Quess Corp Ltd (QCL)

Transcription

1 Quess Corp Ltd (QCL) IPO Note June 29, 2016 RECO: SUBSCRIBE IPO Details Issue Opens 29 Jun 16 Issue Closed 01 July 16 BRLM: Axis Capital/ICICI Securities/ YES Securities Registrar to Issue Link Intime Face Value 10 Offer Size (mn equity shares) 13.1 No. of o/s Shares (Pre Issue) (mn) No. of o/s Shares (Post Issue) (mn) Bid lot 45 Shares and in multiple thereof Issue Price (Rs / share) Issue Size (in mn Rs) 4000 Post Issue implied Market Cap = Rs 39,029 39,910 mn Pre Issue Holding Pattern Promoter Group 97.2 Non Promoter Group 2.8 Source: RHP, IndiaNivesh Research Post Issue Holding Pattern Promoter Group 87.6 Non Promoter Group 12.4 Source: RHP, IndiaNivesh Research Allocation (% of Issue Size) QIBs 75.0 Non Institutional 15.0 Retail 10.0 Source: RHP, IndiaNivesh Research Daljeet S. Kohli Head of Research Tel: daljeet.kohli@indianivesh.in Amar Mourya Research Analyst Tel: amar.mourya@indianivesh.in Kamal Sahoo Research Associate Quess Corp Ltd (QCL) is a step down subsidiary of Fairfax Financial Holdings Group; held through its Indian listed subsidiary, Thomas Cook (India) Ltd (~63% holding post dilution). QCL was incorporated on September 19, The company is one of India s leading integrated business services provider. They offer comprehensive solutions including Recruitment, Temporary Staffing, Technology Staffing, IT Products and Solutions, Skill Development, Payroll, Compliance Management, Integrated Facility Management and Industrial Asset Management Services. The company has operation in 8 countries (International Rev: ~14%): USA, Canada, Sri Lanka, UAE, India, Malaysia, Philippines and Singapore, over 1,20,400 (3400 Core) employees with a pan India presence of 47 offices across 26 cities and serves over 1,300 customers. On back of series of acquisition QCL delivered 52.4% revenue CAGR over last five years. Investment Rational Robust return ratios Improving core employee productivity E commerce and B2C on radar High growth staffing industry outlook Risk & Concerns Acquisitions may not yield desired result Adverse ruling in outstanding litigation Issue Details: The company will fresh equity shares in the range of 12.6 to 12.9 mn to raise Rs.4000 mn. IPO will open on June 29, 2016 with Price Band of Rs 310 Rs 317 per equity share with face value of Rs. 10 each. The minimum bid lot is 45 equity shares and in multiples of 45 equity shares thereafter. Objects of the Issue: Rs Mn Repayment of debt availed by company 500 Funding capital expenditure of company and subsidiary, MFX US 717 Funding incremental working capital requirement 1579 Acquisitions and other strategic initiatives 800 General Corporate proceeds Valuation & Recommendation We like the company conservative approach towards inorganic expansion and ability to integrate and scale from one level to another level. Further, the company s strong ROCE and negative cash conversion cycle make this IPO attractive. At price band of Rs , the stock is available at a multiple of 44.1x 45.1x FY16 EPS, respectively. We recommend SUBSCRIBE rating on QCL. Key Financials (Valuation at Rs.317): Tel: kamal.sahoo@indianivesh.in IndiaNivesh Research IndiaNivesh Securities Limited Research Analyst SEBI Registration No. INH & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai Tel: (022) IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.

2 Investment Rationale Maintaining robust return ratios Despite following the inorganic expansion strategy, QCL has been able to maintain strong return ratios. In last nine years, QCL executed seven key acquisition (See Table Below). In FY16, QCL acquired MFX and Randstad Lanka but simultaneously expanded the ROCE and ROE. This clearly illustrates that acquisitions are done through internal accruals. The debt is only used to fund the growing working capital requirement, which is fostered by hyper revenue growth. Despite this, QCL s total debt v/s net working capital ratio always remained below one (See Table Below). The additional booster for the return ratios is negative cash conversion cycle. QCL: ROCE Trend QCL: ROE Trend 24.0% 23.5% 23.0% 23.1% 23.8% 30.0% 25.0% 20.0% 21.3% 25.6% 22.5% 22.5% 15.0% 10.0% 12.9% 22.0% 5.0% 21.5% FY14 FY15 FY16 0.0% FY14 FY15 FY16 QCL: Total Debt/Net Working Capital 0.61 QCL: Inorganic Growth Strategy Debt/WC Company Acquisition Date Avon July 14, Magna Infotech Dec 23, Avon May 14, 2013 Magna Infotech May 14, 2013 Hofincons Jun 27, 2014 Brainhunter Oct 23, 2014 MFX Nov 3, 2014 Aravon Services Apr 1, 2015 MFX Jan 1, 2016 Randstad Lanka Apr 26, 2016 FY14 FY15 FY16 QCL: Cash Conversion Cycle (Days) FY14 FY15 FY16 Quess Corp (contd...) June 29,

3 Improving core employee productivity The company s vertical focus approach along with deep domain knowledge led to significant core employee productivity across all the key segments. As a result, GTS segment revenue per core employee grew by 33% CAGR followed by 22%/15% CAGR for P&S and IFM segments, respectively. Higher growth in GST vertical was due to significant increase in recruitment team and increasing requirement of third party IT and technology solutions experts. Being the largest IFM and third largest P&S service provider the outlook for these two segments also remains robust. Across Segment Core Employee Productivity Improvement Global Technology Solutions (GTS) Rev/Core Employee People & Services (P&S) Rev/Core Employee FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 Integrated Facility Management (IFM) Rev/Core Employee FY12 FY13 FY14 FY15 FY16 E commerce and B2C on radar In order to capitalize the e commerce growth story QCL has built the ecosystem and providing managed services to leading ecommerce players like Amazon and Urban Ladder. The company has currently deployed 12,500 associate employees with e commerce clients. Going ahead the company plans to move from personnel and material contracts to SLA based contracts thereby providing last mile delivery services across seven cities. QCL is also eyeing higher margin B2C opportunities like integrated Facility management (IFM) where it provides electrical repair, carpentry, plumbing, cleaning, electronic appliance repair and HVAC repair services driven by higher demand and scarcity of trained and certified personnel in those areas. Quess Corp (contd...) June 29,

4 Robust staffing industry outlook India is among the least penetrated flexi staffing markets in the world and accounted for 2.1% of the global staffing market in With increasing competition, margin pressure and shortage of skilled manpower, more temporary jobs are expected to be created. Rationalization on regulatory front could lead to immense opportunity for staffing solutions providers. The temporary general staffing market in India, estimated at Rs 385 bn in 2014, is expected to reach Rs. 918 bn 2019, with 9.0 mn temporary workers v/s 1.3 mn currently. Major growth could come from retail, telecom, BFSI, healthcare and BPO industries. Business Overview Quess Corp, one of India s leading integrated business services providers, offers comprehensive solutions to its clients including recruitment, temporary staffing, technology staffing, IT products and solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. Quess is present in high growth business verticals like temporary general staffing, payroll and compliance outsourcing, professional IT staffing, and facilities management etc. through its different brands. The market for these verticals in India is expected to grow at a CAGR of 19 24% over according to a report by Frost & Sullivan (published in January 2016). Further, penetration levels of these business services is low in India (0.1% for temporary staffing; among the lowest in the world), whereas the same is expected to rise as there is a growing need for flexible and efficient cost structures. Quess Corp Global Technology Solutions (GTS) People and Services (P&S) Integrated Facility Management (IFM) Industrial Asset Management (IAM) Services IT staffing, and IT General Staffing, Recruitment & Soft services (cleaning, security, Industrial operations & product solutions & executive search, Recruitment pest control, etc), Hard services maintenance, Technology services process outsourcing, and (electro mechanical, HVAC, & consultation, and Payroll, compliance & refurbishment, etc), and Food & Managed services background verification services, hospitality services and Training and skill development services Brands 1.Brain Hunter 1.IKYA 1. Avon 1.Hofincons 2.MFX 2. CoAchieve 2. Aravon 2.Maxeed 3.Magna Infotech 3.Excelus 4.Mindwire Amazon, Bata, FMC, Robert Bosch, Large financial L&T Special Steels and Clients Hinduja Group, PNB Large international banks and institutions in India, Fortune 500 Heavy Forgings, and Housing Finance, Indian IT consulting companies real estate services companies, India s leading steel, and VF Brands and Private airport management cement & energy companies companies The company is raising Rs 4000 Mn. through fresh issue of equity shares in the price band of Rs The fresh issue will constitute 10% of the post issue paid up equity share capital of the company assuming the issue is subscribed at the upper end of the price band. Particulars Pre Issue Post Issue No. of shares (%) No. of shares PERCENTAGE(%) No. of shares PERCENTAGE(%) Promoter group 112,775, ,775, Others 559, ,178, Total 113,335, ,953, Quess Corp (contd...) June 29,

5 Valuation & Recommendation We like the company conservative approach towards inorganic expansion and ability to integrate and scale from one level to another level. Further, the company s strong ROCE and negative cash conversion cycle make this IPO attractive. At price band of Rs , the stock is available at a multiple of 45.0x 46.1x FY16 EPS, respectively. We recommend SUBSCRIBE rating on QCL. Peer Comparision EV/Sales EV/EBIDTA P/E(x) EBIDTA % Sales Gr % (Avg 3Yrs) Adecco CY15 * % 28% Manpower CY14 * % 7% Ranstad FY15 * % 10% Quess Corp FY % 51% Teamlease FY % 22% Source: Company, RHP, IndiaNivesh Research, Bloomberg Note * US Listed Peers Quess Corp (contd...) June 29,

6 Consolidated Financial Statements: Income Statement Y E March (Rs m) FY14 FY15 FY16 FY17e FY18e Net sales 10,060 25,671 34,350 39,503 45,428 Y/Y Ch % COGS 9,397 23,652 31,531 36,261 41,700 SG&A ,174 1,350 1,553 EBITDA 402 1,313 1,645 1,892 2,176 Y/Y Ch % EBITDA Margin % Depreciation EBIT 359 1,212 1,485 1,677 1,882 EBIT Margin % Interest Other Income (Inc Forex) ,500 1,500 Extra Ordinary Exps/(Income) PBT 289 1,042 1,247 2,788 2,992 Tax Effective tax rate % Reported PAT ,202 2,364 Y/Y Ch % Minority 13 Adj. PAT (APAT) ,202 2,364 RPAT Margin % Y/Y Ch % Source: Company filings; IndiaNivesh Research Balance Sheet Y E March (Rs m) FY14 FY15 FY16 FY17e FY18e Share Capital ,133 1,133 1,133 Reserves & Surplus 884 2,262 2,322 4,525 6,889 Net Worth 1,845 2,519 3,456 5,658 8,022 Minority Long term loans Others Total Liabilities 2,523 4,847 7,815 10,017 12,381 Gross Block 2,637 3,180 4,622 6,064 7,506 Less Depreciation 1,785 1,887 2,047 2,262 2,555 Net Block 852 1,293 2,575 3,802 4,950 Long Term Inv & Others Current Assets 2,453 5,311 8,673 10,235 12,194 Sundry Debtors 1,245 2,746 4,282 4,857 5,585 Cash & Bank Balance Inventories Others 913 1,742 3,280 3,772 2,271 Current Liabilities 1,408 2,306 4,330 4,916 5,659 Trade Payables 1,437 2,277 4,367 4,953 5,696 Provisions (29) 29 (37) (37) (37) Net Current Assets 1,045 3,005 4,344 5,319 6,535 Total assets 2,523 4,847 7,815 10,018 12,381 Source: Company filings; IndiaNivesh Research Quess Corp (contd...) June 29,

7 Cash Flow Y E March (Rs m) FY14 FY15 FY16 FY17e FY18e Operating Profit 359 1,212 1,485 1,677 1,882 Depreciation Changes in Working Capital , ,511 Interest Paid Cash Flow After Chang in WC ,019 3,298 Tax Others ,500 1,500 Cash flow from operations ,934 4,169 Capital expenditure (net) ,790 1,442 1,442 Free Cash Flow , ,727 Other income Investments Cash flow from investments ,790 1,442 1,442 Long Term Debt (Decrease) Increase 219 1,650 2, Dividend paid (incl tax) Share Issue / Repurchase & Others Cash flow from Financing , Net change in cash ,727 Cash at the beginning of the year ,094 1,586 Cash at the end of the year ,094 1,586 4,313 Source: Company filings; IndiaNivesh Research Key Ratios Y E March FY14 FY15 FY16 FY17e FY18e Adj.EPS (Rs) Cash EPS (Rs) DPS (Rs) BVPS ROCE % ROE % ROIC % EBITDA Margin % Net Margin % PER (x) 25.3x 15.2x 45.1x 18.1x 16.9x P/BV (x) 2.4x 4.0x 11.5x 7.1x 5.0x P/CEPS (x) 19.7x 13.1x 38.2x 16.5x 15.0x EV/EBITDA (x) 106.3x 32.5x 26.0x 22.6x 19.6x Dividend Yield % m cap/sales (x) 0.4x 0.2x 0.1x 0.1x 0.1x net debt/equity (x) 0.2x 0.6x 0.8x 0.4x 0.1x net debt/ebitda (x) 0.9x 1.1x 1.7x 1.2x 0.2x Debtors (Days) Creditors (Days) Inventory (Days) Source: Company filings; IndiaNivesh Research Quess Corp (contd...) June 29,

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