Quess Corp stock rally reflects the charms of the contract labour story

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The labour ministry has recently been pushing for what it calls “fixed-term employment”, a euphemism for contract labour. But the ministry is only underlining what is a well-established trend in the corporate sector. Indeed, investors have for long been attracted to the charms of the temporary staffing story.

Since its listing in July 2016, shares of Quess Corp Ltd have jumped 250%. The stock hit a 52-week high of Rs1,198.90 on 2 January 2018 reacting to two new acquisitions made in the preceding months.

Quess Corp was in the spotlight again on Thursday when the stock surged around 6% intraday on the BSE, following its December quarter earnings results.

Profit after tax exceeded analysts’ estimates, increasing more than 100% year-on-year (y-o-y) to Rs70 crore. However, the spike was aided by a lower tax rate due to section 80JJAA of the Income Tax Act, 1961 and to a certain extent by higher “other income”. This section rewards firms aiding job creation in the formal sector and allows them tax benefits.

The highlight, according to analysts, was the improvement seen in revenue growth of its people and services business, i.e. general staffing.

Quess Corp has exposure to four segments, global technology solutions (GTS), people and services, integrated facility management and industrials. Though a relatively low-margin business, people and services is the highest contributor to the company’s overall revenues (see Chart 1).

After three consecutive quarters of poor revenue growth, the general staffing business saw a pick-up in the September quarter. In the December quarter, revenue growth accelerated further (see Chart 2).

“Employee headcount increased 54% y-o-y in the December quarter to nearly 243,000 from 158,000 employees. People and services and facilities management businesses are the key contributors here. Since the Indian IT sector is now coming out of the blues, we expect IT staffing (global technology solutions) to surge. Industrial staffing too is seeing increase in associate headcount, but it is growing at a slower pace compared to the other three segments,” Ajit Isaac, chairman and managing director, Quess Corp Ltd told Mint.

Going ahead, sustaining this trend in general staffing business will be closely watched, analysts said.

Meanwhile, Quess Corp announced acquisition of a 90% stake in Greenpiece Landscapes India Pvt. Ltd for up to Rs26.2 crore in cash.

“While our focus on acquisitions will continue, efforts are also in the direction of boosting organic growth. We have grown at a CAGR of 45% and about 20% is contributed by organic growth. The recent acquisition of Greenpiece is Quess Corp’s 20th acquisition and given that we have raised capital, we would continue to scout for suitable acquisition opportunities,” Isaac added.

Failure to successfully integrate acquired firms remains a key risk for the company. Apart from that, delayed improvement in the high margin IT staffing segment could play spoilsport too.

Now that the stock has run up quite a bit, analysts see limited upside from the current level. Valuations have corrected from the peak of 52 times seen last year, but a one-year forward price-to-earnings multiple of 37 times is still rich.livemint