Tuesday, 28 June 2016
 

Quess Corp

Robust business model

The largest IT staff augmentation provider and 3rd largest general staffing provider in India also offers many training and facility management services

CM RATING 43/100
Incorporated in 2007, Quess Corp (Quess) is one of India's leading integrated business services provider emerging as the preferred partner for handling end-to-end business functions of the clients. Thomas Cook (India) Limited (TCIL), which in turn is majority owned by Fairbridge Capital (Mauritius) Limited, which is a part of Fairfax, a private equity and investment firm, is the majority shareholder (69.55%) and corporate promoter of the company. Ajit Issac, the other promoter, holds 16.4% stake in the company.

Quess 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. As of February 29, 2016, the company employed more than 120,000 employees, including over 3,400 core employees and over 117,000 associate Employees, i.e., employees placed with their clients.

Based on number of employees, Quess is the largest IT staff augmentation provider and the third largest general staffing company in India. The company is also among the largest training and skill development partner for the Ministry of Rural development based on approved project. Quess has a pan-India presence with 47 offices across 26 cities, as well as operations in North America, the Middle East and South East Asia. Around 85% of total revenues come from India while rest from international markets as on FY 2016.

As of March 31, 2016, company's clients included some of the world's largest, reputable organizations, including 20 companies ranked in the 2015 Fortune Global 500 list. As of March 31, 2016, Quess had more than 1,300 clients, based on ongoing contracts as of such date. The largest client contributes around 7.4% of revenue with Top 10 clients contributing around 30% of total revenue in FY 2016.

The company's service and product offerings include four broad operational segments: Global Technology Solutions (GTS), People and Services (P&S), Integrated Facility Management (IFM) and Industrial Asset Management (IAM). Each segment accounted for around 27%, 56%, 10% and 5%, respectively, of the total revenue of the company for FY 2016.

The GTS segment provides IT staffing, IT product solutions and services in India, North America and South East Asia, under the Magna Infotech, Brainhunter, Mind Wire and MFX brands. The key clients in the GTS segment include four Fortune 50 companies ranked in the 2015 Fortune 500 list, as well as large international banks and Indian IT consulting companies.

The P&S segment provides comprehensive staffing (excluding IT staffing) services and solutions including general staffing, recruitment and executive search, recruitment process outsourcing, as well as payroll, compliance and background verification services under the IKYA and Co Achieve brands. Significant clients in this segment include Amazon, Bata, FMC, Hinduja Group, PNB Housing Finance, VF Brands, and several large multinational conglomerates.

The IFM segment provides integrated facility management solutions to corporate and other organizations such as hospitals, food industry, hospitality services and schools across India. These services are provided under the Avon and Aravon brands. Significant clients in this segment include engineering companies such as Robert Bosch, several large financial institutions in India, Fortune 500 real estate services companies, and private airport management companies.

The IAM segment provides industrial operations and maintenance (O&M) services and related asset record maintenance services under the Hofincons brand across various industries, including power, energy, oil and gas, chemicals and ferrous and non-ferrous metal industries across India and the Middle East under the Maxeed brand. Significant clients in this segment include L&T Special Steels and Heavy Forgings as well as some of India's leading steel, cement and energy companies.

The Offer and the Objects

The issue comprises public issue of Rs 400 crore with equity shares of 1.29 crore of face value of Rs 10 each at lower price band of Rs 310 per share and equity shares of 1.26 crore of face value of Rs 10 each at higher price band of Rs 317 per share. The minimum bid lot is 45 equity shares and in multiples of 45 equity shares thereafter. The issue is made through a book building process and will open on 29 June and will close on 1 July with anchor investor bidding date of 28 June 2016.

In addition to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders, the company intends to utilize the proceeds of the public issue (Rs 400 crore), to fund the existing and incremental working capital requirements for about Rs 157.90 crore, repay the debt of Rs 50 crore, to fund the capital expenditure requirements of Rs 71.70 crore, about Rs 80 crore for acquisition and other strategic initiatives and balance for general corporate purpose.

Strengths

The entire businesses operate on an asset-light model with low capital expenditure requirements.

The company's robust recruitment capability, deep domain knowledge and ability to meet the staffing and other business service requirements of their clients across various jurisdictions and industries in a timely manner provides them with a significant competitive advantage.

The company has a successful track record of acquisitions with successful acquisitions of Magna Infotech and Avon Facility Management Services. It helped in augmenting the existing business verticals and diversify the revenue streams. The company intends to continue the strategic expansion plans through inorganic growth opportunities in underserved markets and geographies that complement the existing operations.

The company continues to improve its operating margins through a gradual shift of its service portfolio towards higher margin businesses such as IT staffing, IT product solutions and services, facility management and industrial asset management.

The company also strives to improve its operating margins further through a range of initiatives, including metric-driven improvement in their client service, application of consistent processes, leveraging scale to improve recruitment efficiency.

The company intends to capitalize on the rapid growth of the e-commerce ecosystem in India including Amazon and Urban Ladder, and as of February 29, 2016, about 12,500 associate employees were deployed with e-commerce clients.

Weaknesses

The company operates in a highly fragmented, competitive, low margin and low entry barrier industry, which is dominated by unorganized players.

The company's general staffing business is subject to adverse fluctuations in general economic and commercial activity in India and during period of economic downturn, temporary employees, which the company recruits, often are laid off first.

Any change in labor laws or government regulations can affect the company's business.

The company had negative operating cash flows in FY 2016 due to increase in working capital requirements. Further, receivables shot up to Rs 428 crore or 34.6% of total assets.

Goodwill due to past acquisitions, as on March 2016, stood at around Rs 204.50 crore, which may have to be written off, if impaired.

The company had issued around 25.60 lakh shares on a right issue basis at Rs 10 per share to the promoters and promoters group in December 2015.

Valuation

The financials for FY 2015 are for 15 months and hence YoY comparison with FY 2016 is not possible as there is seasonality in the business. For FY 2016, consolidated net sales stood at Rs 3435 crore, OP at Rs 164.32 crore and PBT stood at Rs 124.75 crore. Due to MAT credit, the tax rate was lower and, thus, PAT stood at Rs 88.52 crore. At the higher price band of Rs 317, on a diluted equity share capital of the company of Rs 125.90 crore of face value of Rs 10 each, the EPS for FY 2016 works out to Rs 7.

At higher price band of Rs 317, Quess is being offered at a P/E of 45.3 times its FY 2016 earnings.

Nearest comparable listed player is TeamLease. At the current market price of Rs 886, TeamLease is trading at around 60 times its FY 2016 consolidated fully diluted earnings. TeamLease is a debt-free company, while Quess had a long-term borrowing of around Rs 35 crore and short-term borrowing of around Rs 339 crore as on March 2016.

While TeamLease is looking out for acquisitions and has largely grown organically, Quess has successfully integrated and leveraged its previous acquisitions. Around 98% of TeamLease revenue comes from staffing services, where as Quess has a much more diversified customer base and diversified business stream of revenue, which has enabled Quess to generate better OPM of more than 4% for the past four years as compared to around 1% OPM of TeamLease

Quess Corp: Issue highlights
Public Issue size (in no of shares)
- On lower price band 1.29
- On upper price band 1.26
Issue size (in Rs crore ) 400.00
Price band (Rs)* 310-317
Post issue capital (Rs crore) 125.90
Post-issue promoter & Group shareholding (%) 89.6
Issue open date 29/6/2016
Issue closed date 1/7/2016
Listing BSE,NSE
Rating  43/100

Quess Corp: Consolidated Financials
1203(12) 1303(12) 1312(09) 1503(15) 1603(12)
Net Sales 637.00 1001.15 1006.01 2567.06 3435.00
OPM (%) 4.2% 4.3% 4.0% 5.1% 4.8%
OP 26.95 43.08 39.83 130.48 164.32
Other in. 2.43 3.20 2.14 5.70 7.41
PBDIT 29.38 46.28 41.97 136.18 171.73
Interest 12.61 17.61 8.84 21.83 30.79
PBDT 16.77 28.67 33.13 114.35 140.94
Dep. 3.69 4.39 4.24 10.14 16.19
PBT 13.08 24.28 28.89 104.21 124.75
Tax (including Deferred Tax) 4.78 7.18 9.73 36.99 36.23
PAT 8.30 17.10 19.16 67.22 88.52
MI 2.08 5.03 1.30 0.00 0.00
PAT after MI 6.22 12.07 17.86 67.22 88.52
EPS (Rs)* 0.5 1.0 1.9 4.3 7.0
*EPS is annualised on post issue equity capital of Rs 125.9 crore of face value of Rs 10 each
Figures in crore. MI: Minority interest
Source: Capitaline Database