For the stocks in our Business Services coverage — Teamlease, SIS India and Quess — we estimate steady growth and stable margins in Q2FY19.
While these stocks have corrected 25–32% in the past three months, we reiterate that organised business services remain under-penetrated in India and, hence, a headcount CAGR expectation of 9–10% over the next six–seven years is realistic.
However, in light of tighter business conditions for clients and higher funding costs, both of which might persist over the medium term, we are trimming FY19/20E operating profit estimates by 6–11%.
Furthermore, to factor in heightened volatility, we are raising the WACC assumption in our DCF methodology by 100 basis points. We are thus revising down target prices for Teamlease/SIS/Quess from `3,050/1,500/1,300 to `2,801/1,202/1,007; retain ‘BUY’.
For Teamlease, we estimate Q2FY19 sales/Ebitda growth of 22%/34% year-on-year driven by 8–9% year-on-year uptick in associate headcount in general staffing and much higher growth in specialised staffing. For SIS India, we estimate sales/Ebitda will increase 15%/9% year-on-year.
We expect the margin in its domestic security business to be a tad lower around 5% — versus 7% in Q2FY18 — as SIS incurred upfront expenses for a large `3 billion contract win from Cognizant. Adjusted for the one-off gain in Q2FY18, Q2FY19 PAT is likely to be up about 20% year-on-year. For Quess, Q2FY19E sales/Ebitda would spike 40% year-on-year, but organic earnings growth — adjusted for acquisitions — should be 15% year-on-year.
Source: Financial Express