Stock Pick Of The Week: Buy Quess Corp For 42% Gain

HDFC Securities’ pick-of-the-week stock recommendations are much awaited by investors because these recommendations are of stocks which are fundamentally strong and a good track record. The present pick-of-the-week stock recommendation has the potential to give a gain of up to 42%

Quess Corp

Quess Corp is the stock recommended by HDFC Securities. Click here to download the report

Quess Corp
Rating Buy
CMP Rs 789
Target Price Rs 1040
Target Period 4 to 6 quarters
Potential Upside 42%
Quess Corp Stock Data
Market Capitalization Rs 11,650 Cr
Promoters holding 71.40%
Institutions holding 19.60%
Others 9%
52 week H/L Rs 1300/700

Company profile: The Quess Group is a step-down subsidiary of Canada-based Fairfax Financial Holdings Group. Fairfax is a holding company, which, through its subsidiaries, is engaged in property and casualty insurance, reinsurance and investment management. It was acquired in 1985 by its present Chairman and CEO Mr V. Prem Watsa.

Quess Corp (formerly IKYA Human Capital Solutions) is one of India’s leading integrated providers of business services. Quess is focussed on emerging as the preferred business function outsourcing partner for enterprise c ustomers ac ross a wide range of industries. Quess’ servic es and product offerings are currently grouped under four operating segments: Global Technology Solutions, People and Services, Integrated Facility Management (IFM), and Industrial Asset Management (IAM). Quess has team of ~261,700 employees across India, North America, South America, South-east Asia and the Middle East across all segments. Quess serves over 1,700+ clients worldwide. Quess Corp is promoted by Fairfax Financial Holdings through its Indian subsidiary, Thomas Cook India Ltd (TCIL) and Mr Ajit Isaac.



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The company’s employee headcount as on Mar-18 was at ~2,61,700 as compared to ~1,59,200 employees last year, a growth of 64%. Consolidated revenue grew 43% to Rs 6,167 cr in FY18. Consolidated EBITDA surged 49% from Rs 238 cr in FY17 to Rs 354 cr in FY18. The EBITDA margin expanded 23 bps to 5.75% in FY18. Consolidated PAT surged 154% YoY to Rs 310 cr in FY18.

This was on the back of a tax write back of ~Rs 48 cr, and adjusted for the same, profit would have been of ~Rs 260 cr. Cash flow from operations stood at Rs 109 cr in FY18.

Investment rationale & key highlights

Quess has posted ~44% revenue CAGR over FY13-18. EBITDA has witnessed 50% CAGR over the same period. Company continues to grow both organically and inorganically. Net profit has grown at a faster speed at 79% CAGR over FY13-18. PAT margin has also witnessed a robust 330 bps expansion to 5% in FY18. In the past few years, company has made 22 acquisitions and investments. Over the same period, Quess has acquired companies at attractive valuations, and then turned them around successfully. Quess has India’s largest Staffing team with ~1,60,000 associates. Quess is No.1 in Indian IT Staffing market, No.1 in Singapore IT Staffing space, and Top 3 BPO services provider in India.

Recently also, the company acquired the online job portal – Monster’s business and entered into the job seeking segment too. The headcount has also seen ~34% CAGR over FY13-18, and as on Mar-18 it stood at 2.62 lakh, and on Jun-18, it was at 2.72 lakh. Although acquired operations are running into losses, but the deal has been executed at low valuations of ~0.6x EV/Revenue.

We expect the company to continue its growth trajectory via both routes. Moreover, acquisitions made in the last 2-3 quarters would start witnessing better results in all likelihood by Q3/Q4 FY19. We believe premium valuations are justified, given that the promoter is Fairfax which is backed by Mr Prem Watsa, and also a strong management team that should ensure a healthy growth momentum for the company. We estimate ~27% revenue and ~38% PAT CAGR (adjusted for tax in FY18) over FY18-20E. The stock trades at ~25x FY20E earnings.

We recommend Quess as BUY at Rs 789, and add on dips to Rs 725 with TP of Rs 1040 over the next 4-6 quarters. Based on ~32x FY20E EPS, we have arrived at Rs 1040.

Company Business Segments People Services (PS):

Quess’ PS segment provides c omprehensive staffing servic es 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 Coachieve brands.

Quess also provides training and skill development services through 95 plus centres spread across 12 states in India under Quess’ Exc elus brand, in partnership with the Government of India.

Quess is authorised to provide training and skill development programmes covering 21 trades/sectors, including the ITES sector for technical support, the logistics sector for warehouse assistance, and the travel & tourism sector for domestic tour operators. The logistics division provides first & last mile delivery solutions for leading ecommerce clients. PS business comprises 47% of the total revenue share of Quess. In FY18, segment revenue stood at Rs 2878 cr, +23% YoY. EBIT stood at Rs 136 cr, up 25%. EBIT margin stood at 4.7% as compared to 4.6%.

Growth driver: This business has strong growth prospects, given the low penetration rates of temporary staffing in India as well as ample supply of manpower being added to the labour force every year. Quess has also benefitted from a shift in mix towards relatively higher-earnings associates (e.g. driven by the ecommerce boom), which too has led to increases in revenue per associate. General staffing is by far the lowest-margin business within Quess’ overall business portfolio, as it is commoditised and has low entry barriers. However, Quess has consistently tried to move profit margins upward in this business, by offering relatively higher-value services such as recruitment and attendance, in addition to plain-vanilla payroll services.

In addition, company also does greater proportion of its business under the pay-and-collect model, which is relatively working capital intensive. Quess’ margins in its general staffing business are higher than those of Team Lease, its listed peer, whereas its working capital needs are also higher. Quess has grown in the general staffing segment purely by organic means, reflecting that the company recognises the inherently commoditised nature of this business, and is trying to increase the proportion of other, higher margin businesses in its overall portfolio.

HR solutions: The growth in the HR solutions market is expected to be driven by a surge in overall employment in India, based on a stable political environment and strong economic fundamentals with increasing outsourcing of customer-facing sales roles and back office roles. This growth is expected to be driven by sectors such as BFSI, retail, FMCG & consumer durables, healthcare and e-commerce.

Implementation of GST is expected to open up the outsourcing of jobs in the manufacturing sector. The total HR solutions’ outsourcing market in India was estimated to be at Rs 98,022 cr in 2016, which posted 21.8% CAGR between 2011 and 2016.

The temporary general staffing market was at ~Rs 50,033 cr as in 2016. The segment is expected to reach Rs 1,08,749 cr by 2021, and may post 16.8% CAGR between 2016 and 2021. Increasing demand for skilled labour and the inclination of companies to work with inte rmediaries would continue to be the key drivers of growth in the temporary staffing market over the next five years.

General Staffing: Quess’ General Staffing business within the People Servic es segment added 43,000 assoc iates during the year, and became the first staffing company in India to reach 150,000+ employees. The company’s assoc iate c ount for the General Staffing business stood at approximately 157,000+ as on Mar-18. Quess provides temporary staffing solutions across industries, including FMCG, retail and ecommerce, consumer durables, healthcare, BFSI, logistics, media & entertainment, engineering and manufacturing. Quess’ ability to provide rapid ramp-up and value-added personnel services across India provides it a significant competitive edge. The company has developed experience in providing staffing support to the retail and e-commerce industries, including large numbers of sales personnel as well as logistics management staff and delivery teams.

Recruitment and Executive Search: In terms of Recruitment and Executive Search, Quess provides a range of permanent recruitment and executive search services across management levels. Quess’ team of professional rec ruiters, with expertise in their respective domains, provides these services to clients in industries such as IT & ITeS, BFSI, industrials, engineering, resources, consumer services, reta il, telecom, pharmaceuticals and healthcare. Solutions offered include talent acquisition, turnkey projects, project -based recruitment, outplacements and outsourcing of recruitment processes.

Payroll and Compliance: In the Payroll and Compliance management business, Quess provides a comprehensive and cost-effective range of payroll outsourcing services and statutory compliance management solutions, as well as a suite of background verification services. The compliance team focusses on employment, labour and corporate secretarial compliance issues. Quess works with over 600 clients across sectors such as retail, BFSI, FMCG & FMCD, telecom, e- commerce & logistics, and manufacturing & agro etc. It continuously makes efforts in bringing operating leverage into its operations. The core-to-associate ratio, a key efficiency metric , improved to ~290 in FY 2018 from approximately 200 in FY17.

Training & Skill Development:

The average age of India’s population is projec ted to be around 29 years by 2020, one of the lowest in the world. India ’s demographic transition makes it imperative to ensure employment opportunities for millions of youth each year. With nearly 12 mn youth joining the workforce in India every year, the country is witnessing a huge skill gap in employability. Based on the skill gap study conducted by the National Skill Development Corporation over 2017 – 2022, there is an additional net requirement of 103.4 mn skilled manpower by 2022 across 24 key sectors. The Government has started several skill development initiatives to address this challenge. Some of the key initiatives are Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY), Pradhan Mantri Kaushal Kendra (PMKK), National Employability Enhancement Mission (NEEM) and several other state government-led programmes as well. Quess is among the largest training and skill development partners for the Ministry of Rural Development and National Skill Development Corporation. The company trained 17,000 students across 91 training centres last year.

Quess is on track to train 42,000 students across 95+ training centres in the current year owing to the addition of 23 PMKK centres to the existing 20 centres. Bolstered by its successful track record of running projects under the DDU-GKY and PMKK schemes, Quess has recently stepped into the Vocationalisation of Schools arena, and was awarded the RMSA Project for Karnataka for the year 2017-18. As a part of this project, Quess has imparted training in the IT-ITES and retail sector across 75 and 10 government schools in Karnataka respectively.

Global Technology Solutions (TS):

The Technology Solutions segment provides a host of IT/ITeS support services viz. customer lifecycle management, business process management, IT staff augmentation, IT infrastructure managed services, IT products, digital solutions and after-sales support services. Quess offers these services across India, South-East Asia and North America.

The TS business comprises ~30% of the total revenue share. Quess is the largest IT staff augmentation provider in India , and also operates the largest independent IT staffing firm in Singapore through its subsidiary – Comtel Solutions.

The associate headcount in the company’s professional IT staffing operations stood at approximately over 12,000 as on 31-Mar-18.

In FY18, the revenue for the TS segment stood at Rs 1,868 cr as compared to Rs 1,183 cr in FY-17, up 58%. EBIT stood at Rs 118 cr as compared to Rs 82 cr, up by 44%. EBIT margin stood at 6.32% as compared to 6.93%. FY18 saw an improvement in the financial results of Brainhunter (Quess’ vehicle into the North American IT staff augmentation market) and MFX (solutions and products business). Brainhunter and MFX closed FY18 with an EBITDA of CAD US$ 1.2 mn and US$ 4 mn respectively.

Business process management: The growth in the business process management (BPM) market is driven by an increasing use of automation and digital transformation. Globally, the BPM industry witnessed a moderate growth of 3.4% to reach US$ 189 bn in 2017, as compared to US$ 183 bn in 2016. India’s share in the global BPM industry has steadily risen to 15% in 2017 as compared to 11% in 2012, due to a shift in focus to high-end services.

The Indian BPM industry is pegged at US$ 32.5 bn in FY18 as compared to US$ 30.1 bn in FY17. With over 2,500 firms, and the emergence of new technology platforms like analytics, cloud and mobility, the market is expected to reach US$ 50-55 bn by 2025. Demand is being driven by design thinking, automation & cognitive computing abilities, as well as innovation centres. Supported by Government polic ies and initiatives, India’s domestic BPM industry is growing at a rapid pace.

Amongst other segments, customer services and high-end analytics remain the key drivers of industry growth, with 81% share in FY18. Quess already has a high level of service quality and a ready infrastructure in place. It does a lot of data mining, which in turn helps the management understand the clients’ needs better, thus enabling the delivery of better services.

Professional IT staffing: The services under IT flexi-staffing includes providing contractual or contingent manpower support for different IT requirements. According to the Indian Staffing Federation, the professional IT staffing market in India was at US$ 3.04 bn in 2017.

With staff strength of 0.26 mn, the current penetration of IT flexi-staffing is only 5.6% in India. IT/ITES constitutes 90% of the Indian IT flexi-staffing industry, and the industry is expected to reach US$ 5.32 bn by FY21, growing at 14%-16% YoY.

Through Magna, a subsidiary company, Quess provides temporary staffing solutions to IT and ITeS c lients in India. Magna is India’s largest IT staff augmentation provider, based on the number of employees. It provides the entire range of staff augmentation services across various industries, including banking and financial services, automotive and engineering, telecom, healthcare, FMCG and retail.

North American IT staffing markets are amongst the most liberal in the world, owing to a low regulatory burden in terms of sector prohibit ions, limits on the length of assignments and the percentage of agency workers allowed. In 2016, the US IT staffing market size was US$ 28.6 bn, and is expected to maintain a 4% growth in 2018. Quess’ IT staffing servic es in North Americ a, the largest IT and ITeS market globally, are provided through its whollyowned subsidiaries Brainhunter and Mindwire, both acquired in FY15.

Canada-based Brainhunter provides recruitment and staffing services through a comprehensive range of custom-developed human resource information system (HRIS) software, which is also licensed for client use. Brainhunter also provides software solutions that enable its clients to leverage technology for recruiting, managing job postings, and candida te submission processes from multiple staffing vendors in a confidential manner. Mindwire is headquartered in Ottawa, Canada, and focus ses on providing the Canadian Government’s departments and agencies with IT services and solutions.

The Singapore IT staffing market primarily caters to the staffing requirements of technology and banking majors that operate from Singapore, including MNCs with their regional headquarters in Singapore. The IT staff augmentation market in Singapore was SGD 2.15 bn in size as of 2016.

The tightening of the issue of the Employment Pass had a negative impact on the staffing market. However, during the last quarter of FY18, positive trends are being witnessed in terms of the relaxations in issue of employment pass for high-end tech professionals, which is helping the industry.

Mobile and consumer durable break-fix and repairs market: Consumer electronics’ break-fix market in India is pegged at ~Rs 7,500-10,000 cr, capturing 59% of the total break-fix market. Mobile break-fix is the second-largest segment, constituting 26% of the total break-fix market.

A large part of this market is currently dominated by the unorganised players, presenting a huge growth opportunity for the organised players led by GST implementation. Mobile break-fix segment in the sector is the most lucrative one, owing to a great growth opportunity of over 20%, while the consumer durables segment, the largest segment in the industry, is expected to grow at over 15%.

Integrated Facility Management (IFM):

Quess is the leading integrated facility management provider in the country. The facility management business comprises 17% of the total revenue share of the company in FY18. Quess offers a host of services including soft services (housekeeping), hard services (technical services or utilities), food & hospitality (industrial catering), pest control, manned guarding and landscaping.

Quess provides facility management & security services to companies operating across sectors like banking & financial service s, healthcare, education, airports, real estate & property management, manufacturing, information technology, FMCG and travel & tourism.

IFM revenues stood at Rs 1,027 cr in FY18 as compared to Rs 562 cr in FY17, up 83%. EBIT stood at Rs 67 cr as compared to Rs 31 cr, up 120%.

EBIT margin stood at 6.54% as compared to 5.43%. Increased acceptance of outsourcing non-core activities and sustained commercial and office space absorption have been significant for the growth of this segment in India. In FY16, the FM market size grew to Rs 10,400 cr, at a historic five-year CAGR of ~15%. The market is highly fragmented and dominated by various small and medium-sized unorganised players and the soft services (housekeeping) segment, owing to low awareness about the need for professional services (technical services or utilities). The FM market is now shifting from a single-service contract model to an integrated model. An increase in consumables, manpower and management cost s have impacted the cost of FM services, forcing customers to replace long-term contracts and providing momentum for integrated facility management contracts in India.

Management believes the IFM business has the potential grow the fastest amongst all the c ompany’s business segments, driven by the growth in office space across sectors. In this segment, Quess currently provides facility management services for establishments including oil refineries, hospitals, educational institutions, and multiplexes. A vast majority of the c ompany’s business c omes from c orporate establishments.

Food services: The food services market in India stood at Rs 7,530 cr in 2016, growing at 17.9% CAGR since 2010. The market is dominated by the office and health care & educational institutions sub-segments, with a contribution of 34% and 26% respectively. It is estimated to grow at 22% CAGR between 2016 and 2021, driven by food price inflation, supply chain and sourcing practices, competition, food safety laws etc. mainly in the industrial, educational and healthcare sectors. The next big trend in the food services market is the growing prevalence of customised healthy food with high nutritional value, quality, and hygiene.

As of now, over 2,800 projects have been identified under the mission, and the total investment in the mission is estimated to be over Rs1.3 lakh cr. These smart cities will use host of digital infrastructure including environmental sensors to detect & measure pollution levels and other environmental parameters, smart street lights that can be controlled through the command & control room, cameras and VMD boards to control traffic, GPS devices in waste collection vehicles to monitor solid waste management, automatic number plate recognition & traffic violation detection sensors.


India is ranked second-largest in terms of mobile phone penetration after China, with an internet user base set to cross 50 cr by mid-18. The overall growth in digital landscape, together with a large working age population of over 90 cr, presents a significant growth opportunity for the overall recruitment market, especially the online market. With over 80 lakh college-going students in 2016, and the addition of ~30 lakh graduates every year to the Indian job market, this presents a huge opportunity for the online recruitment market.

Government initiatives like Pradhan Mantri Kaushal Vikas Yojna and Make in India are expected to fuel employment generation in the country. Manufacturing, IT & BPM/ITES and finance, insurance & real estate are major contributors of organised private jobs that rely heavily on online recruitment. The online recruitment market in India, the Middle East and South-East Asia is expected to reach US$ 622 mn in 2019, as compared to US$ 294 mn in 2016, at CAGR of 7.3%. This growth is led by expanding digitisation across these regions, and a demographic shift towards the younger population.

The internet business segment at Quess consists of its recent acquisition of Monster India and its business in South-East Asia & the Middle East, and Simpliance, a leading digital labour law compliance platform. Monster, a leading online career and recruitment resource provides relevant profiles to employers and relevant jobs to jobseekers across industry verticals, experience levels and geographies. The business has operations across India, Singapore, Malaysia, Philippines, Hong Kong, Vietnam, Thailand, Indonesia, UAE and Saudi Arabia, with ~68 mn re gistered users, over 86 mn resumes and ~770,000 new monthly registrations.


Vedang Cellular Services Private Limited (Vedang): in Q3 FY18, Quess entered into an agreement to acquire 70% equity stake in Vedang Cellular Services. It completed the acquisition for a consideration of Rs 40 cr. Vedang plans, designs and optimises telecom cell sites, and also installs active components on cellular towers and their O&M. It is one of the largest players in the telecom network operations and maintenance space. Vedang had posted revenue of Rs 78 cr, with PAT margin of 7% with deployed headcount of 1,500 professionals in FY17. This acquisition complements Quess’ c urrent c apabilities in telec om network management in terms of diversified servic e offerings, wider geographical reach and customer base.

Conneqt Business Solutions (Conneqt; formerly known as Tata Business Support Services Limited): In Q3FY18, Quess entered into an agreement to acquire 51% stake in Conneqt , earlier a subsidiary of Tata Sons Limited. Quess paid Rs 153 cr cash consideration for the acquisition. Headquartered in Hyderabad, Conneqt is among India’s premier customer experience (CX) management c ompanies, with over ten yea rs of sectoral expertise. The company serves third-party clients across sectors like BFSI, auto and manufacturing, telecom & media, retail, and in other emerging industries, in India and abroad, with an employee strength of ~27,000 employees, handling ~500 mn customer transactions every year, served through 29 delivery centres and over 470 field offices. Post -acquisition, the company is re-branded as ‘Conneqt Business Solutions’ to give it a distinct and unique corporate identity in the BPM sector. Conneqt reported revenue of Rs 661 cr with an EBITDA margin of 8.5% in FY17. The acquisition gives Quess an entry into the area of customer lifecycle management , and also offers strong cross-selling opportunities across their technology solutions and people services business.

Manipal Integrated Services (MIS): In Q3 FY18, the National Company Law Tribunal (NCLT) approved the scheme of the merger of the facilities management business of Manipal Integrated Services. As per that, Quess issued 71.5 lakh equity shares to equity shareholders of MIS as part of the remaining consideration. In addition to Manipal Group entities, MIS serves more than 150 clients with a presence in healthcare, education and BFSI sectors. As on 31-Mar-18, MIS had a headcount in excess of 17,500 associates.

This strategic acquisition gave Quess a strong foothold in the rapidly-growing healthcare and education facility management space.

Greenpiece Landscapes India (“Greenpiece”): In Q3FY18, Quess announced the intention to acquire 90% stake in Greenpiece Landscapes India for a cash consideration of upto Rs 26 cr. Greenpiece is a leading end-to-end design and landscaping services firm catering to marquee corporate, industrial and real estate firms in India and abroad. Greenpiece generated revenue of Rs 33 cr with an EBITDA margin of 9.8% and deployed headcount of 700 professionals in FY17. Landscaping is an adjacenc y to Quess’s facility management business , and this acquisition further differentiates the offerings. Further, given the fragmented and informal nature of the industry, Quess brings in a much-needed institutional approach to this segment.

Monster India and its business in South-east Asia and the Middle East (“Monster”): In Q4FY18, Quess announced acquisition of 100% stake in Monster India and its business in South East Asia and the Middle East for a cash consideration of US$ 14 mn on debt-free-cash-free basis. Monster, a leading online career and recruitment resource, provides relevant profiles to employers and relevant jobs to jobse ekers across industry verticals, experience levels and geographies. A 20+ year old marquee internet brand provides the widest and most sophisticated job seeking, career management, recruitment and talent management capabilities globally.

Monster worldwide is owned by Randstad. The acqui red business has operations across India, Singapore, Malaysia, Philippines, Hong Kong, Vietnam, Thailand, Indonesia, UAE and Kingdom of Saudi Arabia. With ~68 million registered users, over 86 million resumes and with ~770,000 monthly new registrations, the company is amongst the market leaders in the online recruitment space across each of its operating geographies. The acquired business had generated revenue of US$ 26 mn in CY 2016 with over 600 professionals. In addition to owning a high-recall brand in the HR space, this ac99999quisition complements Quess’s market leading presence in the HR services space by establishing end-to-end offerings across the Employee Lifecycle Management space.

If we look at the job board market, ~70% is, the next is Monster with ~20%. So it is like a duopoly structure. Quess believes that if they can fix Monster to some extent, then it can become strong No. 2, the opportunity to become much stronger is clearly there. In the past also acquisitions, where company has bought assets and turned them around quite well.

If we compare it with InfoEdge, which is the parent of Naukri trades at close to 15 times revenue. Though Monster is into losses, Quess got this under one-time revenue, almost 0.6 times revenue. So, valuation has been very attractive. It is a strong brand that gives complete new product and geography range.

DigiCare Services (QDigi Services): In Q4FY18, Quess announced the acquisition of 100% stake in HCL Computing Products Limited which further acquired Care Business of HCL Services Limited, a subsidiary of HCL Infosystems Limted for Rs.30 Cr on a cash-free-debt-fee basis via a combination of primary and secondary pay-outs. Post-acquisition, the acquired business has been re-branded as ‘DigiCare’ by Quess to give it a distinct and unique corporate identity in the Consumer Services space. DigiCare is one of the leading after-sales service providers for product categories such as mobile phones, consumer electronics and consumer durables in the customer lifecycle management space.

It has an extensive service network across the country and provides end to end support services with over 200 authorized service centers and has a network of 80 walk-in centres. It has strong relationships with leading smart phone makers and consumer durable companies with over 2 millon repairs annually. DigiCare generated a revenue of Rs 191 cr in FY17 with a work force of over 1,400 professionals.

This company has exhibited 20% CAGR over the last two years. The acquisition gave Quess a strategic ent ry into the mobile and consumer durable break-fix and repairs market across India and has c omplemented the c ompany’s offering in the Customer Lifec yc le Management (CLM) spac e.

Other key highlights:

Growth story, industry leader, & GST: One has seen a drastic change in Quess as a company. What started out as just an HR-outsourcing company, today caters to multiple non-core business requirements of corporates. It continues to grow in its existing group of companies, while adding new companies wherever it sees opportunities. In the organised sector, Quess is the industry leader in most of the segments it which it operates. The organic sector makes up only 20-30% of the overall industry. However, with the introduction of GST, unorganised players are expected to face problems, eventually increasing the share of the organised players. This, coupled with the fact that the Government is inclined to introduce changes with regard to skill development and labour law reforms, are all expected to work in the c ompany’s favour. The management targets 20% organic growth.

Successful track record of inorganic and organic expansion: Quess has a track record of successful acquisitions, which have been key enablers for the company to diversify into new service lines and geographies, as well as drive revenue growth and profitability. Quess has made successful acquisitions and grown inorganically by extracting value from the acquired companies. But at the same time, it has also grown organically. We believe Quess has tremendous growth potential, given India’s low penetration of ~0.5% working population, muc h lower than the global average.

Recruitment and regulatory expertise domain understanding: Over the years, Quess has developed considerable expertise in recruiting large pools of qualified candidates suited to client requirements. Quess has also acquired substantial knowledge of labour laws and regulations applicable across various states in India, as well as overseas. This enables it to effectively address regulatory issues encountered by clients.

Clients retention: Established client relationships, leading to recurring business Quess has over the years established long-term relationships with its clients, leading to recurring business. The high client retention levels reflec t the value provided by Quess’ servic es as well as the c ompany’s ability to deliver in accordance with client requirements. Such long term, established relationships have helped the company grow with client needs, increase its market share, and reduce the revenue uncertainty associated with the short -term nature of most of its client contracts.

Changing industry trends: With newer technologies coming up and the rising costs associated with training and development, skills upgradation, etc. companies are choosing to outsource non-core organisational work to professionals. Thus, reducing the costs related to training of employees, HR related activities, etc. This is where companies like Quess step in. While Quess has already invested in the required technology and digital platforms, they can service multiple clients through these existing channels. This way with existing fixed costs, they can ac hieve economies of scale.

View & valuation:

Quess has posted ~44% revenue cagr over FY13-18. EBITDA has witnessed 50% CAGR over the same period. Company continues to grow with organic and Inorganic routes. Net profit has grown at faster speed at 79% CAGR over FY13-18. PAT margin has seen robust 330 bps expansion to 5% in FY18. In the past few years, company has made 22 acquisitions and investments. Over the same period, Quess has acquired companies at much lower valuations and then turned around very good. Recently also, company acquired Monster Business and entered into job seeking portal segment. Although acquired operations are running into loss, but the deal has been done at such a low valuations of ~0.6x EV/Revenue.

We expect continuous margin improvement from each of these segments, led by turnaround in recent acquired companies and cost rationalisation measures. We have taken 70 bps margin expansion over FY18-20E. Strong revenue growth and superior margin mix would lead to stellar ~38% PAT CAGR over the same period. Given the robust balance sheet, strong return ratios, expansion in margin and strong revenues visibility, stock deserves to trade at premium valuations. Quess trades at ~17.5x FY20E EV/EBITDA and ~25x FY20 EPS. We value the company at ~23x FY20E EV/EBITDA and 32x PE, to arrive to target price of Rs 1040. We recommend BUY on Quess at CMP of Rs 789 and add on dips to Rs 725 with TP of Rs 1040 over the next 12-18 months.

We estimate ~27% revenue and ~38% PAT CAGR (adjusted for tax in FY18) over FY18-20E. The stock trades at ~25x FY20E earnings. We recommend Quess as BUY at Rs 789 and add on dips to Rs 725 with TP of Rs 1040 over the next 4-6 quarters. Based upon ~32x FY20E EPS, we have arrived to Rs 1040.

Key risks:

Economic risk: Demand for staffing and other business services is subject to the state of the overall economy. Pronounced softness in the economy in India or in Quess’ other markets could therefore dampen demand for the company’s services. However, Quess is an outsourced service provider and as such generally offers cost advantages to clients who would otherwise perform such work in-house. To this extent, an economic downturn could lead to increased demand for the company’s services, mitigating general ec onomic softness.

Competitive risk: The staffing business in particular is very competitive with low-entry barriers. Therefore, there are a large number of staffing firms that often compete aggressively on costs. Quess’ quality of servic e, complianc e with all relevant rules and regulations, and sc ale of operations provide important competitive advantages relative to such low-cost competitors.

However, if competition in the organised sector intensifies and leads to pric e wars, Quess’ growth and profitability c ould be affec ted.

M&A-related risk: Finally, M&A has been a key element of Quess’ growth strategy. The company has entered new bus iness lines and geographies through strategic acquisitions, and intends to continue with such selective acquisitions. Although the company has a successful track record of turning around acquisitions, any large M&A activity in the future may bring with it associated risks.

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