that fit the skills requirements of the clients and to then place them with the clients, while the Associate Employees themselves remain on roll as employees. TL earns a onetime fee for every Associate Employee it identifies in addition to a monthly fee on their salaries. TL s HR Service Business (1.75% of revenues) includes: Permanent Recruitment - Permanent Recruitment business constitutes a small but strategically important part of human resources services portfolio. Regulatory Compliance - Regulatory Compliance consulting business provides consulting services with respect to staffing and labor compliance issues as well as on corporate and legal compliance issues. There is a team of 116 full-time employees to operate this business as of November 30, Retail Learning Solutions - Retail Learning Solutions follows a franchisee model in implementing the retail learning solutions business. TL offers training programs in IT, Finance and Retail. Institutional Learning Solution - As of November 30, 2015, Institutional Learning Solution business was operated by 24 full-time employees. Clients in this business line are State Governments or Governmental agencies. TL provides placement skills training on behalf of various State Governments. February 01,

8 Company Background Exhibit 15: About the company Employees (Core) 1,218 Customers 1,252+ Regional Offices 8 Incorporated in 2002, TL Services is India-based human resource services and people supply-chain company offering services to various small and large business clients. It offers employment and employability services. The company employment services include temporary staffing, permanent recruitment and regulatory consultancy for labour law compliance. TL employability offerings include different types of learning and training solutions, including retail learning solutions, institutional learning solutions and enterprise learning solutions. Promoter and Management Bandwidth Manish Sabharwal, Chairman and co-founder - Manish Sabharwal is the Co-Founder and currently the Chairman of TL. He holds a masters degree in management from the Wharton School in 1996 and is an alumnus of Mayo College, Ajmer. Manish provides leadership at the Board level and sets out strategies and directions. He is also the chief external spokesperson. In 1996, he co-founded India Life, a human resource outsourcing company that was acquired by Hewitt associates in He was the CEO at Hewitt Outsourcing (Asia) in Singapore. Manish also serves on various State and Central government committees on education, employment and employability. Manish headed the sub-committee for planning commission on remodeling of apprenticeship training as another mode for on the job training. He is currently a nominated member of the Central Advisory Board of Education, the highest advisory body to advise the Centre and State Governments in the field of education. Ashok Reddy, MD and co-founder - Ashok Reddy is the Co-Founder and Managing Director of the company. Ashok oversees operations and represents TL in forums with major clients. Ashok holds a bachelors degree in commerce from the Shriram College of Commerce, University of Delhi and a diploma in management from Indian Institute of Management, Bengaluru. He is a first generation entrepreneur with 17 years of experience in the industry of human resource services. Prior to his current position, he was a director of India Life Capital Private Limited, a pension and provident fund asset management company. He has been awarded the Skills Champion of India award. February 01,

9 Industry Dynamics The flexi-staffing industry includes around six large-size players and many small and medium-size players, having a pan-india presence. Typically, the large-size players have flexi-staffing strength of over 25,000 employees. The flexi-staffing industry is marked by the presence of many large multinationals (such as Adecco, Randstad and global Innovsource) and Indian players (such as TL, Quesscorp, etc). However, the industry in India remains largely fragmented, with small and medium players accounting for nearly 70-80% of the overall industry. A gradual movement towards a more formal set up to employment is anticipated to occur due to various factors such as the increasing number of enterprises turning formal, skills development and regulatory amends in favour of formal and flexistaffing industries. There are opportunities for the flexi-staffing industry to take advantage of across various segments of employment. Exhibit 16: Flexi-Staffing Industry Structure Principal Employer Flexi Employees Fexi-Staffing Company February 01,

10 Exhibit 17: Flexi-Staffing Types Professional Staffing Employees who perform high skilled jobs and work in office White Collar Staffing White-collar worker typically performs work in an office environment They are employees with general training to handle roles like customer services, data entry etc. Blue Collar Staffing Employees who performs manual labour and typically involves working in factory environment Exhibit 18: Range of Service offered by Flexi-Staffing agency Flexi Staffing HR solutions Permanent Consulting Professional& White collar Blue Collar Recruitment Search Training Outsourcing Talent February 01,

11 Financials Exhibit 19: Income Statement (Rs m) Y/e March Net Revenue 9,258 12,507 15,296 20,071 Employee Cost 9,032 12,165 14,839 19,445 Other Expenses EBITDA (208) (111) Depr. & Amortization Other Income Net interest Profit before Tax (165) (42) Total Tax Profit after Tax (165) (42) February 01,

12 Exhibit 20: Balance Sheet (Rs m) Y/e March Share capital Reserves and Surplus 1, ,175 1,483 Total Equity 1,045 1,003 1,180 1,488 Non current Liabilities Long term borrowings Other long term liabilities Long term provisions Total non-current liabilities Short term borrowings Other current liabilities ,320 Short term provisions Total current liabilities 812 1,090 1,059 1,410 Total Equities and Liabilities 1,969 2,238 2,427 3,126 ASSETS Non- Current Assets Fixed Assets Tangible assets Intangible assets Intangible assets under development Total Fixed Assets Non current investments Deferred tax assets Long term loans and advances Other non current assets Total Non Current assets Current Assets Inventory Trade Receivable Cash and Bank ,147 Other Current Assets Short term loans and advances Total current Assets 1,498 1,727 1,919 2,371 Total Assets 1,969 2,238 2,427 3,126 February 01,

13 Exhibit 21: Cash Flow (Rs m) Y/e March C/F from Operations (404) (93) C/F from Investing (306) 69 (348) (244) C/F from Financing 1, (115) (10) Inc. / Dec. in Cash (299) 89 Opening Cash Closing Cash Exhibit 22: 1HFY16 financials Y/e March H1FY15 H1FY16 YoY gr. Revenue from operations (Net) 9,436 12, % Employee benefit expenses 9,148 11, % Other expense % Total Expenses 9,346 11, % EBITDA % EBITDA Margin (%) 0.95% 0.93% (1)bps Total Depreciation & Ammortization % EBIT % EBIT Margin (%) 0.8% 0.9% 9bps Other Income % Finance Cost % PBT % Total Tax (40) % Reported PAT % Net Profit % Margin (%) 1.8% 0.9% (92)bps February 01,

14 % of Total Coverage TeamLease Services Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai , India Tel: (91 22) Fax: (91 22) Rating Distribution of Research Coverage PL s Recommendation Nomenclature 60% 50% 40% 30% 20% 10% 0% 47.7% 40.2% 12.1% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Govind Agarwal, B.E. and PG Diploma in Management, Mr. Hussain Kagzi (BMS), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. 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