Quess, TeamLease to benefit from note ban, GST

Potential gain in market share and focus on high-margin businesses are key positives

Temporary-staffing companies such as Quess Corp and TeamLease Services are among the few that are benefiting from demonetisation as the process has led to a spike in the demand for temporary staff, particularly from banks. 

TeamLease added 7,000 employees in October and November against 4,000 in the December 2015 quarter. Analysts at Spark Capital say demand from banking sector could continue for another six-to-nine months. 

These firms can also gain from the goods and services tax (GST) as they can gain market share from their peers in the unorganised space. Companies in the unorganised sector currently under-pay the service tax payable to the government, say analysts. 

Given that GST would allow companies to receive credit of the service tax paid by temporary staffing companies, it could incentivise them to shift to organised players such as Quess and TeamLease. “Rising market shares would reduce the difference in fees charged by these companies vis-a-vis that of unorganised players and enable the listed companies to scale up their operating margins gradually over the coming years,” says Ravi Vishwanath, chief financial officer at TeamLease. 

Analysts say the Ebitda margin of Quess Corp is likely to scale up to 5.5% this financial year from 4.8% in FY16 and from 1% in FY16 to 1.4% in FY17 for TeamLease. Higher tax deducted at source (TDS) charged on invoices – employees’ salary, vendor revenues and service tax – at 10% impacts the cash flow of these companies. They have to obtain a certificate from the government every year to reduce TDS rate to 0.5%, which usually comes with a lag. 

However, this impact is likely to moderate in the future. “Going forward, the regulatory processes are likely to get streamlined, resulting in early receipt of TDS certificate from tax authorities, while improved margins will also provide some cushion,” says Soumitra Chatterjee of Spark Capital. 

Since demonetisation, Quess is up 13% and TeamLease is down 13%. At current levels, while Quess trades at 65 times FY17 estimated earnings, this metric is lower at 40% in case of TeamLease. A larger revenue base coupled with higher Ebitda margins justify the valuation premium enjoyed by Quess over TeamLease, say analysts. Although most brokerages are positive on these two stocks, the current valuations are on the higher side and seem to adequately capture the positives for now.