New Issues Analysis(IPO) - Quess Corp
By Geetanjali Kedia
Quess Corp is entering the primary market on Wednesday 29th June 2016 to raise Rs. 400 crore, via a fresh issue of equity shares of Rs. 10 each, in the price band of Rs. 310 - Rs. 317 per share. Based on the price discovered, company will issue 1.26 to 1.29 crore new equity shares, at the upper and lower price band respectively. Representing 10% of the post issue paid up share capital at the upper end, issue closes on Friday 1st July 2016.
Quess Corp provides recruitment, staffing, IT products and solutions, skill development, payroll and compliance management services, having 47 offices across India, in addition to overseas business in North America, Middle East and South East Asia, with international geographies contributing ~15% to current turnover. Company operates under 4 business segments - People and Services (57% of total income), Global Technology Solutions (27% of total income), Integrated Facility Management (11% of total income) and Industrial Asset Management (5% of total income). While People and Services earning low margin (FY16 EBITDA margin of 3.5%), Global Technology Solutions and Industrial Asset Management are better at 7% and 11% margins respectively.
Established in 2007 as Ikya Human Capital Solutions, company has grown aggressively via the inorganic route in the past 3 fiscals. While acquisitions of Avon and Magna Infotech have contributed positively, more recent ones like Brainhunter (acquired in Oct 2014) and MFX (49% acquired in Nov 2014 and balance 51% in Jan 2016) continue to be loss making, each reporting net loss of Rs. 13 crore for the last fiscal.
For MFX, which incurred Rs. 13 crore loss for FY16 on negative net worth of Rs. 57.46 crore as of 31-03-2016, Quess Corp has to pay 40% of MFX’s net profit to Fairfax Financial, from CY15 to CY19, as and when MFX turns profitable. Also, as per the share purchase agreement, MFX stake can not be sold until CY19. Thus, even if MFX turns around in the near future, company will not be able to enjoy 100% benefit, despite 100% ownership now. Moreover, IPO proceeds of Rs. 20 crore are also proposed to be invested in MFX, which again will not be 100% beneficial to the company, as cash outflows of 40% of net income may affect future operational performance.
Before starting with financial analysis, it is important to note that till FY13, company followed March year ending, while fiscal year ended 31st December 2013 comprised of 9 months and FY15 comprised of 15 months. As compliance to Companies Act, company has moved to March year end, and FY16 comprised of 12 months ended 31st March 2016.
Through multiple acquisitions, company’s consolidated total income grew from Rs. 1,008 crore in CY13 (9 months) to Rs. 2,573 crore in FY15 (15 months) and Rs. 3,442 crore in FY16 (12 months). However, FY16 EBITDA margin has softened to 4.99% from 5.30% in FY15, due to higher operating expenses. Neverthless, FY16 EBITDA was placed at Rs. 171 crore as against Rs. 136 crore for 15 months period of FY15, up 58% on a like-to-like basis. Acquisitions also boosted FY16 PAT to Rs. 88.5 crore, as against Rs. 67.2 crore for 15 months of FY15, leading to diluted EPS of Rs. 7.67.
As of 31-03-2016, equity stood at Rs. 113.34 crore and net worth was Rs. 346 crore. 99.51% stake is held by promoters - Thomas Cook India 69.55% while Ajit Isaac 29.96%. Their holdings will shrink to ~63% and 26% post IPO, respectively. Company’s consolidated debt stands at Rs. 389 crore and cash and equivalents are at Rs. 109 crore.
Since the business is extremely working capital intensive, Rs. 158 crore from issue proceeds will go towards financing working capital. Rs. 80 crore is earmarked for acquisitions and Rs. 50 crore for debt repayment. Rs. 52 crore will fund company’s capex while Rs. 20 crore is to be spent on for capex of subsidiary MFX US. Acquisition budget of Rs. 80 crore is sizable, given that company has, till date, spent about Rs. 112 crore on acquisitions, which has boosted financial performance handsomely.
Schedule of Other current liabilities on pg 237 of RHP lists accrued salaries and benefits of Rs. 246 crore, which includes bonus payment at revised threshold for FY16, worth Rs. 45 crore. The foot note wrongly refers to Note 26.I of Annx V (Bonus Issue of shares), instead of Note 26.J of Annx V (Bonus as per Bonus Amendment Act, 2015). Error in a crucial regulatory document of this company, which provides compliance services to Fortune 500 companies, paints a poor picture!
Closest listed peer, Teamlease Services, which came out with IPO in February this year at Rs. 850 per share and on EV/EBITDA multiple of 37x (at the time of issue), got listed at Rs. 806 i.e. 5% below issue price, despite subscription of over 66 times, resulting in huge losses to subscribers with leveraged position. Even now, share is ruling close to 910 levels, which is barely 7% return in 5 months’ time for the new investors, as against 15% rise in broader markets! Thus, frenzy for organised staffing companies may be cooling down.
Although margins for Quess Corp are low (5% at EBITDA level, 3% at net level), it is better placed than Team Lease, which clocked 1.65% EBITDA margin for FY16, since former’s employee costs as a percentage to revenue is about 88% vis-à -vis 97% for the latter, thanks to diversified business verticals, some of which are higher margin. Besides, Quess’ topline of Rs. 3,500 crore is higher than Team Lease’s Rs. 2,500 crore. Share of Team Lease is currently quoting at EV/EBITDA and PE multiple of 32x and 63x respectively.
At the upper end of the price of Rs. 317, company is seeking market cap of Rs. 3,993 crore and enterprise value of (EV) of Rs. 4,051 crore. This leads to EV/EBITDA multiple of 25x and 21x for FY16 and FY17 respectively and PE multiple of to 41x and 36x for FY16 and FY17 respectively.
In Feb 2013, Thomas Cook had acquired 74% stake in the company for Rs. 256 crore, valuing it at Rs 346 crore. Upon listing, company is seeking valuation of approximately Rs. 4,000 crore, which is 10x spurt in valuation in 3 years, supported by 7x rise in PAT (Rs. 12 crore in FY13 moving to Rs. 89 crore in FY16) during this period, on revenue growth of 3.4x (from Rs. 1,000 crore in FY13 to Rs. 3,435 crore in FY16). Thus, company’s financial growth has been phenomenal, to say the least.
Low single digit margins, working cap intensive nature of the business, virtually zero entry barrier to the highly competitive industry are some of the key negatives of the issue. However, company is on a high growth trajectory (51% revenue CAGR and 94% PAT CAGR during FY13-16) and is looking to continue the momentum - recently entered last mile delivery business for e-commerce companies. On the pricing front too, issue is attractive, based on peer comparison.
Despite the challenging industry landscape, based on historic growth rates and attractive peer valuation, one can apply in the issue.
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RHP
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