Rating Rationale
March 31, 2020 | Mumbai
TeamLease Services Limited
Rating outlook revised to 'Stable', CP withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.20 Crore
Long Term Rating CRISIL A-/Stable (Outlook revised from 'Positive' and rating reaffirmed)
 
Rs.25 Crore Commercial Paper CRISIL A2+ (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised the outlook on the long-term bank facility of TeamLease Services Ltd (TLSL) to 'Stable' from 'Positive' and reaffirmed the 'CRISIL A-' rating. CRISIL has withdrawn the 'CRISIL A2+' rating on the commercial paper programme at the company's request. The withdrawal is in line with CRISIL's policy.

The outlook revision reflects the decline in the company's liquid assets driven by payment of higher advance tax on account of delay in procuring lower withholding tax certificates and in refund for tax deducted in earlier fiscals. TLSL's operating performance could be impacted in the near term because of the slowdown in the economy on account of the Novel Coronavirus (Covid-19) outbreak. The company is likely to invest in a new business, wherein it will provide ready-to-move-in office space to clients. The business will require significant upfront investment for providing security deposit for leasing office space, office furniture and fittings, laptops, and other facilities. The pace of expansion in this business and its impact on TLSL's operating performance and capital structure will be key monitorables.
 
The rating continues to reflect the company's dominant position in the organised staffing segment and healthy financial risk profile. The strengths are partially offset by exposure to intense competition in general staffing and risks in the new business.

Analytical Approach

CRISIL 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 has amortised goodwill from acquisitions over 5 years.

Please refer Annexure - Details of consolidation, 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 220,000 associates and trainees has contributed to strong revenue growth. It has been consistently growing its associate or trainee base despite large attrition in the temporary staffing segment. Revenue, on a consolidated basis, grew by 25% in fiscal 2019, and around 17.5% in the first 9 months of fiscal 2020, driven by continuous addition to the associate or trainee base.

The company will maintain its strong position over the medium term, driven by its increasing presence across India, well-entrenched relationships with over 2,500 clients, and growing associate or trainee base. The company wants to offer end-to-end solutions to its clients by providing ready-to-move-in office spaces to increase its market share and develop stronger relationships with existing clients. TeamLease's ability to leverage the new offering to improve its position in the staffing business is a key monitorable.

* Healthy financial risk profile: The company had nil long-term debt as on December 31, 2019. Total debt as on December 31, 2019, was Rs 49 crore against cash and liquid assets of Rs 85 crore (Rs 55 crore was unencumbered). Debt protection metrics were comfortable, with interest coverage at 20.7 times and net cash accrual to total debt ratio at 3.75 times in fiscal 2019. Total outside liabilities to tangible networth ratio was healthy at 1.32 times as on March 31, 2019.

Unencumbered cash and bank balance reduced to Rs 55 crore as on December 31, 2019, from Rs 100 crore earlier as the company paid higher advance tax (TDS) in fiscal 2019 on account of delay in procuring lower tax withholding certificates and in refund for tax deducted in earlier fiscals. Debt is expected to increase over the medium term because of investment in the new business of providing infrastructure facilities to staffing clients. Increase in debt, timely refund of advance tax, and build-up of cash balance are key monitorables.

Weaknesses
* Intense competition in general staffing: There is intense competition in the general staffing segment, from which the company derives around 90% revenue, and markup in the segment is hence low at 3-3.5%. Operating margin improved to 1.81% in the first 9 months of fiscal 2020 from 1.66% in fiscal 2018 on account of higher economies of scale and productivity, as reflected in the high associate to core employee ratio of 266 in December 2019 (220 in March 2018). The operating margin is supported by higher contribution from specialised staffing, which commands higher margin. While the profitability is likely to improve, it will remain low as general staffing will remain the largest contributor to revenue.

* Risks from new businesses: TLSL made a series of acquisitions post its initial public offering (IPO) in February 2016. In fiscal 2017, it entered specialised staffing segment by acquiring three companies in information technology (IT) staffing, and since then, has made a number of acquisitions. In fiscal 2019, TeamLease picked up stake in Avantis Regtech Pvt Ltd for Rs 5 crore and acquired the IT staffing vertical of eCentric Solutions, and in fiscal 2020, acquired IMSI Staffing, which provides IT infrastructure staffing solutions. Teamlease is likely to invest in a new business, wherein it will provide ready-to-move-in office spaces. This business will require significant upfront investment largely for providing security deposit for leasing office space, office furniture and fittings, laptops, and other facilities. The pace of expansion in this business, and its impact on operating performance and capital structure will be key monitorables.

The risks will be mitigated by back-to-back arrangement with the landlord and client. Also, TLSL will invest only after signing the agreements with clients, eliminating risk of vacancy. The contracts have a 3-5-year lock-in period, and additional cost because of premature termination will be payable by the client. All cost incurred by TLSL are passed on to the client; TLSL will charge a fixed mark up on the same and bill its clients on a monthly basis.
Liquidity Adequate

The company has adequate liquidity in the absence of long-term debt. The overdraft facility was utilised 44% on average in the 10 months through January 2020, as the company follows the collect-and-pay model on more than 80% of contracts. Total debt as on December 31, 2019, was Rs 49 crore against cash and liquid assets of Rs 85 crore (Rs 55 crore was unencumbered). Unencumbered cash and liquid assets have reduced to Rs 55 crore as of December 2019 from over Rs 100 crore as on March 31, 2018, on account of higher advance tax. Increase in unencumbered cash will be a key monitorable. 

Outlook: Stable

CRISIL believes TeamLease will continue to benefit from its strong position in the temporary staffing segment.

Rating Sensitivity Factors
Upward factors
*Growth of 15-17% in revenue in fiscals 2020 and 2021, and operating margin improving over 2%
*Strong liquidity, driven by increase in unencumbered cash.

Downward factors
*Reduction in operating margin below 1.5%
*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, TeamLease provides temporary staffing. TLSL has more than 2,500 clients and 220,000 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 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 telecommunication staffing segment. In fiscal 2019, it acquired the IT staffing vertical of eCentric Solutions, and in fiscal 2020, acquired IMSI Staffing, which provides IT infrastructure staffing solutions.

For the 9 months ended December 31, 2019, TeamLease reported profit after tax (PAT) and operating income of Rs 65 crore and Rs 4,412 crore, respectively, against PAT and operating income of Rs 69 crore and Rs 3,756 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 5132 4065
Profit after tax (PAT) Rs crore 65 68
PAT margin % 1.3 1.0
Adjusted debt/Adjusted networth Times 0.07 0.07
Interest coverage Times 20.73 29.81
Note: For analytical purposes, CRISIL has amortised goodwill from acquisition for a period of 5 years, resulting in difference in PAT and PAT margin from values reported by the company.

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of the instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 25 Withdrawn
NA Proposed Long Term Bank Loan Facility NA NA NA 20 CRISIL A-/Stable
 
Annexure- List of Entities Consolidated
Entities consolidated Extent of consolidation Rationale for consolidation
TeamLease Digital Pvt Ltd Full Subsidiary of TLSL with strong financial and business linkages as on March 31, 2019
IIJT Education Pvt Ltd Full
TeamLease Education Foundation Full
Keystone Business Solutions Pvt Ltd Full
Evolve Technologies and Services Pvt Ltd Full
Cassius Technologies and Services Pvt Ltd Full
School Guru Eduserve Pvt Ltd Moderate Associate of TLSL, with TLSL owning 22.19% stake; consolidation done to the extent of TLSL's share of profit or loss in the company
Avantis Regtech Pvt Ltd Moderate Joint venture with TLSL holding 33.33% stake; consolidation done to the extent of TLSL's share of profit or loss in the company
TeamLease Skills University Full Strong financial and business linkages with TLSL
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
Commercial Paper  ST  25.00  Withdrawn      28-03-19  CRISIL A2+  26-03-18  CRISIL A2+  28-07-17  CRISIL A2+  CRISIL A2+ 
Fund-based Bank Facilities  LT/ST  20.00  CRISIL A-/Stable      28-03-19  CRISIL A-/Positive  26-03-18  CRISIL A-/Stable  28-07-17  CRISIL A-/Stable  CRISIL A-/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
Proposed Long Term Bank Loan Facility 20 CRISIL A-/Stable Proposed Long Term Bank Loan Facility 20 CRISIL A-/Positive
Total 20 -- Total 20 --
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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