TeamLease Services. Skilling India

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1 Skilling India February 12, 216 Govind Agarwal Rating Price Target We like TeamLease for: BUY Rs1,26 Leadership position in high growth (25 3%) Flexi staffing industry Scale and efficiency benefit led margin expansion which can drive 3 5% EBIT growth Asset light business model: Low capex, negative working capital in FY14 & FY15, zero debt, ~8% of FY16E balance sheet is cash and high ROIC High FCF generation: >1% conversion of EBITDA to FCF TeamLease (TL) is a provider of broad range of human resource services to various industries. It is the leader (5% market share by employees) in formal Flexi staffing industry which is expected to grow by 25 3% over FY14 19E. TL s FY11 15 revenue grew at a CAGR of ~31% along with sharp improvement in EBITDA margins. The company, in our view, is well positioned to maintain high revenue/ebit/eps growth driven by a) expected 25 3% industry growth and b) scope for margin improvement due to scale benefits. We forecast revenue/ebit/net Profit CAGR of 26%/4%/27% over FY15 18%. Company intends to enter into IT, hospitality and healthcare verticals which will further aid margins. We believe, TL is a structural growth story with low capex and working capital requirements, resulting in high FCF generation. We initiate with a BUY rating with TP of Rs1,26 based on 35x FY18 EPS, which is justified against 4%/42% EBIT/PBT CAGR over FY15 18E. Flexi staffing industry to grow at 25 3%: Flexi staffing industry (headcount) in India is expected to grow at a 2 25% CAGR over FY14 19 as per CRISIL estimates. Industry growth in value terms will be higher at 25 3% CAGR over FY Industry growth will be driven by 9 1% growth in formal job market and increase in penetration of flexi staffing from.4% to 1%. Penetration of flexi staffing is expected to witness strong growth owing to a) increasing number of enterprises turning formal, b) skill development and c) regulatory amendments in favour of formal and flexi staffing industry. Market leader with scope for margin improvement: Company is able to differentiate itself by 1) scale (reach and employee headcount), 2) track record of adhering to labour laws and regulations and 3) technological and operational excellence. Company has been able to improve EBITDA margins from negative 5% (FY11) to 1.2% (FY15) largely driven by scale benefits and reduction of losses in training business. Company Report In our view, all the above factors and expected 4%/42% EBIT/PBT CAGR over FY15 18E justify our target P/E multiple of 35x. Key financials (Y/e March) FY15 FY16E FY17E FY18E Revenues (Rs m) 2,71 25,384 31,771 39,998 Growth EBITDA (Rs m) PAT (Rs m) EPS (Rs) Growth (%) 73.3 (2.3) Net DPS (Rs) Profitability & Valuation FY15 FY16E FY17E FY18E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research, Valuation at IPO price of Rs85/share Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Investment Rationale Leader in the Flexi Staffing Industry in India TL is the leader in India s Flexi Staffing industry with a market share of 5% by number of associate employees (14,946 employees). Company has reported a steady growth in the associate employee strength with a CAGR of 17% over FY1 15. Aided by associate growth, wage inflation and improved realization per employee, TL has reported revenue CAGR of 3.7% over FY Exhibit 1: TL is the top player in the flexi staffing industry (by headcount) 5% 5% 5% 3% 3% 3% 2% 2% 2% Teamlease Adecco Randstad Quesscorp Genuis Consultant Manpower Global Innov 75% Needs Manpower GI Staffing Others Source: RHP, Company Data; PL Research, Values approximated Strategies: TL s strategy is to achieve scale in staffing through five key elements: 1) Technology 2) Operations 3) Compliance 4) Business Development and Brand Promotion and 5) Associate Employee Hiring. TL expects to grow through strategic acquisitions which will enable the company to leverage existing assets and offer clients more comprehensive and attractive services. Strengths: TL has strong functional knowledge and expertise across industry sectors. Staffing services across various industries include Consumer durables, Chemicals, Manufacturing, Media & Telecom, Retail, Banking, Financial services and Insurance (BFSI), e Commerce, Pharmaceuticals and Health care sectors. February 12, 216 2

3 Flexi staffing industry to grow at 25 3% CAGR Flexi staffing industry s headcount is expected to grow at a CAGR of around 2 25% between FY14 and FY19, as per CRISIL research estimates. In India, as of FY14, this industry in value terms was around Rs18 22bn. Over the next five years, the flexistaffing industry is expected to grow by 25 3% in value terms to attain a value of around Rs61 64bn. Exhibit 2: Formal Industry Market size (excludes Agriculture) Exhibit 3: Penetration of Flexi Staffing Industry % 1.% 1.% (million people) %.6%.4%.4% 2.2% E E.% E E Source: RHP, Crisil Research, PL Research Exhibit 4: Total Flexi Staffing Industry Size (number of people) Source: RHP, Crisil Research, PL Research Exhibit 5: Flexi Staffing Industry Size (million people) (Rs bn) E E P Source: RHP, Crisil Research, PL Research Source: RHP, Crisil Research, PL Research Penetration of flexi staffing is expected to witness strong growth owing to various factors which include increasing number of enterprises turning formal, skill development and regulatory amendments in favour of formal and flexi staffing industry. Initiatives taken by the flexi staffing industry, such as training services, are also likely to add to the industry growth over the long term. February 12, 216 3

4 Asset light model, high FCF generation TL operates an asset light model with low capital expenditure, low working capital and consequently, high operating and free cash flow. Historically, the company s receivable days have been in the range of TL had EBITDA to FCF conversion of more than 1% for FY14 and FY15. Exhibit 6: Healthy FCF generation Exhibit 7: Low capital expenditure requirement (Rs m) (Rs m) FY14 FY15 FY16 E FY 17E FY 18E FY14 FY15 FY16 E FY 17E FY 18E Source: Company Data; PL Research Source: Company Data; PL Research Revenue/EBIT/PAT CAGR of 26%/4%/27% over FY15 18E We expect TL to deliver healthy revenue CAGR of 26% over FY15 18E driven by 15% growth in associate employees. We forecast EBITDA margin expansion from 1.2% in FY15 to 1.6% in FY18. This will drive 38%/4% EBITDA/EBIT CAGR over FY15 18E. Tax rate for the company will increase from 5.5% in FY15 to 34% in FY18E and hence PAT CAGR will be lower at 27%. Exhibit 8: Revenue growth to remain strong Exhibit 9: EBIT and Net profit (Rs m) (Rs m) 45, 4, 35, 3, 25, 2, 15, 1, 5, 39,998 31,771 25,384 2,71 FY 15 FY16 E FY 17E FY 18E (Rs m) EBIT Net Profit FY 15 FY16 E FY 17E FY 18E Source: Company Data; PL Research Source: Company Data; PL Research February 12, 216 4

5 Valuation and view BUY rating with TP of Rs1,26 TeamLease revenues have grown at 31% CAGR over FY11 15 along with substantial margin improvement. We forecast revenue/ebit/pat CAGR of 26%/4%/27% over FY15 18E. Net profit growth is lower due to increase in tax rate from 5% in FY15 to 34% in FY18E. We note that PBT growth remains strong at 42% CAGR over FY15 18E. TL is the market leader in India with market share of ~5% in terms of number of associate employees. Crisil expects formal flex staffing industry to grow at a CAGR of 25 3% over FY14 19E. Given TL s industry leadership and the past track record, we believe our revenue estimates are reasonable. With increased scale, EBITDA margins should expand from 1.2% reported in FY15. Company has an asset light model, with low capex and working capital requirement (negative working capital in FY14/FY15) and consequently generates high FCF. Considering all the above factors, we believe TeamLease is a structural growth story and the stock can sustain high valuation multiples. We assign a P/E multiple of 35x to arrive at Mar 217 target price of Rs1,26. Our target multiple is justified against 4%/42% EBIT/PBT CAGR over FY15 18E. Global peers trade at 11x forward EPS but they have much lower revenue (5 6%) and EBITDA (7 14%) growth profile. Exhibit 1: Comparative Valuation (Global comparisons) Mcap (Rs bn) Sales (m) PE Ratio (x) EV/Sales CY16E RoE (%) EV/EBITDA (x) CY15E CY17E CAGR (%) CY15E CY16E CY17E CY15E CY16E CY17E (x) CY15E CY16E CY17E CY15E CY16E CY17E Sales EBITDA Addeco SA REG ,986 22,937 24, % 7% Ranstad Holding NV ,214 2,517 21, % 14% Source: Bloomberg, PL Research February 12, 216 5

6 Financial Highlights We forecast 25.8% revenue CAGR over FY15 18E driven by ~15% growth in associate employee strength. We have not factored in any acquisition in our estimates and hence, the cash raised from the IPO results in a jump in interest income for the company. Increase in tax rate from 5.5% in FY15 to 34% in FY16 results in YoY decline in Net Profit, though EBIT/PBT growth in FY16 is healthy at 31%/28%. Company has made investments in scaling up the sales and business development team and IT team which has resulted in almost flat YoY EBITDA margins in FY16. We believe that the investments are a step function and the margins will expand substantially as the revenue scales up and company derives scale benefit. Exhibit 11: P&L Summary FY15 FY16E FY17E FY18E Revenue (Rs m) 2,71 25,384 31,771 39,998 Growth 31.2% 26.5% 25.2% 25.9% EBITDA (Rs m) EBITDA margin 1.2% 1.2% 1.4% 1.6% EBIT (Rs m) EBIT margin 1.1% 1.1% 1.3% 1.5% Adjusted PAT (Rs m) Adjusted PAT margin 1.5% 1.1% 1.4% 1.5% Effective tax rate 5.5% 34.% 34.% 34.% EPS (Rs) Growth 73.3% 2.3% 66.3% 34.6% Exhibit 12: Assumptions for Staffing revenues FY15 FY16E FY17E FY18E Staffing Revenues (m) 19,731 24,993 31,322 39,482 YoY gr. 31.3% 26.7% 25.3% 26.1% Staffing employees 94,647 18, , ,673 YoY gr. 15.3% 15.% 13.% 16.% Average associate employees 88,357 11, , ,833 Average revenue per employee (') YoY gr. 14.9% 1.% 1.% 1.% February 12, 216 6

7 We believe company has following margin levers: Scale and efficiency benefits: Increase in core employee strength is lower than the increase in associate employees. Currently the ratio of core employee to associate employee is 9. Company intends to increase it to 15 over the next 3 5 years. Efficiency benefits flow from the technological and process scalability of the company. It has a team of ~8 employees involved in development of technology platforms. Entry into new verticals: Company is currently in general staffing which is low margin business. Diversification into new verticals such as IT/healthcare/hospitality will benefit margins. For example gross margin in IT staffing are in 12 18% range against 3 5% in general staffing. Exhibit 13: Cost Structure FY12 FY13 FY14 FY15 FY16E FY17E FY18E Revenues 9,258 12,57 15,296 2,71 25,384 31,771 39,998 Employee expenses 9,31 12,165 14,839 19,445 24,623 3,816 38,773 Other expenses EBITDA % to sales Employee expenses 97.5% 97.3% 97.% 96.9% 97.% 97.% 96.9% Gross margin 2.5% 2.7% 3.% 3.1% 3.% 3.% 3.1% Other expenses 4.7% 3.6% 2.2% 1.9% 1.8% 1.6% 1.5% EBITDA margins 2.2%.9%.8% 1.2% 1.2% 1.4% 1.6% Exhibit 14: Cost efficiency and scale benefits reflected in other expenses Other expenses (Rs m) FY12 FY13 FY14 FY15 FY16E FY17E FY18E February 12, 216 7

8 Exhibit 15: Revenue growth to remain strong Exhibit 16: EBITDA margin expansion likely Revenue (Rs m) Growth (RHS) EBITDA Margins 5, 4, 3, 2, 1, 2,71 25,384 31,771 39,998 35% 3% 25% 2% 15% 1% 5% 2.% 1.5% 1.%.5% 1.2% 1.2% 1.4% 1.6% FY 15 FY16E FY 17E FY 18E %.% FY 15 FY 16E FY 17E FY 18E Exhibit 17: EBIT and Net Profit growth Exhibit 18: Net Margins (Rs m) EBIT Net Profit FY 15 FY16 E FY 17E FY 18E 1.8% 1.6% 1.4% 1.2% 1.%.8%.6%.4%.2%.% 1.5% 1.4% 1.5% 1.1% FY 15 FY16 E FY 17E FY 18E Exhibit 19: Healthy FCF generation Exhibit 2: High cash in balance sheet results in lower ROE (Rs m) FY15 FY16 E FY 17E FY 18E 25% 2% 15% 1% 5% % 21% 14% 12% 8% FY 15 FY16 E FY 17E FY 18E February 12, 216 8

9 Exhibit 21: Cash rich balance sheet with negative working capital Y/e March FY15 FY16E FY17E FY18E Shareholder's Funds 1,485 3,382 3,84 4,376 Total Debt Other Liabilities Total Liabilities 1,713 3,61 4,32 4,64 Net Fixed Assets Goodwill Investments 929 1,35 1,35 1,35 Net Current Assets Cash & Equivalents 218 1,979 2,462 3,116 Other Current Assets 1,64 2,52 2,568 3,233 Current Liabilities 1,792 2,274 2,846 3,583 Other Assets Total Assets 1,713 3,61 4,32 4,64 Exhibit 22: Cash and liquid investments comprise 67% of Balance sheet (FY15) 1.% 8.% 67.% 83.5% 86.7% 9.2% 6.% 4.% 2.%.% FY15 FY16E FY17E FY18E February 12, 216 9

10 Business Strategy Develop new areas of growth by diversifying service offerings across the human resources value chain TL has commenced expanding the services to span the entire chain of human resources in India, covering aspects of employment, employability and education. In the employment services, it intends to grow a) Permanent Recruitment services by adding newer forms of recruitment like Recruitment process outsourcing and b) Regulatory consultancy for labour law having dedicated personnel for business development/marketing activities. In employability offerings it intends to improve a) Retail learning solutions and b) Institutional learning solutions. Continue to grow through strategic acquisitions TL intends to pursue strategic acquisitions that will enable it to leverage the existing assets and offer the clients more comprehensive and attractive services. TL wants to enhance and expand its presence in both existing and new segments and target industries, as well as expand the solution and technology platform. Strategic acquisitions could also enable TL to establish the presence in newer sectors such as IT, Healthcare and Hospitality, given the specialized human resources requirements. Achieving scale in staffing through five key elements The following five elements are aimed to achieve scale in the staffing business Technology Technology is at the forefront of TL s business and is the key enabler of core staffing business, as well as for the non staffing businesses. As of Nov 3, 215, it employed a team of 77 software engineers, who continually develop various applications that enable it to grow the business, while achieving efficiency and economies of scale. Below are some of the key software applications developed by TL s in house technology team. Associate Lifecycle system TL s technology team rolls out annual versions that reflect significant upgrades to the system towards achieving increasing levels of automation of the business processes. TL is currently on version 9., and is working on version 1.. The primary business objective of version 1. is to reduce the time taken to process the approximately 1, payroll records across 1,252 clients as of Nov 3, 215. It currently takes 117 hours to process these payrolls and processes through a system of sequential processing; version 1. will reduce this to approximately four hours using a parallel processing system. February 12, 216 1

11 Candidate Lifecycle System (CLCS) CLCS was developed principally for the permanent recruiting business but is also used in the sourcing side of the staffing business. CLCS is a Microsoft systems based platform that automates the candidate lifecycle from processing job requirements provided by clients, to registering mandates, searching for matching candidates in the database using artificial intelligence, to sending profiles to clients, processing client shortlists of candidates, tracking interviews and raising invoices in the case of permanent recruitment candidates or migrating them to the ALCS system in the case of temporary staffing candidates. It is currently on version 3.1. The business objective of version 4. is to create market place for job seekers. Regulatory Lifecycle Systems RLCS manages the entire consulting process. The system has an embedded store of all relevant labor laws in India and is designed to accept inputs of client data perform automatic audits of the clients' regulatory compliance status and generate reports, which it can send to clients as part of the consulting services. TL is currently on version 7.. TL s technology team is working on developing version 8., which will have improved usability that will make work flows self guided and user friendly. Center Operation Management System (COMS) COMS is a Microsoft systems based technology platform that manages the retail learning solutions business operating under the IIJT brand. COMS manages the franchisee operations from candidate registration to tracking courses and classes to collecting royalties from franchisees. Operations TL moved from a distributed operational model to a centralized model during the year Centralising all the operational teams has helped TL maintain consistency in delivery and improved performance. The constant endeavor has been to improve staffing operations systematically through people, process and technology. Compliance TL intends to continually improve the regulatory compliance processes. The adoption of labor reforms in India which will enforce minimum wage compliance, provide options to low wage employees to determine their portion of statutory contribution to PF, ESIC etc., will significantly expand the market for organized temporary staffing service providers by curbing the dominance of the unorganized temporary staffing market. February 12,

12 Business Development and brand promotion Given the unique nature of the industry it operates in whereby the organized staffing companies have only a 1% share of the total staffing market, TL intends to aggressively expand the reach and service offerings by increasing the size of business development teams and brand building activities. Associate Employee Hiring Hiring of Associate Employees is a key element of the staffing business and leads to enhanced customer satisfaction. This activity is being carried out by the sourcing department through a dedicated team of 16 fulltime employees as of Nov 3, 215, in addition to certain vendors at locations where TL does not have a physical presence. In the years ended March 31, 214 and 215, approximately 6% and 1%, respectively, of Associate Employee applicants were successfully matched to temporary staffing roles with clients. February 12,

13 Competitive Strength Market Leader with Scale benefits TL has a large market share than the competitors, both Indian as well as global staffing companies in terms of revenues. TL s growth has been largely organic and as of Nov 3, 215, it had 1,252 clients and 14,946 associate employees, making TL leading organized temporary staffing services companies in India with a significant brand value, which enables them to grow the business by attracting new clients as well as associate employees. Strong compliance practices that enables to build relationship with clients TL places tremendous emphasis on compliance with applicable labour laws and regulations in an industry that for the most part is highly unrecognized and fragmented. TL s focus on regulatory compliance gives it a significant competitive advantage, concerning labour laws with most of the larger clients shifting to organized service providers to comply with applicable regulations Technological and operational Excellence TL has implemented processes and systems that have resulted in operational excellence. It has undertaken series of actions that have streamlined the operations. TL has centralized operations, finance, IT and regulatory compliance teams in Bengaluru. Strong functional knowledge and expertise across industry sector Due to scale of operations and diverse client base TL has developed deep expertise around the human resources functions across sectors for the staffing services. Direct sales force and go to market strategy is aligned with broad sector neutral reach which enhances the client value proposition and allows TL to leverage the strong institutional knowledge to further expand the presence in the market. Strong Management and Thought leadership in public policy initiatives TL is professionally managed company with high quality senior management team that provides the right balance of expertise, experience and strategic vision contributing to growth. Management team is backed by individual promoters that have extensive experience in Human Resource Services industry in general and staffing industry in particular. February 12,

14 Business Description TL s core business is providing staffing solutions (98.25% of revenues) across industry sectors and diverse functional areas. Majority of Associate Employees are engaged in sales, logistics and customer service functions. TL offers temporary staffing services under the staffing business. It is one of India's largest companies providing temporary staffing and payroll services in the organized sector by revenues and by the number of Associate Employees. TL provides businesses with rapid access to a highly qualified and productive pool of candidates to give them the flexibility. Temporary staffing business requires identification of Associate Employees that fit the skills requirements of the clients and to then place them with the clients, while the Associate Employees themselves remain on roll as employees. TL earns a onetime fee for every Associate Employee it identifies in addition to a monthly fee on their salaries. TL s HR Service Business (1.75% of revenues) includes: Permanent Recruitment Permanent Recruitment business constitutes a small but strategically important part of human resources services portfolio. Regulatory Compliance Regulatory Compliance consulting business provides consulting services with respect to staffing and labor compliance issues as well as on corporate and legal compliance issues. There is a team of 116 full time employees to operate this business as of November 3, 215. Retail Learning Solutions Retail Learning Solutions follows a franchisee model in implementing the retail learning solutions business. TL offers training programs in IT, Finance and Retail. Institutional Learning Solution As of November 3, 215, Institutional Learning Solution business was operated by 24 full time employees. Clients in this business line are State Governments or Governmental agencies. TL provides placement skills training on behalf of various State Governments. February 12,

15 Company Background Exhibit 23: About the company Employees (Core) 1,218 Customers 1,252+ Regional Offices 8 Incorporated in 22, TL Services is India based human resource services and people supply chain company offering services to various small and large business clients. It offers employment and employability services. The company employment services include temporary staffing, permanent recruitment and regulatory consultancy for labour law compliance. TL employability offerings include different types of learning and training solutions, including retail learning solutions, institutional learning solutions and enterprise learning solutions. Promoter and Management Bandwidth Manish Sabharwal, Chairman and co founder Manish Sabharwal is the Co Founder and currently the Chairman of TL. He holds a masters degree in management from the Wharton School in 1996 and is an alumnus of Mayo College, Ajmer. Manish provides leadership at the Board level and sets out strategies and directions. He is also the chief external spokesperson. In 1996, he co founded India Life, a human resource outsourcing company that was acquired by Hewitt associates in 22. He was the CEO at Hewitt Outsourcing (Asia) in Singapore. Manish also serves on various State and Central government committees on education, employment and employability. Manish headed the sub committee for planning commission on remodeling of apprenticeship training as another mode for on the job training. He is currently a nominated member of the Central Advisory Board of Education, the highest advisory body to advise the Centre and State Governments in the field of education. Ashok Reddy, MD and co founder Ashok Reddy is the Co Founder and Managing Director of the company. Ashok oversees operations and represents TL in forums with major clients. Ashok holds a bachelors degree in commerce from the Shriram College of Commerce, University of Delhi and a diploma in management from Indian Institute of Management, Bengaluru. He is a first generation entrepreneur with 17 years of experience in the industry of human resource services. Prior to his current position, he was a director of India Life Capital Private Limited, a pension and provident fund asset management company. He has been awarded the Skills Champion of India award. February 12,

16 Industry Overview Large working population with low literacy levels In India, people aged between 15 to 59 years are typically considered working age population. According to census data, this employable population has experienced a 24.7% growth between 21 and 211. This increase far exceeds the growth in India's general population for the same period of 17.7%. The proportion of India's population who are part of the working group population has risen from around 57% in 21 to 62% in Exhibit 24: Distributions of people by working age group (211 12) Working age (15 59) 61.8% Above working age(6 and above) 8.3% Exhibit 25: Education level of working population (211 12) Secondary 11% Higher secondary 7% Diploma/cert ificate 1% Graduate and above 13% Below working age ( 14) 29.9% Middle 15% Literate and upto primary 22% Not literate 31% The proportion of illiterate people in India's working group population has declined by 3 4% between 24/25 211/212. Among the literate group in the working population, there has been growth in the amount of workers with graduate and above and higher secondary education. However, a large proportion of the working group population is yet to attain secondary level of education. Those workers with an education profile below secondary level of education primarily work in the informal sector (being selfemployed or working in unincorporated proprietary or partnership enterprises). By contrast, those with higher education levels are employed in the formal sector (such as in government entities, public/private limited companies and other registered organizations). The dropouts from the under graduate pool are the key target segments for flexistaffing. February 12,

17 High level of informal employment Exhibit 26: Distribution of workforce Exhibit 27: Formal v/s Informal Employment Casual Labour 29.9% 1% 8% Formal Informal Regular (wage salaried) 17.9% Self employed 52.2% 6% 4% 2% % Manufacturing Construction Minning Elecricity,gas water Due to the lack of employment opportunities and poor skill sets, workers are forced to either work as low paid casual workers or become self employed. More than half of the workforce is self employed owing to lack of employment opportunities. The proportion of self employed and casual labourers is around 82.1% of the total workforce India's informal sector is currently driving employment. About 8% of India's workers are in the informal sector, with particularly high levels of informal workers evident in the manufacturing and construction industries. The cumulative effect of low levels of literacy, less than adequate skill sets, and lack of employment opportunities is a high level of self employment, due to which informal employment dominates employment in most sectors. Challenges in Indian Employment market The biggest challenges confronting the Indian employment industry today are a) Bringing jobs to people wherever they are located. b) Improving skill sets of the workforce and ensuring employment generation keeps pace with rising literacy. c) Regulatory measures to increase formalization of enterprises. d) Reducing informal employment to increase social security. e) Regulatory push towards formal employment and the introduction of vocational education and training. February 12,

18 Lack of opportunities in their domestic zones is putting pressure on people from lessdeveloped regions to migrate, causing social and familial dislocations and putting pressure on civic and social infrastructure. By contrast, service industries such as IT/IT enabled services, banking and telecom services are facing a shortage of people with the necessary skill sets. Due to lack of opportunities in their home regions, many workers are turning entrepreneurs, or end up doing lower paying jobs or casual work. This is reflected in the large number of enterprises in the country being operated informally. On one hand, the industry is unable to find enough people with the adequate skillsets and on the other hand, there are large numbers of people working in jobs far below what their educational qualifications or skill sets demand. Nearly 5% of factories are set up in five states which lead to significant demandsupply gap of workforce. Flexi Staffing plays a key role in taking jobs to people and people to jobs. Exhibit 28: 5 states account for more than 5% of the factories Tamilnadu 17% Others 46% Maharashtra 13% Gujurat 1% Uttar Pradesh 7% Andhra Pradesh 7% February 12,

19 Regulatory changes to drive formal employment India has plethora of labour laws which deter industry from giving permanent employment to people which leads to creation of informal sector. Central government and state governments are now working towards labour reforms. Amendments in labour laws will have a positive impact on flexi staffing agencies. Certain states (such as Rajasthan) have recently taken the lead in reforming employment norms, which should contribute to an increase in the formal employment market share. Exhibit 29: Applicable laws (major ones) Industrial Disputes act Lays out situations when strikes/lockouts can be declared unlawful or illegal, circumstances which can permit industrial unit to close down and situations for retrenchment, lay off and dismissing workman and others Contract Labour act Specifies regulation of contract labour employment in certain establishments and also for its abolition in certain matters/scenarios Factories act Establishies guidelines for the safety of workers in fractories Apprentices act Regulates the programme of training of Apprentices for optimum utilization of training infrastructure available in industry to meet the skilled manpower requirement of Indian industry Staffing companies are also playing an active role in skills development. As flexistaffing agencies act as an intermediary between end use organizations and employees, the flexi staffing industry has a continuous understanding of the skill demand and supply trends for end use companies. The flexi staffing industry acts as an enabler, by providing job seekers with training on the requested skills of end use industry to make them job ready for the end use organizations. Flexi staffing companies are therefore able to offer end use companies with ready trained employees. This reduces the costs that would be incurred by the employer in training their new employees. February 12,

20 Exhibit 3: Opportunities for flexi staffing Population (1,227 mn) Working Age 768mn Labour Force (446 mn) Work Force (427 mn) Unemployed (19 mn) Formal (81 mn) Informal (346 mn) Permanent Temporary Casual Casual Fixed short term contract Self Employed Bipartite Tripartite There is a growing awareness among corporate globally of the advantages of flexistaffing. Over the next few years, this will encourage more companies to consider flexi staffing as a viable employment option. A gradual movement towards a more formal set up to employment is anticipated to occur due to various factors such as the increasing number of enterprises turning formal, skills development and regulatory amends in favour of formal and flexistaffing industries. There are therefore favourable circumstances for flexi staffing agencies due to the gradual transformation towards formalization from casual workers over the longer term. February 12, 216 2

21 Sizing the industry 25 3% revenue CAGR Exhibit 31: Total industry employment (excludes agriculture) Exhibit 32: Formal Industry Market size (excludes agriculture) (million people) (million people) FY 5 FY 12E FY 19E FY 5 FY 12E FY 19E The overall workforce is expected to grow at a CAGR of 2 3% during to Sectors such as IT enabled services and banking, financial services and insurance are expected to have relatively higher growth in overall employment as compared to other sectors. The formal workplace is expected to grow at a CAGR of 9 1% during to Exhibit 33: Penetration of Flexi Staffing within overall employment Exhibit 34: Total Flexi Staffing industry size 1.2% 1.% 1% %.6%.4%.2%.4% (million people) % FY 14E FY 18E FY 12E FY 14E FY 19P Flexi staffing is expected to grow at a CAGR of around 2 25% between and Although there are new upcoming sectors such as e commerce that will create fresh demand for flexi staffing in India, the dominance of manufacturing (which has large proportion of unorganized players) in the industry will increase. Amendments to labour laws will increase the occurrence of flexi staffing being used. February 12,

22 The penetration of flexi staffing is expected to witness strong growth owing to various factors which include increasing number of enterprises turning formal, skill development and regulatory amendments in favour of formal and flexi staffing industry. The initiatives taken by the flexi staffing industry, such as training services, are also likely to add to the industry growth over the long term. The growth in penetration levels expected to be witnessed over the next five years is largely in line with many global economies who witnessed similar growth pattern. Exhibit 35: Flexi Staffing industry size (Rs bn) The flexi staffing industry in India as of in value terms was around Rs18 22bn. The average wages for the flexi staffing workers is assumed to be around 8, 1, (which reflects weighted average of wages for organised and unorganized players). Over the next five years, the flexi staffing industry is expected to grow by 25 3% to attain a value of around Rs61 64bn. Over the long term, manufacturing sector is expected to increase outsourcing of its labour force to third party staffers. The other end use sectors are expected to largely remain stable, except for a sharp decline in the retail segment owing to the largescale increase in e retailing. Nevertheless, fast moving consumer goods & retail are expected to constitute a significant proportion of the overall flexi staff industry due to end use size. IT segment is expected to drive flexi staffing demand in the future. The need for technically upgraded skill sets, coupled with high cost of acquiring talent is expected to encourage the industry to consider flexi staffing as a potential solution. Demand for flexi staffing in Logistics and Telecommunications is also likely to grow on account of the increasing reach of service providers and the penetration of e commerce across various regions of the country. February 12,

23 Industry Dynamics The flexi staffing industry includes around six large size players and many small and medium size players, having a pan India presence. Typically, the large size players have flexi staffing strength of over 25, employees. The flexi staffing industry is marked by the presence of many large multinationals (such as Adecco, Randstad and global Innovsource) and Indian players (such as TL, Quesscorp, etc). However, the industry in India remains largely fragmented, with small and medium players accounting for nearly 7 8% of the overall industry. A gradual movement towards a more formal set up to employment is anticipated to occur due to various factors such as the increasing number of enterprises turning formal, skills development and regulatory amends in favour of formal and flexistaffing industries. There are opportunities for the flexi staffing industry to take advantage of across various segments of employment. Exhibit 36: Flexi Staffing Industry Structure Principal Employer Flexi Employees Fexi Staffing Company February 12,

24 Exhibit 37: Flexi Staffing Types Professional Staffing Employees who perform high skilled jobs and work in office White Collar Staffing White collar worker typically performs work in an office environment They are employees with general training to handle roles like customer services, data entry etc. Blue Collar Staffing Employees who performs manual labour and typically involves working in factory environment Exhibit 38: Range of Service offered by Flexi Staffing agency Flexi Staffing HR solutions Permanent Consulting Professional& White collar Blue Collar Recruitment Search Training Outsourcing Talent February 12,

25 Flexi staffing industry size by verticals Exhibit 39: Flexi Staffing Industry Size (Logistics & Telecom) Exhibit 4: Flexi Staffing Industry Size (Manufacturing) (m people) (million) FY12 FY19 FY12 FY19 Exhibit 41: Flexi Staffing industry size (Retail, FMCG & Hospitality) Exhibit 42: Flexi Staffing industry size (Media and Entertainment) (million) Retail/FMCG.3 Hospitality 1.2 (million people) FY12 FY19 FY12 FY19 Exhibit 43: Flexi Employment Industry size (IT/ITeS) Exhibit 44: Flexi Employment Industry size (BFSI) (million) (million people) FY12 FY19 FY12 FY19 February 12,

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27 Income Statement (Rs m) Y/e March FY15 FY16E FY17E FY18E Net Revenue 2,71 25,384 32,65 4,511 Employee Cost 19,445 24,623 31,99 39,267 Gross Profit ,244 Raw material cost Other Expenses EBITDA Depr. & Amortization Net Interest Other Income Profit before Tax Total Tax Profit after Tax Ex Od items / Min. Int. 11 Adj. PAT Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March FY15 FY16E FY17E FY18E C/F from Operations C/F from Investing (244) (1) (4) (4) C/F from Financing (1) 1,474 (34) (43) Inc. / Dec. in Cash 9 1, Opening Cash ,979 2,472 Closing Cash 219 1,979 2,472 3,142 FCFF Balance Sheet Abstract (Rs m) Y/e March FY15 FY16E FY17E FY18E Shareholder's Funds 1,485 3,382 3,812 4,397 Total Debt Other Liabilities Total Liabilities 1,713 3,61 4,4 4,625 Net Fixed Assets Goodwill Investments 929 1,35 1,35 1,35 Net Current Assets Cash & Equivalents 218 1,979 2,472 3,142 Other Current Assets 1,64 2,52 2,592 3,274 Current Liabilities 1,792 2,274 2,873 3,629 Other Assets Total Assets 1,713 3,61 4,4 4,625 Key Financial Metrics Y/e March FY15 FY16E FY17E FY18E Growth Revenue (%) EBITDA (%) PAT (%) 73.3 (1.9) EPS (%) 73.3 (2.3) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) (2.7) (3.2) (3.2) (3.2) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFF / PAT February 12,

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