Detailed Rationale

CRISIL Ratings has upgraded the ratings on the bank facilities of TeamLease Services Limited (TLSL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The upgrade reflects expectation of continued improvement in the company’s business profile with healthy revenue growth anticipated over the medium term, along with enhanced profitability.  The company has grown at compound annual growth rate (CAGR) of 24% over the five years till fiscal 2020 and is expected to register healthy growth of 20% over the medium term, which will be driven by increased formalisation of the largely unorganised labour industry with implementation of new labour law codes. Furthermore, higher focus in the specialised segment is expected to support improvement in operating profitability.

 

While revenue de-grew in fiscal 2021 due to the Covid-19 pandemic, operating margin improved to 2% from 1.7% in fiscal 2020, resulting in higher accrual. Strong accrual and lower debt has helped sustain the healthy financial risk profile of TLSL. The company had debt of Rs 27 crore and comfortable capital structure with gearing of 0.06 time as on March 31, 2021.  Furthermore, liquidity has been enhanced on account of tax (TDS) refunds of over Rs 250 crore that was received in fiscal 2021, resulting in large unencumbered cash of over Rs 320 crore as on March 31, 2021. Strong financial risk profile and healthy liquidity position will support TLSL’s growth.

 

The ratings also reflect the company’s dominant position in the organised staffing segment, healthy financial risk profile and prudent working capital management. 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 TLSL, its operating subsidiaries and TeamLease Skills University (TLSU), which is held under the TeamLease Education Foundation, collectively referred to as TeamLease, as they have strong business and financial linkages.

 

Moreover, CRISIL Ratings has 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: TeamLease is a large player in the domestic human resource services industry, with a strong position in the temporary staffing segment. Its large base of more than 2,20,000 associates and trainees has contributed to strong revenue growth. Barring fiscal 2021, the company has been consistently growing its associate or trainee base, despite large attrition in the temporary staffing segment.

 

While associate/trainee headcount saw a steep decline of 14% in the first quarter of fiscal 2021, due to the pandemic (compared to March 2020), there was recovery from the second quarter itself and headcount surpassed pre-pandemic levels by the end of the fiscal. As a result, revenue de-growth in fiscal 2021 was limited to 9%. The second wave of the pandemic had a lesser impact on TLSL, as reflected by drop of less than 1% in the headcount of June 2021, compared to March 2021 level. Healthy revenue growth is expected in the current fiscal (over the muted revenue of fiscal 2021). TLSL has grown at CAGR of 24% over the five years till fiscal 2020 and growth of over 20% is expected over the medium term. Growth will be supported by increased formalisation of the labour industry in India, stemming from increased goods and services tax (GST) compliance and implementation of new labour law codes.

 

Despite lower revenue in fiscal 2021, operating margin improved to 2% from 1.7% in fiscal 2020. The improvement was supported by higher productivity (ratio of associate/trainee base to core employee has increased from 277 as of June 2019 to 352 as of March 2021) driven by closure of loss-making businesses (permanent recruitment and institutional learning services) as well as higher use of automation in daily activities and steps for cost reduction that have streamlined activities of various entities acquired in the specialised staffing segment. Enhancement in operating margin from 0.7% in fiscal 2016 to 2% in fiscal 2021 has also been supported by higher revenue contribution from the specialised staffing segment (TLSL entered this space in fiscal 2017 and this segment contributed to about 8% of revenue in fiscal 2021).The company is expected to maintain its strong position over the medium term, driven by its increasing presence across India, well-entrenched relationships with over 3,500 clients and growing associate or trainee base.

 

• Healthy financial risk profile: The company was net debt-free as on March 31, 2021, as total debt was Rs 27 crore against cash and liquid assets of Rs 350 crore (of which Rs 320 crore was unencumbered). The company had debt of Rs 27 crore as on March 31, 2021, resulting in low annual maturing debt obligation. Debt protection metrics were comfortable, with interest coverage ratio of 15 times and net cash accrual to total debt ratio of 4.45 times in fiscal 2021. Strong accrual (~Rs 120 crore in fiscal 2021) and low debt has resulted in healthy accretion to reserves, resulting in comfortable capital structure with total outside liabilities to tangible networth ratio (after amortisation of goodwill over a duration of five years as per CRISIL Ratings’ adjustment) of 1.49 times as on March 31, 2021.

 

Unencumbered cash and bank balance has increased to over Rs 320 crore as on March 31, 2021, from around Rs 80 crore as on March 31, 2020, due to receipt of Rs 250 crore of TDS refunds in fiscal 2021, which were excessively deducted in previous years. Unencumbered cash of around Rs 100 crore is expected to be maintained by the company for exigencies after funding acquisitions and other investments. The company had taken up acquisition of Rs 300 crore in the past five years with annual expenditure remaining under Rs 100 crore, which was funded through internal accrual and surplus cash.  Healthy accrual and absence of any large debt-funded acquisitions will help the company sustain its financial risk profile.

 

• Prudent working capital management: TLSL has a comfortable liquidity position as it follows the collect-and-pay model on more than 85% of its contracts. Hence, average peak utilisation of the Rs 182 crore overdraft facility has been only 20% over the 12 months till June 2021. Moreover, receivables were stable at under 25 days in the last five fiscals. While there has been write-off of debtors in fiscals 2021 and 2020, it was largely related to the permanent recruitment business that was discontinued in fiscal 2021 and, hence, these costs will not be incurred going forward.

 

Weaknesses:

• Intense competition in general staffing: While profitability is likely to improve over the medium term, due to higher scale and continued implementation of technology solutions in day-to-day activities, it is expected to be low at below 5% as general staffing will remain the largest contributor to revenue.

 

The 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, who have to incur high overheads to maintain quality of services and staff. Furthermore, there is intense competition in the general staffing segment, from which the company derives around 90% of its revenue and mark-up in the segment is low at 3.0-3.5%.

 

Also, since the business is largely service-oriented, it involves engagement of manpower and most players in this industry face the risk of high attrition rates, driven by 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 company’s strong market position. 

 

• Project risk stemming from inorganic growth: The company had 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. The company is expected to continue to grow through the inorganic expansion route. While these acquisitions have helped TLSL scale up faster, the company remains exposed to project risk and the successful integration of these businesses will remain a key monitorable.

 

Earlier, the company was expected to make significant investment by providing ready-to-move-in office spaces, thereby offering an end-to-end solution to its general staffing clients. However, investment in this space has been limited (only Rs 3 crore was invested in fiscals 2020 and 2021) and incremental investment is expected to remain low over the medium term.

Liquidity: Adequate

The company had unencumbered cash of over Rs 320 crore as on March 31, 2021, supported by over Rs 250 crore of TDS refunds received during the year. Unencumbered cash of around Rs 100 crore is expected to be maintained for exigencies. The company has a comfortable liquidity position as it follows the collect-and-pay model on more than 85% of its contracts. Therefore, average peak utilisation of the Rs 182 crore overdraft facility was only 20% over the 12 months till June 2021. The company had only Rs 27 crore of long-term debt (in TLSU) as on March 31, 2021, resulting in low annual maturing debt obligation, which can be comfortably met by 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.

Rating Sensitivity factors

Upward factors

• Sustained annual revenue growth of more than 20%, with continued improvement in operating margin
• Strong liquidity, driven by increase in unencumbered cash

 

Downward factors

• Reduction in operating margin to below 1.7%
• 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 2,20,000 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, the company 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, it acquired IMSI Staffing, which provides IT infrastructure staffing solutions.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Revenue	Rs crore	5,374	5,895
Profit after tax (PAT)	Rs crore	53	0.86
PAT margin	%	0.98	0.01
Adjusted debt/adjusted networth	Times	0.06	0.22
Interest coverage	Times	15.0	8.3

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

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the 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	20	NA	CRISIL A/Stable
NA	Bank Guarantee	NA	NA	NA	33	NA	CRISIL A1
NA	Cash Credit	NA	NA	NA	122	NA	CRISIL A/Stable