Temporary staffing firms seek rapid growth through series of acquisitions

Temporary staffing companies are attracting the attention of investors because the Indian flexible staffing sector is relatively undeveloped and offers huge growth potential.

Reflecting this optimism, shares of Quess Corp. Ltd and TeamLease Services Ltd have been on an uptrend since their listing in 2016. To achieve faster sector diversification and customer penetration, both companies continue to rely on inorganic growth through a series of acquisitions.

Shares of Quess Corp. rose nearly 10% intraday on Tuesday after it acquired a 51% stake in Tata Business Support Services.

The buyout is part of its global technology solutions segment, a high-margin business that contributes nearly 30% of total revenue. The segment already includes four companies that employ IT staff—Magna Infotech, Brainhunter, MFX and Comtel.

In October, TeamLease Services announced the acquisition of Evolve Technologies, a provider of temporary staffing services to telecommunications clients.

It recently announced a 40% stake in Schoolguru, a technology-driven academic services provider. TeamLease Services entered the IT recruiting business in September 2016 and has made three acquisitions in the sector.

The India Staffing Federation predicts that India’s IT employment sector will grow at an annual rate of 14-16% between 2017 and 2021, adding that the size of the technology employment sector will double in five years.

Analysts say that while this bodes well for both companies, Quess Corp. is poised to reap greater benefits than TeamLease Services because of its greater involvement in IT recruiting (see chart).

In the September quarter, both companies reported decent earnings. However, on a sequential basis, Quess Corp. had a higher associate headcount than TeamLease Services.

The overall headcount segment in the latter was impacted by uncertainty around the Goods and Services Tax (GST) that weighed on hiring of select clients and a subdued telecom sector. The company’s management expects the softness in adding associates to the overall headcount to continue in the December quarter as well.

The second half of the fiscal is relatively stronger for the sector. It is to be noted that in the December quarter of the last fiscal, both the companies reported a rise in overall headcount post demonetisation.

Meanwhile, TeamLease Services shares are up 108% year-over-year, while Quess Corp. is up 39%. Both stocks have more than doubled in value since going public and continue to command high valuations.

Since the Indian temporary employment sector is highly unorganized, the formal sector firms are poised to benefit from the anticipated shift towards the organized sector in the GST era. However, this will be a gradual process. On the other hand, failure to successfully integrate acquired firms remains a key risk for both firms.

In summary, while hiring activity remains favorable, the high valuations and rapid price growth of both these stocks leave limited room for further upside.