Quess Corp IPO Valuation Looks Attractive. Should You Invest?

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Quess Corp is seeking to raise Rs 400 crore through an initial public offer (IPO), which opens on June 29 (Wednesday) and closes on July 1. Investors can apply for a minimum of 45 shares in the price band of Rs 310-Rs 317.

Here are 10 things to about this IPO:

1) Quess Corp, a Bengaluru-based human resource service provider, is issuing around 1.26 crore fresh shares to raise Rs 400 crore from the public. At the upper price band of Rs 317, the fresh issue will be 10 per cent of the post-issue equity capital of the company. After the IPO, promoter and promoter group holding in the company will fall to 89.5 per cent against 99.5 per cent earlier.

2) Out of the IPO proceeds of Rs 400 crore, Quess Corp plans to use Rs 50 crore for repayment of debt, Rs 158 crore towards funding working capital requirement and Rs 72 crore will be used towards capital expenditure at its subsidiary MFX US. Quess Corp will set aside Rs 80 crore out of the IPO proceeds for acquisition and other strategic initiatives as well.

3) Quess Corp is promoted by Thomas Cook India and Ajit Isaac, a veteran in human resource industry. Quess Corp is present in four business segments – general staffing, IT staffing, integrated facility management (IFM) and industrial asset management (IAM). Staffing business contributes 84 per cent to its revenue while IFM and IAM business verticals contribute 16 per cent.

4) Quess Corp has a pan-India presence with 47 offices across 26 cities and 1.2 lakh employees. It also has operations in North America, the Middle East and Southeast Asia. Its top 10 clients accounted for 30.4 per cent of its revenue in FY16 while the largest client’s share was 7.4 per cent. Amazon, Bata India, Hinduja Group and four Fortune 50 companies are among its clients. Over the years, acquisitions – 9 companies since 2009 – have significantly contributed to Quess Corp’s growth.

5) Analysts say Quess Corp’s business has high growth potential as staffing business is expected to grow at a CAGR (compound annual growth rate) of 19-24 per cent over the next few years. Angel Broking says penetration level of staffing business is very low in India (0.1 per cent), which provides humongous scope for future growth.

6) Quess Corp has a track record of successfully integrating the acquired entities, which were bought with an aim to diversify its revenue stream. Domestic brokerage Motilal Oswal said Quess Corp has continuously improved its operating margin through change in the service portfolio mix.

7) Quess Corp had reported a net profit of Rs 89 crore on revenues of Rs 3,435 crore for FY16. Over the last four years its revenue has grown at a CAGR of 52 per cent while net profit has witnessed a CAGR of around 94 per cent. Its operating margin has improved from 4.3 per cent in FY13 to 4.8 per cent in FY16. At the upper end of the of the price band, Quess Corp shares are valued at 40.6 times its FY16 earnings per share of Rs 7.8, which is lower compared to its rival Team Lease’s valuation. (Team Lease shares trade at 63 times its FY16 earnings per share). Quess Corp (25.6 per cent return on equity) also has a better return ratio compared to Team Lease (8 per cent return on equity).

8) Angel Broking has given a “subscribe” rating on the issue citing its relatively lower valuation and high growth potential. “We expect the company to report healthy growth on back of increase in industry penetration,” Angel Broking said. Asit C Mehta and Hem Securities also have a “subscribe” rating on the issue.

9) Quess Corp has already raised Rs 180 crore from 15 anchor investors at Rs 317 per share.

10) Lack of pricing power on the back of intense competition and a possible slowdown in the industry are cited as key risks for the business of Quess Corp.