Quess, TeamLease to benefit from note ban

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

Temporary staffing companies such as Quess Corp (Quess) and Team Lease Services (Team Lease) are amongst the few that are benefitting from the demonetisation exercise as the process has led to a spike in the demand for temporary staff, particularly from banks. Team Lease, for instance, added 7,000 employees in October and November as against an addition of 4,000 in the December 2015 quarter. Analysts at Spark Capital believe the higher demand from banking sector could continue for another six to nine months. This process as well as implementation of goods and services tax (GST) mechanism augurs well for these players as they can gain market share from their peers in the unorganised space. The unorganised players 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 would incentivise them to shift to organised players such as Quess and Team Lease. "Rising market shares would gradually 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, CFO at Team Lease. These companies are also looking at scaling up their presence in the high-margin IT sector as well as by offering value-added human resources (HR) services to their clients in a bid to drive growth as well as margins going forward.

In fact, analysts believe EBITDA margin of Quess Corp is likely to scale up to 5.5 per cent this fiscal from 4.8 per cent in FY16 and from 1 per cent in FY16 to 1.4 per cent this fiscal for Team Lease. Higher TDS charged on the invoices which include employee salary, vendor revenues and service tax at 10 per cent impacts the cash flow of these companies. They have to obtain certificate from the government every year to reduce TDS rate to 0.5 per cent 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 per cent and Team Lease is down 13 per cent. At current levels, while Quess trades at 65 times FY17 estimated earnings, while this metric is lower at 40 per cent in case of Team Lease. A larger revenue base coupled with higher EBITDA margins justify the valuation premium enjoyed by Quess over Team Lease, believe analysts. Though most brokerages are positive on these two stocks, current valuations are on the higher side and seem to adequately capture the positives for now.