Issue opens: Tuesday, 2nd February 2016
Issue closes: Thursday, 4th February, 2016
Fresh Issue Size: Rs.2737 million
Face Value – Rs.10
Price Band – Rs.785 to Rs.850
Bid Lot – 15 Equity shares and in multiples thereon.
Valuation and Investment Rationale
The Initial Public Offer is having a price band of Rs.785 on the lower side and Rs.850 on the higher side. The price to earnings ratio is in the range of 45 to 49. The Price to Earnings ratio is very expensive for the consideration of the IPO price in the range of Rs.785 and Rs.850. The growth for the next few years is already discounted in the asking price and does not leave much room for appreciation immediately after listing. The Company has been able to increase the revenues from fiscal 2011 to fiscal 2015 at a CAGR of 30.7%.
TeamLease Services is India’s leading organised staffing company with a market share of approximately 5% in terms of associate employees in 2014. In terms of revenues, it has larger market share relative to its Indian as well as Indian operations of global staffing competitors. India is the world’s second largest labour market with only around 10% of its labour force working in formal employment. Anticipated gradual movement towards a more formal set-up to employment due to various factors such as the increasing number of enterprises turning formal, skills development and regulatory amends in favour of formal and flexi-staffing industries could enable the company to grow its business by attracting new customers.
The flexi-staffing industry is marked by the presence of many large multinationals (such as Adecco, Randstad and Global Innovsource) and Indian players such as TeamLease, Quesscorp. However, the industry in India remains largely fragmented, with small and medium players accounting for nearly 70-80% of the overall industry.
The IPO size is small in terms of its offering and if the subscription is high the allotment would happen on a random basis for investors.
The offer has been graded by CRISIL Research and has been assigned a CRISIL IPO grade of ‘4/5’ indicating that the fundamentals of the offer are above average relative to other listed equity shares in India.
Objects of the Issue:
The public issue comprises a fresh issue by the company and an offer for sale by the shareholders.
Company will not receive any proceeds from the Offer for Sale.
The fund raised through fresh issue proposes to utilise the Net Proceeds towards funding the following objects:
1. Funding existing and incremental working capital requirements of the Company;
2. Acquisitions and other strategic initiatives;
3. Upgradation of the existing IT infrastructure; and
4. General corporate purposes.
In addition, the Company expects to receive the benefits of listing of the Equity Shares on the Stock Exchanges, enhancement of the Company’s brand name and creation of a public market for its Equity Shares in India.
Company Business Overview
Incorporated in 2002, TeamLease Services is Mumbai India based human resource services and people supply-chain Company offering services to various small and large business clients. TeamLease offers employment and employability services.
TeamLease employment services include temporary staffing, permanent recruitment and regulatory consultancy for labor law compliance.
TeamLease employability offerings include different types of learning and training solutions, including retail learning solutions, institutional learning solutions and enterprise learning solutions.
TeamLease has over 1 lakh associate employees as of Nov 2015. Company has 8 regional offices and over 1000 full time employees.
Competitive strengths of TeamLease:
1. Market leading position with scale [over 5% market share]
2. Strong compliance practices that enable the company to build longstanding relationships with clients
3. Technological and operational excellence
4. Strong functional knowledge and expertise across industry sectors
5. Strong management and thought leadership in public policy initiatives and backing by marquee private equity investors
The promoters of the company are Manish Mahendra Sabharwal, Ashok Kumar Nedurumalli, Mohitkaran Virendra Gupta, HR Offshoring Ventures Pte. Ltd, MKS Management Consultancy Services LLP, NED Consultants LLP and Dhana Management Consultancy LLP.
Risks Relating to the Business
Highly competitive, fragmented industry with low barriers to entry –
The staffing services market is highly fragmented and competitive. TLS competes in national and regional markets with both full-service and specialised temporary staffing companies. Though a majority of its competitors are smaller than TLS both in terms of revenues and number of associate employees, several competitors, including the Indian affiliates or India-based operations ofglobal players such as Adecco SA, Manpower Inc., Randstad Holding NV, Kelly Services, Inc. and Indian human resources companies such as Quess Corp Ltd., have substantial marketing and financial resources at their disposal. Further, price competition in the staffing industry is intense, particularly for qualified industrial personnel and could remain high, which could directly impact the size of its workforce and, therefore, potentially limit TLS’ ability to maintain or increase its market share or profitability.
Extensive government regulation may restrict type of services permitted –
The staffing services sector is subject to complex laws and regulations. These laws and regulations cover the following such as Minimum Wages Act, ESI Act, CLRA Act, EPF Act and IDAct, which vary from state to state in India and are subject to change. These laws and regulations sometimes limit the size and growth of staffing services markets. Changes in laws or government regulations may result in prohibition or restriction of certain types of employment services that TLS and its competitors are permitted to offer. Imposition of new or additional licensing or tax requirements can reduce TLS’ revenues and earnings.
Loss of major client could have material impact on financials –
During the financial year ended at March 31, 2015, TLS derived 17.64% of its revenues from top five clients and 24.56% of total revenues from its top ten clients. Though the company intends to increase its revenues and earnings from major corporate clients, downsizing by any of TLS’ client may reduce its spending on the services while loss of any one or more of clients, could have a material adverse effect on its business. Further, receipts from clients are generally made after TLS’ pays salaries to its associate employees. Thus, bankruptcy of any major client could have a material adverse impact on its ability to meet working capital requirements.
Short duration client contracts, termination clauses may create uncertainty –
Most of the company’s client contracts can be terminated by the client on short notice without penalty. Majority of the client contracts are for a period of a year or less. Clients, therefore, are not contractually obligated to continue to do business with TLS in the future. This creates uncertainty with respect of revenues and earnings.
The consolidated total revenues were Rs. 12,157.93 million, Rs.20,184.60 million and Rs.15,375.25 million and profit after taxation was Rs. 109.72 million, Rs.296.90 million and Rs.178.57 million, respectively, in the six months ended September 30, 2015, and in the years ended March 31, 2015 and 2014.
The company has no long term borrowings as on 30th September 2015.
Indian Economy and Employment Scenario
India’s GDP growth is experiencing an upswing following a slump between 2010 and 2013. Estimates from various agencies suggest that the country’s economy is gradually on the road to recovery. The Central Statistical Office placed the country’s GDP growth for 2013-2014 at 4.9%, which was higher than the 4.5% estimated.
In 2015-2016, GDP is estimated to grow by around 7.9%. As the economy recovers and grows, flexi-staffing is expected to become an integral part of the expansion plans of companies.
Staffing industry transformation
India is the world’s second largest labor market. Only around 10% of India’s labour force works in formal employment. Redefining the nature of employment and having a greater amount of workers in formal employment will be critical if India’s economic development is to become more broad-based, not only in terms of regions, but also in terms of social inclusion.
There should be a move from informal to formal employment which will lead to an increasing play thereon of the formal sector.
Indian labour market transformation
India’s poverty is about low productivity. India is on the cusp of a transformation of its five geographies of work-
Physical geography of work;
Enterprise geography of work;
Sectoral geography of work;
Education geography of work; and
Legislative geography of work.
Flexi Staffing Industry Overview
Globally, the staffing industry has grown considerably over the past few years. According to the CIETT Economic Report 2014, the industry size had reached 11.5 million workers by the end of 2012. Thus, despite the slump in the aftermath of the financial crisis, and the resultant economic slowdown, the industry still had a 7% growth rate over the last decade.
Indian flexi-staffing industry overview
A gradual movement towards a more formal set up to employment is anticipated to occur due to various factors such as the increasing number of enterprises turning formal, skills development and regulatory amends in favour of formal and flexi-staffing industries.
Overall current industry size
Employment numbers: In 2013-2014, it is estimated that the employees in the flexi-industry was between 1.6-1.8 million. Penetration levels: Based on the total workforce, penetration levels for 2013-2014 are estimated to be 0.4%.
Segmental mix: The segmental mix in the flexi-staffing industry for the years 2011-2012was as follows: Segmental Mix (2011-2012)
Industry size: The flexi-staffing industry in India as of 2013-2014 in value terms is around ` 180-220 billion. The average wages of flexi-staffing worker is assumed to be around ` 8,000-10,000 (which reflects weighted average wages for organised and unorganised players).
The flexi-staffing industry is marked by the presence of many large multinationals (such as Adecco and Randstad) and Indian players (such as TeamLease, Quesscorp and Innovsource). However, the industry in India remains largely unorganised, with small and medium players accounting for nearly 70-80% of the overall industry.
Overall current industry growth
The overall workforce is expected to grow at a CAGR of 2-3% during 2011-2012 to 2018-2019. Sectors such as manufacturing, financial, real estate, business services and retail will continue to have a relatively higher proportion of the workforce. Sectors such as IT enabled services and banking, financial services and insurance are expected to have relatively higher growth in overall employment as compared to other sectors.
The formal workplace is expected to grow at a CAGR of 9-10% during 2011-12 to 2018-2019. This increase will be across sectors as newer labour laws come into force, and the general overall workforce grows. Apart from manufacturing, which is expected to constitute a large amount of the overall formal employee base, sectors such as fast moving consumer goods and logistics are expected to account for a significant proportion of the formal workforce.
Finally, flexi-staffing is expected to grow at a CAGR of around 20-25% between 2013-2014 and 2018-2019. Although there are new upcoming sectors such as e-commerce that will create fresh demand for flexi-staffing in India, the dominance of manufacturing (which has large proportion of unorganised players) in the industry will increase. Amendments to labour laws will increase the occurrence of flexi-staffing being used.