Rating Rationale
December 28, 2020 | Mumbai
Quess Corp Limited
'CRISIL AA/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.200 Crore
Long Term Rating CRISIL AA/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA/Stable' rating to the long-term bank facilities of Quess Corp Limited (QCL; a part of the Quess group).
 
The rating reflects the Quess group's established market position as one of the largest business services company with a leadership position in the organised staffing business with a diversified customer base. The rating also factors in the group's prudent working capital management and strong technological capabilities resulting in healthy operating efficiencies and its robust financial risk profile supported by a healthy capital structure. These strengths are partially offset by exposure to intense competition and weak performance of some of QCL's subsidiaries.

Analytical Approach

For arriving at the rating, CRISIL has consolidated financials of QCL and its subsidiaries, collectively referred as the Quess group, as all these entities are under the same management with significant business and financial linkages. Associates and joint ventures, where there is no control, are proportionately consolidated to the extent of interest in these businesses.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position
The Quess group is one of the largest business services companies in India offering diverse services including staffing solutions, training, catering, facility management, security services and technological services. The group enjoys leadership position in the domestic general staffing and IT staffing businesses and is also one of the largest players in the Integrated Facilities Management (IFM) and is a leading human resources (HR) payroll services provider in India. It reported a strong revenue growth of 33.7% over the five fiscals through 2020 to about Rs 11,000 crore, aided by healthy cash flow in the domestic staffing business. The associate base in the general staffing business also increased substantially over the years, supported by geographical expansion into Tier 2 and Tier 3 cities and steady addition of clientele. Though the headcount came down in the first half of fiscal 2021 as an impact of the ongoing Covid-19 pandemic, revenue growth is expected to continue at a healthy rate going forward because of increasing formalisation of the job sector.
 
The Quess group also has a diverse customer base of over 2,800 enterprise clients, with majority of them availing of multiple services. Further, large and reputed customer base spread across diverse sectors (such as banking, financial services and insurance, information technology (IT)/IT-enabled services, retail, telecom, fast moving consumer goods, industrials, healthcare & education and logistics sectors) results in relatively low revenue concentration risk and helps overcome the risk of slowdown in any particular industry.
 
* Prudent working capital management and strong technological capabilities
The working capital cycle has been managed prudently, as reflected in gross current assets of 79-137 days over the five fiscals ended March 31, 2020. Despite healthy revenue growth and significant amounts of taxes deducted at source and held with the IT department, the Quess group funded a large part of its working capital requirement from internal cash accrual and equity without relying much on debt. Moreover, most contracts (almost 72%) are on collect-and-pay basis with customers which ensures that cash flow is not stretched.
 
Further, the group has strong technological capabilities and has been continuously investing in technology and is doing technological rollouts that enable it to efficiently manage employees and monitor productivity. Thus, operating margin is usually better than peers. 
 
* Robust financial risk profile
Financial risk profile is likely to remain strong, marked by adequate adjusted networth, healthy capital structure and low net debt to adjusted networth ratios. In the past, the group raised sizeable equity through its initial public offering (IPO) and institutional placement programmes (IPP), resulting in a strong adjusted networth of Rs 2,353 crore as on March 31, 2020. Gearing and net debt (excluding lease liabilities) to adjusted networth ratios remained comfortable at 0.63 time and 0.17 time, respectively. The group made sizeable acquisition over the last three years that are primarily funded with equity. CRISIL believes that investment in acquisitions will not be significant over the medium term leading to sustenance of its healthy capital structure.
 
However, sizeable capital raised by the group was used for acquisitions in the past 3-4 years, resulting in below par return on capital employed (RoCE) ratio of 12.5% in fiscal 2020. Moreover, interest coverage ratio remained relatively lower at around 4 times in fiscal 2020 because of the impact of interest on lease liabilities and of the non-controlling interest put options where the group had contractual commitment to acquire balance stake in some subsidiaries. These metrics started improving from the second quarter of fiscal 2021 on account of reduction of debt and the sustained improvement of these metrics will remain a key monitorable.
 
Weaknesses
* Exposure to intense competition in general staffing industry
The manpower staffing industry comprises several unorganised and organised players in the domestic market. Thus, there is intense competition among the large players and the numerous unorganised players that have regional presence and offer the same services at lower cost. This results in pricing pressure for organised players, which have to incur high overheads to maintain quality of services and staff. Also, the business being largely service oriented, involves engagement of manpower, and most players in this industry face the risk of high attrition rates, driven by the intense competition among players to poach trained manpower. Issues relating to workforce availability can also adversely impact the group's relationship with clients and therefore its revenue flow. However this is partly offset by the group's strong market position and superior technological capabilities. 
 
* Weak performance of some subsidiaries/associates
Some subsidiaries acquired by the Quess group are still in the investment/growth phase and may need continued operational, managerial and financial support till they scale up and manage on their own. QCL has a moral obligation to support these entities both on an ongoing basis and during distress. As of March 2020, QCL extended loans & advances of over Rs 130 crore to subsidiaries/associates and in fiscal 2020 alone, QCL converted loans, interest and other dues receivable from the subsidiaries/associates of about Rs 233 crore (excluding Rs 147 crore investment in Conneqt) into compulsorily convertible debentures.
 
The group invested over Rs 136 crore to acquire controlling stake in Terrier; considering the significant potential for growth in the security services business, the entity might require funds to support its growth. Further in Monster.com and DigiCare businesses, continuous investment in technology and/or regular fund support may be required for their growth. However, the Quess group had taken various steps including exiting non-profitable businesses and long gestation period projects to improve its operating cash flows; some of these businesses include Quess East Bengal Fc, Trimax Smart and Dependo Logistics, which reported significant losses in fiscal 2020. However any future acquisitions, the funding mix and the entity's operational performance will remain key monitorables.
Liquidity Strong

The Quess group has strong financial flexibility, supported by robust networth base, healthy net cash accrual, moderately utilised bank limits and unencumbered cash & cash equivalent balances. Cash accrual is expected at Rs 440-590 crore per annum over the medium term, sufficient to meet the yearly term debt obligation of Rs 170-180 crore (including lease liabilities). Average bank limit utilisation was moderate at around 64% during the 12 months through August 2020. Unencumbered cash & cash equivalent balances were over Rs 260 crore as on March 31, 2020, and current ratio was comfortable at 1.44 times.

Outlook: Stable

The Quess group should continue to benefit from extensive experience of its promoter and established relationships with clients.
 
Rating Sensitivity Factors
Upward Factors
* Continued healthy revenue growth of over 20% per annum along with diversification of business risk profile and sustenance of operating margin at 6-7%, leading to substantial increase in cash accrual
* Significant improvement in financial risk profile and liquidity, marked by noteworthy reduction of debt, increase in cash balances and substantial improvement in interest coverage and RoCE ratios
 
Downward Factors
* Operating margin dropping by 100-150 basis points along with stretch in working capital cycle, resulting in steep decline in cash accrual
* Large, debt-funded acquisitions, impacting financial risk profile, RoCE and liquidity.

About the Company

QCL was incorporated in 2007 as IRIS Capital Solutions Pvt Ltd in Bengaluru and started its operations as an HR services company. The name was subsequently changed to IKYA Human Capital Solutions Pvt Ltd and later to QCL in 2013. QCL has pan-India presence with 65 offices and also has operations in North America, the Middle East and South East Asia, through its subsidiaries and associate concerns. The company provides staffing solutions, training & development, IFM services, security services and technology solutions. From fiscal 2020 onwards, the Quess group consolidated its operations into three business segments ' workforce management, operating asset management and global technology solutions. 
 
QCL is currently promoted by Mr Ajit Isaac and Fairfax Financial Holdings Ltd (Fairfax; rated BBB-/Stable by S&P) ' through its subsidiary Fairbridge Capital Mauritius Ltd. In 2013, Fairfax, a Canadian insurance conglomerate, acquired majority stake in QCL through its Indian subsidiary Thomas Cook (India) Ltd (TCIL; 'CRISIL A+/CCR A+/Negative/CRISIL A1'). QCL had subsequently come out with its IPO in 2016 and got listed on the Bombay Stock Exchange and the National Stock Exchange of India Ltd in July 2016. QCL had also done an IPP in fiscal 2018 and with these TCIL's stake in QCL had come down significantly. During fiscal 2020, QCL was demerged from Thomas Cook (India) Ltd (TCIL) and Fairfax currently holds about 32% in QCL.
 
For the half year ended September 30, 2020, the Quess group reported profit after tax (PAT) of Rs 86.4 crore on operating income of Rs 5,056.0 crore as against Rs 121.0 crore and Rs 5,078.0 crore, respectively, in the corresponding period of previous year.

Key Financial Indicators - Consolidated
As on/for the period ended March 31 Unit 2020* 2019*
Operating income Rs crore 10,994 8,530
Reported PAT Rs crore (432) 256.6
PAT margin % (3.9) 3.0
Adjusted debt/adjusted networth Times 0.63 0.29
Interest coverage Times 4.0 4.5
*CRISIL adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name    of
instrument
Date      of
allotment
Coupon rate (%) Maturity
date
Issue size (Rs.Crore) Complexity level Rating assigned with outlook
NA Working Capital Demand Loan NA NA NA 75 NA CRISIL AA/Stable
NA Working Capital Facility NA NA NA 125 NA CRISIL AA/Stable
 
Annexure - List of Entities Consolidated
Name of the subsidiary/associate/JV Extent of Consolidation Rationale
MFX Infotech Private Limited# Full Wholly-owned subsidiary
Brainhunter Systems Ltd. Full Wholly-owned subsidiary
Mindwire Systems Limited Full Wholly-owned subsidiary
Quess Corp (USA) Inc. Full Wholly-owned subsidiary
Quess (Philippines) Corp. Full Wholly-owned subsidiary
Quesscorp Holdings Pte. Ltd. Full Wholly-owned subsidiary
Quessglobal (Malaysia) Sdn. Bhd. Full Wholly-owned subsidiary
MFXchange Holdings, Inc. Full Wholly-owned subsidiary
MFXchange US,Inc. Full Wholly-owned subsidiary
Dependo Logistics Solutions Private Limited% Full Wholly-owned subsidiary
Excelus Learning Solutions Private Limited Full Wholly-owned subsidiary
Golden Star Facilities and Services Private Limited# Full Wholly-owned subsidiary
Comtel Solutions Pte. Ltd. Full Wholly-owned subsidiary
Quess Corp Lanka (Private) Limited Full Wholly-owned subsidiary
Vedang Cellular Services Private Limited Full Subsidiary with significant operational and financial linkages
Conneqt Business Solution Limited Full Subsidiary with significant operational and financial linkages
Comtelink Sdn. Bhd Full Wholly-owned subsidiary
Comtelpro Pte. Limited. Full Wholly-owned subsidiary
Monster.com (India) Private Limited Full Wholly-owned subsidiary
Monster.com.SG PTE Limited Full Wholly-owned subsidiary
Monster.com HK Limited Full Wholly-owned subsidiary
Agensi Pekerjaan Monster Malaysia Sdn. Bhd Full Subsidiary with significant operational and financial linkages
Quess Corp Vietnam LLC Full Wholly-owned subsidiary
Quesscorp Management Consultancies Full Wholly-owned subsidiary
Quesscorp Manpower Supply Services LLC Full Wholly-owned subsidiary
Qdigi Services Limited Full Wholly-owned subsidiary
Greenpiece Landscapes India Private Limited# Full Wholly-owned subsidiary
Simpliance Technologies Private Limited Full Subsidiary with significant operational and financial linkages
Trimax Smart Infraprojects Private Limited# Full Wholly-owned subsidiary
Quess Services Limited Full Wholly-owned subsidiary
Allsec Technologies Limited Full Subsidiary with significant operational and financial linkages
Allsectech Inc., USA Full Subsidiary with significant operational and financial linkages
Allsectech Manila Inc., Philippines Full Subsidiary with significant operational and financial linkages
Retreat Capital Management Inc., USA Full Subsidiary with significant operational and financial linkages
Terrier Security Services (India) Private Limited* Proportionate Investment entity consolidated to the extent of equity interest
Himmer Industrial Services (M) Sdn. Bhd. Proportionate Investment entity consolidated to the extent of equity interest
Heptagon Technologies Private Limited Proportionate Investment entity consolidated to the extent of equity interest
Quess Recruit, Inc. Proportionate Investment entity consolidated to the extent of equity interest
Quess East Bengal FC Private Limited^ Proportionate Investment entity consolidated to the extent of equity interest
Agency Pekerjaan Quess Recruit Sdn. Bhd. Proportionate Investment entity consolidated to the extent of equity interest
#Amalgamation with QCL is in process
%Sold in Q1 of fiscal 2021
*QCL acquired controlling stake in Q1 of fiscal 20221
^became a wholly-owned subsidiary of QCL in Q2 of fiscal 2021
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  200.00  CRISIL AA/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Working Capital Demand Loan 75 CRISIL AA/Stable -- 0 --
Working Capital Facility 125 CRISIL AA/Stable -- 0 --
Total 200 -- Total 0 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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