Detailed Rationale

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

 

TLSL registered revenue growth of ~26% in fiscal 2022, driven by client acquisition and hiring in the ecommerce, finance, and telecom segments. The company acquired ~300 new clients in fiscal 2022 against ~100 in fiscal 2021. Its earnings before interest, tax, depreciation, and amortisation (Ebitda) improved to Rs 135 crore in fiscal 2022 from Rs 109 crore in fiscal 2021 due to better operating efficiency. The Ebitda margin remained flat at ~2%.

 

In first quarter of fiscal 2023, the revenue has increased by over 35% y-o-y, however the profit margins have declined to 1.35% due to hike in salary of the core employees and hikes in associates’ salaries. The company bills its clients on a fixed mark-up and hence the percentage margins got impacted. The profitability is expected to improve in the current fiscal due to healthy revenue growth and consequent operating leverage. Further, increasing share of specialized staffing and changes in contracts to variable mark-up for new clients will support the profitability going forward.

 

The financial risk profile remains healthy as reflected in low gearing, adequate total outside liabilities to tangible networth ratio and strong interest coverage.

 

The ratings reflect the company’s dominant position in the organised staffing segment 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 TLSL, 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: 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 2,90,000 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.

 

The headcount of associates and trainees increased 25% in fiscal 2022, supporting the revenue growth. Revenue rose at a compound annual growth rate of 11% over the five years through fiscal 2022 and should see healthy growth during the rest of fiscal 2023 supported by hiring for the upcoming festive season.

 

The company will 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: TLSL was net debt-free as on June 30, 2022, with cash and liquid assets of over Rs 330 crore (encumbered cash of Rs 300 crore). Debt protection metrics were comfortable, with interest coverage ratio at 27.3 times and net cash accrual to total debt ratio at 2.10 times in fiscal 2022 against 14.97 times and 4.45 times, respectively, in fiscal 2021. Strong accrual (~Rs 80 crore in fiscal 2022) and low debt have has resulted in healthy accretion to reserves, leading to comfortable capital structure with total outside liabilities to tangible networth ratio (after amortisation of goodwill over five years as per adjustment by CRISIL Ratings) of 1.49 times as on March 31, 2022, against 1.28 times as on March 31, 2021.

 

Unencumbered cash and bank balance increased to over Rs 300 crore as on June 30, 2022, from around Rs 80 crore as on March 31, 2020, due to receipt of Rs 250 crore of tax deducted at source (TDS) refund in fiscal 2021, (the TDS was deducted excessively in previous years). The company made acquisitions of Rs 300 crore in the past five years while annual expenditure remained under Rs 100 crore, funded through internal accrual and surplus cash. Unencumbered cash is expected at Rs 90-100 crore even after acquisitions and other investments. While healthy accrual will help sustain the financial risk profile, 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 was utilised just 10% on average over the 12 months till June 2022. Moreover, receivables were stable under 25 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.

 

Weaknesses:

• 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 700 per associate per month. 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 was no acquisition during fiscals 2021 and 2022, 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 and its integration will remain a key monitorable.

Liquidity: Adequate

TLSL had unencumbered cash of over Rs 300 crore as on June 30, 2022, supported by over Rs 250 crore of TDS refund in fiscal 2021. Unencumbered cash is expected at Rs 90-100 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. Therefore, average utilisation of overdraft facility was only 10% over the 12 months till June 2022. The company had only Rs 11 crore of long-term debt (in TLSU) as on March 31, 2022, 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.

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 1.7% 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.

During the first three months of fiscal 2023, the company earned revenue and profit after tax of Rs 1,879 crore and Rs 27 crore, respectively, against Rs 1,377 crore and Rs 27 crore, respectively, during the corresponding period of the previous fiscal.

Key Financial Indicators

As on / for the period ended March 31		2022	2021
Revenue	Rs crore	6,824	5,374
Profit after tax (PAT)	Rs crore	19	69
PAT margin	%	0.30	1.30
Adjusted debt/adjusted networth	Times	0.07	0.05
Interest coverage	Times	27.3	15.0

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