Quess Corp Ltd

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About the Company

Quess Corp Limited is India’s biggest business service provider. It offers a host of services to help organizations from varied sectors manage their non-core activities across Workforce Management, Operating Asset Management, and Global Technology Solutions across industries and geographies. The company has a workforce of over 385,000 professionals spread across India, North America, South America, South East Asia, and the Middle East offers solutions across areas such as general staffing, IT staffing and recruitment, facility management, security services, BPO, CLM, business intelligence, robotic process automation and more.

Q3 2020 Updates

Financial Results & Highlights

Detailed Results

1. The company had a good Q3 with 35% YoY growth in consolidated revenues and 15% YoY growth in consolidated PAT.
2. The company saw its headcount grow 26% YoY to cross 385k employees.
3. EBITDA margin improved 63 bps YoY to 6.1% in Q3.
4. Cash generation was up 39% YoY with cash conversion rising 600 bps YoY to 51% in Q3.
5. The company has reduced debt by Rs 431 Cr in the last 6 months.
6. Post demerger with TCIL, Quess is held directly by Fairfax holdings (33%).
7. The workforce management division saw revenue growth of 52% YoY with associate headcount 34% YoY.
8. In the operating asset management division, revenues grew only 4% YoY associate headcount grew 11% YoY.
9. The tech services division saw revenue growth of 23% YoY.
10. In Emerging businesses, Monster saw EBITDA losses decline QoQ while job views/month grew to 29.4 lac vs 14.5 lac last year.
11. Digicare Services saw an EBITDA growth of 52% YoY with the service network expanding to 569 stores from 189 stores a year ago.

Investor Conference Call Highlights

1. In the Ahmedabad Smart City Project, around Rs 92 Cr has been collected from a total of Rs 230 Cr. Around Rs 40 Cr is expected to be collected from this project in Q4.
2. Post the demerger with TCIL, the company has simplified its overall group structure and merged the subsidiaries Aravon, CenterQ, CoAchieve and Master Staffing Solutions with the parent company.
3. The company has added Mr. Suraj Moraje from McKinsey to lead the digital transformation initiative at Quess and to function as Group CEO Designate and Executive Director.
4. The management has stated that the revenue growth was primarily driven by the headcount addition that took place in the previous 2 quarters. The primary cause for the fall in margins for the quarter was the festive bonuses and incentives paid in Q3 during the festive season which was a one-off situation.
5. The management expects workforce management business to stay at current levels after significant growth so far in the year.
6. In the industrial asset management business, the company has wound up most of its nonperforming clients. The revenue growth in this segment is muted mostly because of the company has let a few customers go.
7. The management has admitted that the hiring from clients has gone down a little post the festive season for the company and the industry in general. Thus the company is looking to expand its customer base in order to reduce dependence on customer concentration in the telecom and retail sectors.
8. The company is looking to expand and penetrate into tier 2 and tier 3 markets for the above-mentioned customer base expansion.
9. The company has also started a reasonable large contract in Dec-Jan which will reflect in revenues from Q4 onwards.
10. The management has acknowledged that Magna is going through a lean phase. It sees momentum coming back into this business from December onwards. The current focus for this business is to cater to high margin and niche recruitment with a particular emphasis on 8 to 10-year assignments. This will in fact take some time to consolidate and deliver as the company will also have to build a center of excellence for it.
11. The management believes that Brainhunter has turned around the corner and should be stable now. Mindwire is now a steady business that caters to the Canadian Federal Government business. All 3 operating regions in Canada have turned profitable for the company with CAD 60 million in revenue and CAD 2.7 to 3 million in EBITDA.
12. IN MFX, the entity has turned profitable again for the company. Now it is doing around $40 million in revenues and $ 4 million in EBITDA.
13. The company provides around 7000 to 8000 people to Amazon as manpower. Around 1200 are bikers and 300 have 4 wheelers for Amazon Transportation Services. At its peak, these people deliver around 150,000 consignments in a month.
14. Amazon also has installation services from Digicare where all products sold from Amazon will be installed by Digicare at customer sites.
15. Other big customers for Digicare include Samsung and Xiaomi.
16. The businesses of Magna and Comtel have started to show steady growth in performance and the management expects these businesses to contribute more to overall performance in the future.
17. On a full-year basis, IKYA contributes around Rs 180 Cr in revenues and generates a margin of around 20% for the company.
18. The management has mentioned that in the People & Services business, it sees margins levels of around 5-5.5% as steady-state margins for the division.
19. The gross debt reduction in the quarter was around Rs 90 Cr which contributed to a reduction in the interest of Rs 6 Cr for the company. The management expects the debt to go further lower than current levels in the account of strong cash generation by the company.
20. The other income has reduced for the company as some of the intercompany loans given out by the company have been converted to CCDs.
21. In the tech services division, the management expects growth to be primarily driven by the BPO and BPM business. Conneqt has grown about 13-15% so far and the management is expecting good growth from Allsec too. Together these two are helping mitigate the losses from Monster.
22. The management expects good growth and profit generation from the tech services division once Monster turns profitable.
23. On average, the management is expecting a margin of 5.5% from the general staffing division for the year.
24. The management expects margin expansion to be coming primarily from the tech services division. Conneqt already yields 8-9% margins while Allsec has margins of 20%. Once Monster turns profitable, this tech services division shall help push overall margins up for the company.
25. The management has guided that the company has targeted EBITDA growth of 20% for the year and it seems to be on track to achieve this target.
26. The change to Ind AS has not had a big impact on workforce management numbers. It has only affected the Conneqt business.
27. The management has explained that the cause for the decline in margin is not unusual expenses but a change in delivery mix. This is because the company is now executing a few big projects which do yield lower margins than typical small projects which have caused a decline in margin.
28. Currently, around 65% of people in the company are working on fixed base contract projects while 35% are working on variable base contract projects. The management has mentioned that the company’s policy is to go for variable base contracts given the choice.
29. The company is looking to do the buyback from Heptagon and use these funds to invest in Terrier before consolidating it. The company is also waiting for foreign shareholding to go down to comfortable levels from the current level of 48% before taking the above actions.
30. The company is also looking to offload its stake in East Bengal FC and has fixed the date of 31^st May for its contract termination with the club. Post this date, it expects to carry no financial liability from East Bengal.
31. The management has mentioned that the company has been trying to make Monster leaner and improve and relaunch the product in the next 30 to 45 days. After this launch, it expects sales to pick up.
32. The company has also revamped the sales team for Monster and is now expecting a smoother booking of revenue from this entity. The job posting and application number on the site have increased by almost 100% YoY and thus the management expects sales growth to follow close by with this rise in product usage.
33. The company has put a big emphasis on increasing its collect and pay in a percentage in the business and seen this number go up to 72% at present. This is also a reason for an increase in working capital. The company has been proactive in its emphasis on the collection and the right timing of invoices which has led to decreasing DSO levels and increasing cash conversion.
34. The company is also targeting a cash conversion of 50% for this year. The management expects the entire cash generated in the next 6-8 quarters to go towards reducing debt and ultimately bringing the company to a net cash level. Another major goal for the company is to bring ROE up to 20%.
35. The management has mentioned that the company is looking to first declutter the balance sheet, reduce subsidiaries, increase cash conversion and increase ROE going forward.

Analyst’s View

Quess Corp is a company that is growing its revenue and profit rapidly. In the last 5 years, the revenue has grown at a CAGR of 53% and profits have grown at a CAGR of 72%. However, they had ventured into a few un-related fields in the recent past which concerned investors. The most talked-about being the investment in a football club (FC), East Bengal. The company has realized its mistake and is now looking to offload its stake in East Bengal FC. It has fixed the date of 31^st May for its contract termination with the club. Overall, the growth momentum continues to be strong. After being on an acquisition spree for the last few years, the management now guides for consolidation and focus on margin improvement. Post the demerger from Thomas Cook India Ltd, Quess Corp has again attracted interest from the investors’ community. However, it is to be seen how the company performs in the next few quarters. Quess Corp continues to be one of the stock to watch out for in the staffing space in India.

Q3 2019 Updates

Financial Results & Highlights

Detailed Results

1. Revenues grew 37% YoY with 23% organic growth.
2. PAT margins at consolidated level were at 2.99% mainly due to operating losses in Monster.
3. PAT of 9M2018 and 9M2019 are not comparable since 9M’19 had tax benefits of more than Rs 67 Cr and 9M’19 had impact of non-cash items like customer relationship amortization and NCI put options.
4. Segment wise results:
   • People Services: Revenue Up 35% YoY (EBIT Up 35% YoY)
   • Technology Services: Revenue Up 49% YoY (EBIT Up 30% YoY)
   • Industrials: Revenue Up 14% YoY (EBIT Up 7%   YoY)
   • Facilities Management: Revenue Up 18% YoY (EBIT Up 21% YoY)

Analyst’s View

Quesscorp has been on expansionary mode for a while and are doing pretty well all round considering the fact that they are also foraying into newer areas. The company has delivered good growth in both revenues and profits on a year on year basis. However most of this growth is inorganic and on the back of wafer-thin margins. Fairfax Financial Holdings Group’s investment into the company and a record successful IPO on the stock exchange has put Quess in the news for long. Let’s see how they deliver in the next few quarters.

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