IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens Issue Closes 29-Jun-16 1-Jul-16 Issue Size ( Crore) 400 Price Band ( ) 310-317 No of Shares on Offer (crore) 1.29-1.26 QIB (%) 75 Non-Institutional (%) 15 Retail (%) 10 Minimum lot size (No. of shares) 45 Objects of the Issue Objects of the Issue Repayment of debt availed by company Funding capital expenditure of company and subsidiary, MFX US Funding incremental working capital requirement Acquisitions and other strategic initiatives General Coporate proceeds Shareholding Pattern Amount 50 crore 71.7 crore 157.9 crore 80 crore NA Pre-Issue Post-Issue Promoter & promoter group 97.2% 87.6% Public/others 2.8% 12.4% Financial Summary Crore FY12 FY13 FY14* FY15** FY16 Total Revenue 639.4 1004.4 1008.1 2572.8 3442.4 EBITDA 26.9 43.1 39.8 130.5 164.1 (%) 4.2 4.3 4.0 5.1 4.8 Diluted EPS 0.6 1.3 1.5 5.2 6.9 RoCE 35.7 44.8 18.6 46.1 34.6 *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Valuation Summary (at 317; Upper price band) (x) FY13 FY14 FY15 FY16 EV/EBITDA 94.0 101.7 31.1 24.7 P/E 238.5 212.7 60.7 46.1 Research Analyst Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com June 28, 2016 Quess Corp Ltd, founded in 2007 and headquartered in Bengaluru, is one of India s leading business service providers handling end-to-end business functions for clients. Quess services span across recruitment, temporary staffing, technology staffing, IT products & solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. As of February 2016, it had over 117,000 associate employees i.e. employees placed with clients and has provided employment to more than 120,000 associates. Quess has 1,300 clients (20 Fortune 500 clients), 47 offices across 26 cities and 3,400 core employees across India, North America, Middle East and South East Asia. Quess Corp aims to raise 400 crore through a fresh issue of shares (at a price band of 310-317 per share). Investment Rationale Staffing industry at nascent stage The flexi-staffing industry is marked by the presence of many large multinationals (such as Adecco, Randstad and Global Innovsource) and Indian players (like TeamLease). However, the industry in India remains largely fragmented, with small and medium players accounting for nearly 70-80% of the overall industry. Leading integrated business services provider Quess Corp is India s leading integrated business services provider spanning across wide industries such as e-commerce, technology, BFSI, real estate, infrastructure facility management, power, energy, oil & gas, chemicals, metals, automotive, engineering, telecom, healthcare, FCMG and retail providing services like recruitment, temporary, staffing, technology staffing, IT products & solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. Quess is India s largest IT staff augmentation provider and one of the largest general staffing companies in India. Concerns Quess Corp Ltd Price band 310-317 Acquisitions may not yield intended benefits Benefits from MFX US may not be entirely available to shareholders Adverse ruling related to Brainhunter acquisition could impact business prospects Loss of major client could have material impact on financials Adverse ruling in outstanding litigation could have adverse impact Foreign exchange rate fluctuations could adversely impact business operations Priced at PE multiple of 45x FY16 EPS on lower band; 46.1x on higher band At the IPO price band of 310-317, the stock is available at a multiple of 45x-46.1x FY16 EPS at the lower/upper band, respectively. Tushar Wavhal tushar.wavhal@icicisecurities.com
Company Background Quess Corp Ltd, founded in 2007 and headquartered in Bengaluru, is one of India s leading business service providers handling end-to-end business functions for clients. The company s services span across recruitment, temporary staffing, technology staffing, IT products & solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. As of February 2016, Quess had over 117,000 associate employees i.e. employees placed with clients and has provided employment to more than 120,000 associates. Quess has 1,300 clients (20 Fortune 500 clients), 47 offices spread across 26 cities and 3,400 core employees across India, North America, Middle East and South East Asia. As of FY16, top10 clients contributed 30.4% to total revenues while largest client Samsung India Electronics India contributed 7.4% of total revenues. Total 23 out of top 25 clients have been working with Quess for over three years while 15 out of top 25 clients have been with the company for a period exceeding five years. Key clientele among 1300 clients include: Amazon, Bata, FMC, Hinduja Group, PNB Housing Finance, VF Brands, Robert Bosch, L&T Special steels and Heavy Forgings. Quess Corp aims to raise 400 crore through a fresh issue of shares (at a price band of 310-317 per share). Financial Performance Revenues, EBITDA, PAT have grown at 52.4%, 57.1%, 80.7% CAGR, respectively, in FY12-16. In FY16, revenue, EBITDA and EBITDA margins were 3,442 crore, 164.1 crore and 4.8%, respectively. Exhibit 1: Revenue grows at 52.4% CAGR in FY12-16 crore 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-52.4% 3,442.4 2,572.8 1,004.4 1,008.1 639.4 FY12 FY13 FY14* FY15** FY16 Total Revenue Source: Company, ICICIdirect.com Research,*April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Page 2
Exhibit 2: Segmental revenue break-up ( crore) 3500 3000 2500 2000 1500 1000 500 0 2944 2315 991 997 630 491 252 7 11 9 FY12 FY13 FY14 FY15 FY16 India International Source: Company, ICICIdirect.com Research,*April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Exhibit 3: EBITDA and EBITDA margins (%) trends Exhibit 4: Profit after tax trends crore 200 150 100 50 0 5.1 164.1 4.2 130.5 4.3 4.0 4.8 26.9 43.1 39.8 FY12 FY13 FY14* FY15** FY16 6 4 % 2 0 crore 100 80 60 40 20-88.5 67.2 19.2 17.1 8.3 FY12 FY13 FY14* FY15** FY16 EBITDA EBITDA Margin (%) PAT Source: Company, ICICIdirect.com, Research, *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Source: Company, ICICIdirect.com, Research, *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Exhibit 5: Return ratios, RoCE & RoE % 50 45 40 35 30 25 20 15 10 5-44.8 46.1 35.7 34.6 18.6 25.1 26.7 25.6 15.6 10.4 FY12 FY13 FY14 FY15 FY16 RoCE RoE Source: Company, ICICIdirect.com Research Page 3
Quess Corp s service and product offerings primarily consist of four operational segments: Global Technology Solutions (GTS), People and Services (P&S), Integrated Facility Management (IFM) and Industrial Asset Management (IAM). Exhibit 6: Quess Corp segmental and product offerings Source: Company, ICICIdirect.com Research Global Technology Solutions (GTS): The GTS segment provides IT staffing, IT product solutions and services in India, North America and South East Asia under Magna Inoftech, Brainhunter, Mindwire and MFX brands. The company owns and operates offshore delivery and development centres in Chennai and Bengaluru in India with sophisticated data centres at Ridgefield Park (New Jersey) and Roanoke (Virginia) that ensure disaster recovery protection and meet applicable regulatory requirements. Key clients include four of the fortune 50 companies. People and Services (P&S): P&S segment provides staffing (excluding IT staffing) services and solutions, which include general staffing, recruitment and executive search, recruitment process outsourcing, payroll process, compliance and background verification services under Ikya and CoAchieve brands. The company also provides training and skill development services through its 66 centres across 12 states in India under Excelus brand in partnership with the Government of India. Clients include Amazon, Bata, FMC, Hinduja Group, PNB Housing Finance, VF Brands, etc. Integrated Facility Management: The IFM segment provides facility management solutions such as janitorial services, electro-mechanical services, pest control, food and hospitality services to corporates, hospitals, schools and various organisations across India under the Avon and Aravon brands. Clients in these segments include Bosch, a large Indian financial institution, a Fortune 500 real estate services company, and a private airport management company. Industrial Asset Management (IAM): The IAM segment provides industrial operations and maintenance service and related asset record maintenance services under brand Hofincons, serving industries like power, energy, oil & gas, chemicals, ferrous and non-ferrous metal across India and Middle East. Under the Maxeed brand, the company provides managed services for utilities (meter reading services) and telecom companies (tower maintenance and network deployment services). Page 4
Exhibit 7: Segmental break-up Segment ( crores) FY12 FY13 FY14* FY15** FY16 Global technology solutions Revenue 204.946 268.715 262.262 737.241 921.688 % of total revenue 32.0% 26.7% 26.0% 28.6% 26.7% EBITDA 13.463 18.067 20.648 64.418 65.807 EBITDA Margins (%) 7% 7% 8% 9% 7% Associate Employees 5063 7328 7296 8748 8077 Core employees 658 574 613 668 723 People and Services Revenue 362.6 622.0 618.8 1403.6 1949.8 % of total revenue 56.7% 61.9% 61.4% 54.5% 56.6% EBITDA 13.3 29.6 15.7 40.6 68.8 EBITDA Margins (%) 3.7% 4.8% 2.5% 2.9% 3.5% Associate Employees 31128 44146 46652 63141 82170 Core employees 204 227 276 365 405 Integrated Facility Mgmt Revenue 71.349 112.333 125.759 302.113 372.417 % of total revenue 11.2% 11.2% 12.5% 11.7% 10.8% EBITDA 4.552 7.455 16.295 19.868 22.762 EBITDA Margins (%) 6.4% 6.6% 13.0% 6.6% 6.1% Associate Employees 6871 9040 12312 17619 20012 Core employees 132 198 233 241 343 Industrial Asset Mgmt Revenue 127.4 193.2 % of total revenue 5.0% 5.6% EBITDA 18.2 22.2 EBITDA Margins (%) 14.3% 11.5% *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Source: Company, ICICIdirect.com Research, *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Strategies Staffing industry at nascent stage India is among the least penetrated flexi staffing markets in the world and accounted for 2.1% of the global staffing market in 2012. With increasing competition, margin pressure and shortage of skilled manpower, more temporary jobs are expected to be created. As Indian industry familiarises itself with the benefits of temporary staffing and rationalisation of regulatory regime this would lead to immense opportunity for staffing solutions providers. The temporary general staffing market in India, estimated at 38,500 crore in 2014, is expected to reach 91,800 crore by 2019, with 90 lakh temporary workers vs. 13 lakh currently. Growth would come in from retail, telecom, BFSI, healthcare and BPO industries, as organisations grapple with issues related to labour while compliance issues require liaising with local authorities and could increasingly drive clients to adopt temporary staffing. Page 5
Exhibit 8: India staffing market forecasts 2014-19 1000 918 800 600 400 385 457 543 646 769 200 0 2014 2015 2016 2017 2018 2019 Revenue (in billion) Source: RHP, ICICIdirect.com Research Leading integrated business services provider Quess Corp is India s leading integrated business services provider with services spanning across wide industries such as e-commerce, technology, BFSI, real estate, infrastructure facility management, power, energy, oil & gas, chemicals, metals, automotive, engineering, telecom, healthcare, FCMG and retail. The company provides services like recruitment, temporary, staffing, technology staffing, IT products & solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. Quess Corp is India s largest IT staff augmentation provider and one of the largest general staffing companies in India. Quess Corp has 47 offices across 26 cities in India and also has offices in North America, Middle East and South East Asia. In FY16, top 10 clients contributed 30.4% to total revenue while largest customer Samsung India contributes 7.4% of total revenues. Quess also has sticky client relationships as 23 out its top 25 clients have been with the company for over three years while 15 out of top 25 clients have been with Quess Corp for over five years. Successful track record of integrating acquired companies Quess Corp has a successful track record of acquiring companies to fill service offering and geographic gaps, and turning them around. Most acquisitions have been funded through internal accruals. Quess has been successful in improving the operating performance of acquired companies. This has been amply reflected in the integration of Magna Infotech and Avon. Exhibit 9: Successful track record of acquisitions Acquired Entity During acquisition FY12 FY13 FY14 FY15 FY16 Avon Revenues 12 72 115 127 302 318 EBITDA 0.2 5.2 8.0 8.1 20.7 19.1 Magna Infotech Revenues 182 205 269 263 545 460 EBITDA 10 13 18 22 64 58 Source: RHP, ICICIdirect.com Research Page 6
Embarking on e-commerce boom and other B2C opportunities Quess Corp intends to capitalise on the growth of the e-commerce ecosystem in India since it provides managed services to leading e- commerce players like Amazon and Urban Ladder and has deployed 12,500 associate employees with e-commerce clients. The company plans to move from personnel and material contracts to SLA based contracts thereby providing last mile delivery services across seven cities. Quess is also eyeing higher margin B2C opportunities like integrated facility management (IFM) where it provides electrical repair, carpentry, plumbing, cleaning, electronic appliance repair and HVAC repair services driven by higher demand and scarcity of trained and certified personnel in those areas. Exhibit 10: Financial Summary Crore FY12 FY13 FY14* FY15** FY16 Total Revenue 639.4 1004.4 1008.1 2572.8 3442.4 EBITDA 26.9 43.1 39.8 130.5 164.1 EBITDA Margin (%) 4.2 4.3 4.0 5.1 4.8 Depreciation 3.7 4.4 4.2 10.1 16.0 Tax -4.8-7.2-9.7-37.0-36.2 PAT after exceptional items 9.0 18.4 20.7 72.4 95.4 Diluted EPS 0.6 1.3 1.5 5.2 6.9 RoCE 35.7 44.8 18.6 46.1 34.6 RoE 15.6 25.1 10.4 26.7 25.6 Source: Company, ICICIdirect.com Research,*April 1, 2013 - December 31,2013, **January 1, 2014 - March 31, 2015 Page 7
Key risks and concerns Acquisitions may not yield intended benefits Quess Corp may undertake acquisitions in line with its growth strategy. However, successful implementation of acquisitions depends on a range of factors, including funding arrangements, cultural compatibility and integration. Failure to successfully integrate acquisitions with the company s existing business or acquisition not delivering intended results could negatively affect Quess financial performance. Benefits arising from MFX US may not be entirely available to shareholders Quess Corp s subsidiary Quess US and Quesscorp Holdings Pte Ltd, acquired MFX from Fairfax Financial Holdings ltd (FFHL) under a share purchase agreement on November 3, 2014. The acquisition is subject to earn-out mechanism under which Quess US is required to pay 40% of net income to FFHL for each of the financial years beginning from January 1 and ending on December 31, 2015, 2016, 2017, 2018 and 2019, respectively. Accordingly, benefits from part of the issue proceeds that are proposed to be utilised in MFX, may not be entirely available to investors. Adverse ruling under Brainhunter acquisition may impact business prospects Quess Corp acquired Brainhunter (previously named Zylog Systems (Canada) Ltd) on September 17, 2014, which was governed by Canadian laws. Brainhunter, originally owned by Zylog Systems ltd, a Chennai headquartered company, had pledged its shares as security for certain loans but due to its inability to repay loan, the bank invoked its shares pursuant to notice on May 1, 2014. Zylog is currently under liquidation pursuant to order by Madras High Court dated July 3, 2014. Quess Corp has received notice from official liquidator on November 28, 2014 alleging violation of law during the acquisition of Brainhunter. However, Quess has denied such allegations. Any adverse ruling of the court could have material impact as Brainhunter contributed 7.1% and 10.9% of Quess revenue in FY15 (15 months) and FY16, respectively. Further, Quess Corp may not be able to fully recover its investment (CAD 204,285) into Brainhunter and could also be subject to penalties worth CAD 10.7 million. Loss of major client may have material impact on financials During the financial year ended March 31, 2016, Quess Corp derived 7.06% of its revenues from top client and 30.4% of total revenues from its top 10 clients. Though the company intends to increase its revenues and earnings from major corporate clients, downsizing by any of Quess top customers may reduce their spending on services while loss of any one or more of clients, could have a material adverse effect on its business. Most of the company s client contracts can be terminated by the client at short notice without penalty. Short duration client contracts and termination clauses could create uncertainty. Majority of the client contracts are discrete in nature without any commitment to a specific volume. Consequently, clients are not contractually obligated to continue to do business with Quess Corp. This could result in revenue and earnings uncertainty. Adverse ruling in outstanding litigations may have adverse impact... An adverse ruling on outstanding proceedings at different levels of adjudication before various courts, tribunals and appellate authorities could have a material impact on Quess Corp s performance. Page 8
Financial Summary Exhibit 11: Profit and Loss Statement ( Crore) FY12 FY13 FY14* FY15** FY16 Revenue from operations 637.0 1,001.2 1,006.0 2,567.1 3,435.0 Other Income 2.4 3.2 2.1 5.7 7.4 Total Revenue 639.4 1,004.4 1,008.1 2,572.8 3,442.4 Cost of services 4.6 14.6 22.5 71.7 63.2 Employee benefits expense 574.2 907.1 909.5 2,268.4 3,036.1 Other Expenses 31.3 36.4 34.2 96.5 171.5 Total Operating Expenditure 610.1 958.1 966.2 2,436.6 3,270.9 EBITDA 26.9 43.1 39.8 130.5 164.1 Finance Cost 12.6 17.6 8.8 21.8 30.8 Depreciation 3.7 4.4 4.2 10.1 16.0 PBT 13.1 24.3 28.9 104.2 124.7 Tax (4.8) (7.2) (9.7) (37.0) (36.2) PAT 8.3 17.1 19.2 67.2 88.5 Diluted EPS 0.7 1.4 1.5 5.3 7.0 Source: RHP, ICICIdirect.com Research *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Exhibit 12: Balance Sheet ( Crore) FY12 FY13 FY14* FY15** FY16 Equity Capital 30.0 30.0 96.2 25.8 113.3 Reserve and Surplus 23.1 38.3 88.4 226.1 232.2 Total Shareholders funds 53.1 68.2 184.5 251.9 345.6 Minority Interest 11.4 16.4 Long term borrowings 0.0 3.2 0.0 35.5 Other long term liabilities 0.4 2.3 0.7 Long term provisions 0.6 1.3 1.2 8.5 46.5 Total Debt 0.6 1.7 6.8 9.2 82.0 Liabilities Total 65.1 86.3 191.3 261.1 427.5 Fixed Assets 7.4 8.5 12.2 18.9 52.9 Tangible 7.1 6.5 7.6 14.6 44.4 Intangible 0.3 1.9 4.2 4.3 6.1 Capital Work in progress 0.4 2.4 Goodwill 25.0 25.0 72.9 110.4 204.6 Non-current Investments 3.7 Deferred tax asset 7.6 6.6 5.1 3.8 23.3 Long terms loans and advances 25.0 29.3 62.6 54.5 83.9 Other non-current assets 0.1 0.8 0.0 0.4 2.2 Inventories 0.1 0.4 0.4 0.4 1.8 Trade receivables 117.7 158.0 124.5 274.6 428.2 Cash 29.1 23.4 29.1 81.8 109.4 Short term loans and advances 13.6 25.5 8.9 43.7 40.4 Other current assets 28.7 53.5 82.4 130.5 287.6 Total Current Assets 189.2 260.8 245.3 531.1 867.3 Short term borrowings 55.6 87.9 60.9 220.4 339.0 Trade Payables 4.3 5.7 4.8 41.4 67.4 other current liabilities 127.9 148.7 139.0 189.5 384.3 short term provisions 1.3 2.2 2.2 6.7 19.7 Total Current Liabilities 189.1 244.6 206.9 458.0 810.3 Net Current Assets 0.1 16.2 38.4 73.1 57.0 Assets Total 65.1 86.3 191.3 261.1 427.5 *April 1, 2013 - December 31,2013, **Jan 1, 2014 - March 31,2015, Source: RHP, ICICIdirect.com Research Page 9
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com Page 10
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Please note, ICICI Securities Ltd has been appointed as one of the Lead Managers to the public issue of Quess Corp Ltd. This report is prepared on the basis of publicly available information. Page 11