Hold TeamLease Services; target of Rs 3573: Prabhudas Lilladher

Prabhudas Lilladher recommended hold rating on TeamLease Services with a target price of Rs 3573 in its research report dated July 27, 2022.

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July 29, 2022 / 09:36 PM IST

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Prabhudas Lilladher's research report on TeamLease Services

We downgrade TEAM to HOLD (earlier: Accumulate) as we believe current valuations fully price in potential earnings growth. Our EPS estimates cut by 9.7%/3.6% led by cut in EBIT margin estimate by 25 bps in FY23 and 3% cut in revenue in FY24. Slowing hiring demand in manufacturing and new gen sectors affected by funding freeze, plus delay in hiring decisions in specialized staffing signal slowdown compared to strong hiring demand seen in FY22. We note that hiring picked up towards end of Q1 and management expects growth to recover in Q2, plus sub-contracting is likely to be preferred over hiring employees on payroll amidst uncertain demand. However, we expect normalization in revenue growth in FY23 due to early signs of slowdown in demand in early part of Q1 and lower realisation. EBIT margin declined by 81bps QoQ, 61bps YoY due to salary inflation of associates, annual salary appraisal of core employees (12% YoY vs 7-8% historically), seasonality in EdTech business, one-time costs related to IndAS 111 adjustment and relocation to another office in Bangalore.

Outlook

We expect margins to gradually improve in next three quarters led by revenue growth and FTE productivity improvement but expect it to be lower at 1.4% for FY23 (vs 1.6% in FY22). We continue to value TEAM on 35x multiple on FY24 EPS to arrive at target price of Rs.3573 (earlier: 3642). At CMP, the stock trades at 48x/36x multiple on FY23/24 EPS of 77.9/102.1 with EPS CAGR of 26% over FY22-24E.

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