Team Lease- Stock Analysis

18 May 2019 Read 121 Views

TeamLease services  primarily is a temporary staffing service provider. The company started operations in the year 2002 with just 4 offices, 20 employees and 40 clients. Today, the company boasts of 2.1 lakh huge associate employee base with over 2250 clients making them one of India’s largest private sector employers.The main goal of TeamLease is ‘putting India to work, focusing on three Es – Employment, Employability and Education. Employment involves matching the hiring requirements of customers with the right human resources and provide access to a better quality workforce. Employability is all about building careers and bridging the skill gap through training that matches corporate skill sets. And lastly, ‘Education’ involves the TeamLease Skills University - India’s first vocational skills university which prepares people to enter the workforce by equipping them with vocational skills.

What is Good?

The business model of TeamLease services is such that it creates a network effect. Since there are already over 2250 clients using TeamLease services, this network will attract more associate employees to join and since there is a huge network of associate employees, corporates looking to hire will be attracted to TeamLease, thus increasing their client base further.TeamLease is already one of the leading players in the staffing industry. It has further engaged in relevant acquisitions to strengthen its position in the market. Also, the company is debt free even though it has gone on a spur of acquisitions in the previous 3 years. 

Management Analysis-

The management of TeamLease looks like quite a formidable team looking to make the most of the coming years. Its recent acquisitions speak volumes of their outlook going into the future.They have alo remained completely focused and have not deviated away from their core vision to ‘put India to work’. 

The management salaries are not too high and the company is completely free from any promoter pledging of shares. The management is headed by Chairman Manish Sabharwal and MD Ashok Reddy, both of them co-founders of the company. 

Management score: 9/10

Industry Analysis- 

India is country with a huge population and more a young population. We have a demographic dividend of something just under 30 which clearly indicates the vast majority is that of the working population. However, unemployment has been a huge problem haunting our country for decades. There might be opportunities galore but right skills or the required qualification may be lacking in many cases. 

Over 90% of the Indian workforce still works in the informal sector and this presents a huge market for the temporary staffing industry. There are 400 million Indians in the workforce, of which only 19 million work in in the organised sector. There are 80 million in the unorganised sector — contract employees who do not get their full salary and are not paid statutory benefits like PF and medical. 

There is a huge market yet to be captured. 

Globally, temporary staffing is a $140 billion industry, but unlike the west, Indians are not very fond of temporary staffing. People are temporarily staffed because they are not able to get a permanent job, it is not out of choice that they become temps. 

The government too doesn’t give as much importance to temporary staffing and hinders its growth through archaic labour laws. The laws are there to protect employment but are not very conducive to employment generation.

Industry score: 7/10

Business analysis-

Primarily a temporary staffing business, TeamLease services has now become a one-stop solution for all HR related issues. Its services include Temporary staffing, recruitment, payroll processing, education, apprenticeship training and regulatory consulting of labour law compliance.

The temporary staffing services is nothing but providing the required professionals to the corporate clients as and when required. TeamLease has a huge database of associate employees who are registered with them. It matches the employees with the right skill sets as per the clients requirement. All employee related issues are taken care by TeamLease, therefore the employee employer relationship exists between the employee and TeamLease but not the company in which he works for. The employee has only a functional relationship with the client. The temporary staffing business in India services the unemployed people and people working in the informal sector by providing them with jobs relevant to their skill set. The companies too may require staff on a project to project basis and may not have a job post for a permanent placement. The temporary staffing industry aims to bridge this gap. 

TeamLease earns revenue through commissions based on various factors from their clients. They also manage the payroll of their employees and receive a mark-up from their clients.  

Business score: 8/10

Valuation-

  • The valuation was done by using both DCF calculation and EPS calculation method.
  • The future cashflows were estimated looking at various factors like the growth opportunities ahead and the increasing working population of the country. The rate was estimated in 3 phases, i.e., next 5 years, the later 5 years and then the terminal growth.
  • TeamLease is currently trading at a PE of 52. However, in the coming years it is bound to reduce. We have estimated a 10 year forward PE of 30x and estimated a reasonable EPS growth. This gets us to an estimated share price which was discounted to today’s value. The stock looks clearly overvalued at this point in time. This is my personal opinion and is based on several estimations and there is no guarantee that the stock will behave in exactly the same manner.  

Valuation: 3/10

Total Score: 27/30.

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Disclaimer- The article is for educational purpose only. Nothing in this article should be interpreted as investing advice.
Disclosure- We might have recommended this stock to our advisory clients.

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