By Geetanjali Kedia

Teamlease Services is entering the primary market on Tuesday 2^nd February 2016, to raise Rs. 150 crore via a fresh issue of equity shares of Rs. 10 each and an offer for sale of up to 32.2 lakh equity shares, by PE investors and a small portion by promoter, both in the price band of Rs. 785 to Rs. 850 per share. The total fund raising aggregates to Rs. 424 crore, at the upper end of the price band, of which, offer for sale portion is Rs. 274 crore. Representing 29.16% of the post issue paid-up capital at the upper end, the issue will close on Thursday 4^th February.

Teamlease Services provides human resource services (employment, employability and education) mainly for sales, logistics and customer service functions to the Indian organized sector, having close to 1.05 lakh associate employees as of 30-11-15. For FY15, company’s consolidated revenue stood at Rs. 2,007 crore and margins being wafer-thin on account of employee costs accounting for ~97% of topline, EBITDA stood at Rs. 35 crore for FY15, resulting in EBITDA margin of just 1.77%. Due to negligible depreciation and finance costs, net profit came in at Rs. 30 crore and net margin at Rs.1.48%, leading to an effective EPS of Rs. 19.36 for FY15, after adjusting for bonus issue of 29 shares for 1 share held, on 9-7-15 and consolidation of face value from Re. 1 to Rs. 10 on 10-7-15. Why did company, with FV of Re.1, think of consolidating it to Rs. 10, ahead of the IPO?

For H1FY16, consolidated revenue and EBITDA stood at Rs. 1,210 crore and Rs. 17 crore respectively, up 28% and 14% YoY respectively. However, increase in employee benefit expenses to 97.5% of sales from 96.9% of sales, shrunk EBITDA margin to just 1.44% for the first half of FY16, from FY15’s 1.77%. Effect on net profit was sharper, declining to Rs. 11 crore in first half of FY16 (net margin of mere 0.91%), from Rs. 17 crore reported for H1FY15 (net margin 1.82%), signifying the very high delta on account of a single line item, making it a very risky proposition. EPS for H1FY16 stands at Rs. 7.16.

As of 30^th September 2015, company’s net worth is at Rs. 160 crore, comprising equity share capital of Rs. 15.33 crore (post 29:1 bonus and consolidation of FV from Re. 1 to Rs. 10 per share) and reserves and surplus of Rs. 144 crore - Rs. 100 crore Securities Premium (on account of PE investment in 2009 and 2011) and Rs. 44 crore Profit and Loss credit balance. Although company has operational history of over 10 years (established in 2002), it became profitable only in FY14 (took over a decade to breakeven). Hence, balance in P&L is quite low. 

Being absolutely debt-free, it has cash and equivalents of Rs. 122 crore, as of date, which is mainly from the past PE deals, as cash profit of only Rs. 57 crore has been earned in 30 months between FY14 to H1FY16. Promoter holding currently stands at 51.86%, while 2 PE investors (Gaja Capital and India Advantage Fund), who are part-selling, hold 41.67%. Balance stake is held by key managerial personnel and employee trust. Post IPO, promoter holding will decline to 45.61%, while the 2 PE investors will hold a combined 19.43% stake (assuming book discovery at upper end).

Fresh issue of Rs. 150 crore looks structured, only to comply with Sebi’s IPO requirements, since the company is flush with surplus cash of Rs. 122 crore, as of 30-9-15. One of the object of the issue is acquisition and other strategic initiative worth Rs. 25 crore, to be incurred in FY16 itself. With barely 2 months for the fiscal to close and target yet to be identified, unlikely that this amount will be utilized as stated in the RHP. Also, of the Rs. 80 crore to be utilized from IPO proceeds towards working capital, only Rs. 32 crore is to be deployed in FY17 while Rs. 48 crore is needed for FY18, which can very well be taken care of, through bank funding and internal accruals, at a later stage. Last object of upgrading IT infra worth Rs. 15 crore is also a mere eyewash. Thus, the IPO is undertaken only to provide part exit to PE investors, having invested in the company since 5-7 years (2009 and 2011).

At upper end of price band of Rs. 850, company is seeking a market cap of Rs. 1,453 crore, on enterprise value (EV) of Rs. 1,332 crore. This leads to EV/EBITDA multiple of 37x and 28x for FY16 and FY17 respectively, which is quite aggressive, given company’s EBITDA margin in very low single digits, coupled with fragmented and highly competitive nature of industry, with almost nil entry barriers. Even on a PE multiple based valuation, 59x and 43x for FY16 and FY17 respectively are unconvincing and very stretched.

Since 75% of issue is reserved for QIBs, as company does not have 3 year history of positive bottomline, the issue, with its ‘hype surrounding unique play and first sector listing’ may create buzz among institutional investors. However, fundamentally, it is not suited for retail investors, due to wafer-thin margins and expensive valuations.

Hence, we advise an avoid on the issue.  

Disclosure: No interest.