Quess Corp: To Buy or not?
Quess Corp plans to raise capital of Rs 400 crore through fresh issue of shares in the range of Rs 310.00 – Rs 317.00 per equity share. The bid lot size is 45 shares. The public issue opens on 29 June and closes 1 July.
The funds raised will be used for
1) Repayment of debt of Rs 50 crore
2) Capex Rs 71.7 crore
3) Working capital Rs 157.9 crore
4) Acquisitions Rs 80 crore
5) Rest Rs 40 crore for corporate functions
Quess Corp is a Bengaluru based leading integrated business services provider. It provides services in IT & maintenance, HR & staffing, Training, compliance management, facility management and plant and machinery maintenance. Company aims to offload the burden of clients in activities categorized as unproductive or non-revenue accretive. It derives 85.7% of revenue from India (Rs 2944 crore) and rest from Asian countries, UAE, USA and Canada.
Company was founded in 2007 and is owned by Thomas Cook, whose stake is 69.55%. It has grown inorganically in all the verticals. With equity infusion from Thomas Cook in 2013 and availability of cash, the acquisition spree picked up pace. It expanded its portfolio by acquiring Hofincons (in asset management), Brainhunter (in IT solutions) and MFX (IT infrastructure) in 2014 followed by Aravon (in facilities management) in FY15 and Randstad Lanka in FY16. Its reporting segments are – Global technology solutions (GTS), People and services (P&S), integrated facility management (IFM) and Industrial asset management (IAM).
We see that P&S segment is the highest contributor to revenue however has the lowest margins of 3.5% and contributes only 38% to EBITDA. For Quess, IAM is a high margin business with margins of 11.8% and contributes 12% to EBITDA.
Overview of the segments and growth prospects
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GTS |
IAM |
P&S |
IFM |
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Market growth | Indian IT staffing - CAGR of 21.7% over 2014- 2019; US market driven by skilled labour and Technology changes | Market expected to grow at CAGR of 10.8% from 2014 -19; demand driven by outsourcing in manufacturing and infrastructure space | Recruitment process outsourcing (RPO) expected to grow 25 -35% YoY; Payroll and compliance to grow at CAGR of 20%; Training growth driven by government impetus | Shift to integrated single vendor model. Expected CAGR of 24% from 2014- 19 |
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Brands of Quess | Magna Infotech (Indian IT staffing); Brainhunter & Mindwire ( IT staffing North America); MFX (IT solutions & Products) | Hofincons (Industrial operations and maintenance services) and Maxeed (Managed services) | IKYA, Coachieve, excelus | Avon, Aravon |
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Financials | Revenue growth driven by acquisitions in FY14 and FY15: Margins better in Indian operations (12.7%) however Brainhunter and MFX yet to reach profitability | Revenue increased by whopping 51% YoY; Margins declined by 280bps to 11.5% | Revenue increased by 39%YoY in FY16 and margins improved by 600 bps to 3.5%. Revenue per employee also improved to Rs 48.1mn/ employee | Revenue grew by 23% YoY in FY16 however margins fell marginally by 50bps to 6.1%. |
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Growth levers | Senior level positions with niche skills; Higher penetration | Shift from O&M contracts to managing entire industrial asset lifecycle | Growth to be driven by RPO and compliance services; also move to SLA based model for higher integration in established relationships | Focus on B2C high margin business and using technology for cost savings |
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Our outlook | Revenue to grow in high single digit; Margins to range in 7-9% as international operations may be a drag in short term | Company is building capabilities in high margin business and will see margin improvement over long term. A potential high growth area for company. | Key revenue growth driver with est. growth above 20%; margins to remain in the range of 3 - 4% and will remain pressurised due to competition | High demand pull growth of 20%; margins might see marginal improvement due to revenue mix shift to B2C. |
Financials: Company has been able to grow topline at the CAGR of 52% from FY12 to FY16; while EBITDA and PAT have increased by CAGR of 55% and 81% respectively over the same period. EBITDA margins have ranged at 4.6% to 5%. Company’s play on debt, lifted ROE in FY15 and FY16 above 20% from lows of 11.7% in FY12. Company enjoys healthy debt to equity ratio at 1.08x with debt of Rs 374.4 crore as of FY16. We see that with expansion, company is struggling to manage working capital requirements. With the cash infusion through IPO, we believe cash flow from operations should turn positive.
Valuation: At higher band of 317, the P/B is approximately 5.3x, P/E is 45x and EV/2016 EBITDA is 5.6x. Assuming growth of 25% in the bottomline we get 2017 EPS of 8.78 and 2017 P/E of 36.0x approximately. Compared with other business service providers like Serco and Team lease, Quess enjoys better margins and ROE. Team lease at the time of IPO was valued at over 40 times it P/E. Quess has a more diversified portfolio and margins are higher. With growth potential in high double digits in bottomline, we believe the premium is justified. Due to premium pricing, listing gains will be limited. We would recommend investors to go long on this scrip.