TeamLease IPO analysis

The Issue
TeamLease Services (TSL), a Mumbai based company engaged into providing of human resource services in the organized segment, is entering the capital market with its maiden Initial Public Offering (IPO). The issue will open for subscription on February 2 and will close on February 4.  The price band for the issue has been fixed at Rs 785 to Rs 850 per equity share of face value of Rs 10. The issue comprises of a fresh equity issue of upto Rs 150 crore and an Offer For Sale of upto 3219723 number of shares. Therefore, at upper price band, the total fund that will be raised through the issue will be to the tune of Rs 423 crore (Rs 150 crore of fresh equity issue and Rs 273.67 crore offer for sale portion); and lower band will be Rs 402.74 crore.  The net offer will constitute atleast 25 per cent of the post-Offer paid-up Equity Share capital. The company is raising funds for upgradation of existing IT infra; working capital needs; acquisition; and other strategic initiatives.

Issue Detail:

Issue Open: Feb 2, 2016 - Feb 4, 2016
Issue Size: 3,219,723 of offer for sale and Rs 150 crore fresh issue of Equity Shares of Rs. 10 
Issue Size: Rs. 402.74 - 423.67 crore
Face Value: Rs. 10 Per Equity Share
Issue Price: Rs. 785 - Rs. 850 Per Equity Share
Market Lot: 15 Shares
Minimum Order Quantity: 15 Shares
Listing At: BSE, NSE

Company
TSL provides human resource services in the organized segment delivering a broad range of human resource services to various industries. It delivers a broad range of human resource services to various industries and diverse functional roles across India to meet the needs of small and large business clients as well as those of qualified job seekers or "Associate Employees". Its services span the entire supply chain of human resources in India, covering aspects of employment, employability and education. Its employment services include temporary staffing solutions, permanent recruitment services and regulatory consultancy for labor law compliance; and its employability offerings include different types of learning and training solutions including retail learning solutions, institutional learning solutions and enterprise learning solutions. The Company had 104,946 Associate Employees as of November 30, 2015. All of its businesses operate on an asset-light model with low capital expenditure requirements.

A majority of the Company's Associate Employees are engaged in sales, logistics and customer service functions. As of March 31, 2015 it has provided employment to approximately 1.12 million Associate Employees since 2002. As of November 30, 2015, it served over 1,252 clients with a network of nine offices and 1,218 full-time employees across India. The Company had 979; 1,057; and 1,218 full-time employees as of March 31, 2014; March 31, 2015; and November 30, 2015, respectively.

Financials
For the five year ending FY15, total revenue of the company has grown at annual rate of 30.3 per cent and was at Rs 2018.46 crore in FY15. The growth rate seems to be maintained for the first six months of FY16; and TSL posted revenue of Rs 1215.7 crore in H1FY16 against Rs 949.8 crore during H1FY15. The company derives most of its revenue (98 per cent for the first six months of H1FY16) from sales of services, consisting of revenues from staffing services. Other areas of operation such as recruitment services (one-time fees); skills and development services; royalty and affiliation fees, etc. are yet to pick up and start contributing to company’s revenue.

Despite posting such good growth at topline, the bottomline of the company does not impress much. The net profit of the company for FY15 remained at Rs 29.7 crore and for the H1FY16 it stands at Rs 10.9 crore. If we work out the margins at net profit levels it has never crossed 2 per cent since FY14, when it posted profit for the first time since 2002. The net profit margin for H1FY16 is even worse and remained below one per cent. The picture at EBITDA level has not changed much as company is debt free and hence has incurred lesser finance cost and also lesser depreciation cost as the company works on asset light model. The reason for such lower margins is due to higher employee benefit expenses that has consistently been above 96 per cent since FY12. The management of the company believes that the margins will improve from here on as company has already absorbed all fixed costs, and as economies of scale kick in, it will help them to improve the margins going forward.

Valuation
On valuation front at the price band of Rs 785-850, the issue is available in the Price to Earnings (PE) of 55.53x – 60.07x after the annualised earning of H1FY16 and on fully diluted equity share capital. Although there are no listed comparable players, PE of 60 looks stretched especially looking at such lower margins. Even if we consider from market cap to sales perspective, the company is asking more than six times, again on higher side. Therefore, we advise our readers to stay away from the issue.