Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of TeamLease Services Ltd (TLSL) at ‘CRISIL A/Stable/CRISIL A1’.

 

TLSL registered operating income growth of 17% in fiscal 2023, primarily driven by increasing headcount in the general staffing and allied services segment – the segment witnessed growth of 23% in fiscal 2023. Operating income continues to remain strong in the current fiscal as well, with the company reporting 16% year-on-year growth in the first half of fiscal 2024 (H1 2024) and the momentum is expected to continue with compound annual growth rate (CAGR) expected at 20-25% over the medium term.

 

While operating income grew significantly, operating margin has reduced substantially from 2% in fiscal 2022 to 1.5% in fiscal 2023, also remaining below CRISIL Ratings’ earlier estimates. The margin further reduced to 1.3% in H1 2024. This is because of – 1) significant headwinds seen in information technology (IT) sector, resulting in lower headcount and margin in the specialised staffing segment which generates higher margin of 7%-9% (6.64% in H1FY24), b) discontinuation of the National Employability Enhancement Misson (NEEM) scheme by the government affecting the company’s degree apprenticeship (DA) business and 3) seasonality of in the educational technology (EdTech) segment. While the margin from EdTech have improved from the second quarter of fiscal 2024 (Q2 2024), the headwinds from the other segments are expected to continue in the near term. The company is diversifying its customer base and expanding into global capability centres (GCCs) of multinational companies as well as domestic corporates within the financial services, consumer goods and retail segments, which has resulted in headcount addition of 19,175 in H1 2024 against a reduction of 2780 in fiscal 2023. Further, the participation in other schemes under the DA business is also increasing, which has already covered the loss under NEEM scheme and the numbers are expected to improve in the coming quarters. Increasing share of specialised staffing, changes in contracts to variable mark-up for new clients and cost optimisation measures undertaken by the company should also support profitability going forward. While these measures are expected to result in gradual improvement in the operating margin, it is expected to remain lower than erstwhile levels of ~2% at 1.6-1.8% over the medium term. Any further decline or lower than expected improvement in operating margin will remain a key rating sensitivity factor.

 

Financial risk profile remains comfortable as reflected in low gearing and adequate total outside liabilities to tangible net worth (TOL/TNW) ratios (after factoring in amortisation of goodwill over five years as per adjustment by CRISIL Ratings) of 0.03 time and 1.40 times respectively, as on March 31, 2023. There is no long-term debt on the books of the company and net cash accrual are sufficient to cover working capital cycle which is reflected in nil utilisation of the bank lines over the 12 months ended December 31, 2023. Financial risk profile is further supported by cash and equivalents of Rs 345 crore as on September 30, 2023, and liquidity of Rs 100-150 crore is expected to be maintained at all times.

 

The ratings continue to reflect the company’s dominant position in the organised staffing segment. These strengths are partially offset by exposure to intense competition in general staffing and risk stemming from acquisitions.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TeamLease Services Ltd, its operating subsidiaries and TeamLease Skills University (TLSU; TLSL has provided corporate guarantee to the bank loans availed by TLSU), which is held under the TeamLease Education Foundation, collectively referred to as TLSL, as they have strong business and financial linkages.

 

CRISIL Ratings has also amortised goodwill from acquisitions over five years.

 

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:

• Dominant position in the organised staffing segment: TLSL is one of the large players in the domestic human resource services industry, with a strong position in the temporary staffing segment. Its large base of more than 259,525 associates and trainees has contributed to strong revenue growth. The company has been consistently growing its associate or trainee base, despite large attrition in the temporary staffing segment.

 

The headcount of associates and trainees increased 23% in fiscal 2023, supporting operating income. Operating income grew at a CAGR of 12% over the five years through fiscal 2023 and should see healthy growth of 20-25% CAGR over the next 3 fiscals, supported by momentum in the general staffing and growing potential from GCC and non-IT domestic corporates.

 

The company will maintain its strong position over the medium term, driven by its increasing presence across India, well-entrenched relationships with over 3,600 clients and growing associate or trainee base.

 

• Healthy financial risk profile: There is no long-term debt in the books of the company and it is net debt free with a cash balance of Rs 345 crore as on September 30, 2023. Debt protection metrics were comfortable, with interest coverage ratio at 23.3 times and net cash accrual to total debt ratio at 6.61 times in fiscal 2023 against 27.3 times and 2.1 times, respectively, in fiscal 2022. Strong accrual (Rs 161 crore in fiscal 2023) and low debt have has resulted in healthy accretion to reserves, leading to comfortable capital structure with TOL/TNW ratio of 1.40 times as on March 31, 2023, against 1.49 times as on March 31, 2022.

 

Unencumbered cash and cash equivalents stood at Rs 345 crore as on September 30, 2023, thereby supporting liquidity. The company has made acquisitions of Rs 300 crore in the past seven fiscals through 2018, funded through internal accrual and surplus cash. The company is expected to continue to grow through the inorganic route. Nevertheless, liquidity is expected to be maintained at Rs 100-150 crore at all points in time. Any large, debt funded acquisition will remain a key monitorable.

 

• Prudent working capital management: TLSL follows the collect-and-pay model for more than 85% of its contracts, which supports liquidity. The overdraft facility remained un-utilised for the 12 months ended December 31, 2023. Moreover, receivables were stable under 20 days in the past five fiscals. While the company wrote off receivables in fiscals 2021 and 2020, these were largely related to the permanent recruitment business, which was discontinued in fiscal 2021, and will not recur.

 

Weakness:

• Intense competition in general staffing: The staffing industry comprises several organised players in the domestic market. There are also several unorganised players that have regional presence and offer services at lower cost, resulting in intense competition. This results in pricing pressure for organised players, who have to incur large overheads to maintain quality of services and staff. Furthermore, there is intense competition in the general staffing segment, from which TLSL derives around 90% of its revenue and mark-up in the segment is low at around Rs 684 per associate per month (PAPM, reduced substantially from Rs 780 PAPM pre-pandemic). The operating profitability, therefore, remains modest. The company plans to move from fixed mark-up to variable plus fixed mark-up to improve its profitability and market acceptance for the same remains to be seen.

 

As the business involves engagement of manpower, most players in this industry face high attrition, driven by intense competition among players to poach trained manpower. Issues relating to workforce availability can adversely impact relationships with clients and, therefore, revenue flow. However, this is mitigated by the company’s strong market position. 

 

• Risks stemming from inorganic growth: TLSL has made a series of acquisitions post its initial public offering (IPO) in February 2016. In fiscal 2017, the company entered the specialised staffing segment with the acquisition of three companies in IT staffing and since then has made a number of other acquisitions. In fiscal 2019, the company picked up stake in Avantis Regtech and acquired the IT staffing vertical of Ecentric Solutions. In fiscal 2020, it acquired IMSI Staffing, which provides IT infrastructure staffing solutions. While there were no acquisitions in fiscal 2023, the company will likely continue to grow through inorganic expansion. Even though the acquisitions have helped TLSL scale up faster, it faces risks related to integration of the new businesses. Any large acquisition, its integration and funding will remain key rating sensitivity factors.

Liquidity: Adequate

TLSL had unencumbered cash and equivalents of over Rs 345 crore as on September 30, 2023. Unencumbered cash is expected to be maintained at Rs 100-150 crore on an ongoing basis. The company has comfortable liquidity position as it follows the collect-and-pay model for more than 85% of its contracts. Consequently, average utilisation of overdraft facility was almost nil for the 12 months ended December 31, 2023. The company had only Rs 4.76 crore of long-term debt (in TLSU) as on March 31, 2023, resulting in low annual debt obligation, which can be comfortably met through expected annual accrual of more than Rs 100 crore.

Outlook Stable

CRISIL Ratings believes TLSL will continue to benefit from its strong position in the temporary staffing segment and its healthy financial risk profile.

 

ESG profile

CRISIL Ratings believes that TLSL’s environment, social, and governance (ESG) profile supports its credit risk profile.

 

The staffing sector has a low impact on the environment because of the lower greenhouse gas (GHG) emissions, and low waste generation by its core operations. The sector has a moderate social impact because of its large workforce and the impact on the health and wellbeing of its workers on account of its nature of operations. The company is focusing on mitigating environmental and social risk.

 

• The company is taking initiatives to reduce its energy consumption in its offices by taking measures such as shifting to LED lights, opting for better efficiency standards for its equipment and lower its emissions.
• ESG disclosures of the company are evolving and it is in the process of further strengthening the disclosures going forward.
• The gender diversity of the company stands at 36.4%. The attrition rate is 55%, which is greater than the industry average.
• TLSL’s governance structure is characterised by 70% of its board comprising independent directors, presence of investor grievance redressal mechanism, and high quality of financial disclosure.
   

There is growing importance of ESG among investors and lenders. TLSL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given medium share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Upward factors

• Healthy improvement in operating margin on a sustained basis
• Sustained annual revenue growth of more than 20% along with maintaining strong liquidity

 

Downward factors

• Reduction in operating margin to below 1.5% on a sustained basis
• Significant debt-funded investment or acquisition, weakening the capital structure
• Decline in liquidity, driven by reduction in unencumbered cash

About the Company

Established in 2002 by Mr Manish Sabharwal, Mr Ashok Reddy, and Mr Mohit Gupta, TLSL provides temporary staffing solutions. TLSL has over 3,500 clients and 2,90,000 associates and trainees. It acquired Indian Institute of Job Training in fiscal 2010 for Rs 24 crore, largely funded through private equity investors.

 

The company signed a memorandum of understanding with the government of Gujarat in 2011 for setting up TLSU. In February 2016, it raised Rs 150 crore through an IPO.

 

The company entered the specialised staffing segment in fiscal year 2017 by acquiring three companies in the IT staffing business: Asap Infosystems Pvt Ltd, Nichepro Technologies Pvt Ltd and Keystone Business Solutions Pvt Ltd. In fiscal 2018, it acquired Evolve Technologies and Services Pvt Ltd in the telecommunication staffing segment. In fiscal 2019, it acquired the IT staffing vertical of eCentric Solutions, and in fiscal 2020, IMSI Staffing, which provides IT infrastructure staffing solutions. While no acquisitions were made during fiscals 2021 and 2022, the company increased its stake in existing subsidiaries. No acquisitions were made in 2023.

Key Financial Indicators

As on / for the period ended March 31		2023	2022
Revenue	Rs crore	7,989	6,824
Profit after tax (PAT)	Rs crore	102	23
PAT margin	%	1.30	0.30
Adjusted debt/adjusted net worth	Times	0.03	0.07
Interest coverage	Times	23.35	89.60

Note: For analytical purposes, CRISIL Ratings has amortised goodwill from acquisition for five years, resulting in difference in PAT and PAT margin from the values reported by the company

Any other information: Not applicable