Buy TeamLease Ltd for the Target Rs.2,200 by Motilal Oswal Financial Services Ltd
A mixed-bag quarter
Steady GCC demand cushions overall softness
* TeamLease (TEAM)'s 1QFY26 revenue growth of 12% YoY was below our estimate of 16% YoY growth. General Staffing grew by 2% QoQ, while Specialized Staffing grew 12% QoQ. HR services declined 41% QoQ. EBITDA margin of 1.1% was in line with our expectation. EBITDA declined by 35% QoQ. Adj. PAT at INR250m was up 29% YoY/down 34% QoQ. The company's revenue/EBITDA/PAT grew 12.1%/38%/29% YoY in 1QFY26. We expect revenue/EBITDA/PAT to grow 14.5%/36%/66% YoY in 2QFY26. We reiterate our BUY rating with a TP of INR2,200.
Our view: Sluggish BFSI and IT hiring weigh on performance
* 1QFY26 performance was slightly muted, due to the impact of unseasonal rains on the Consumer segment and continued hiring softness in BFSI and IT Services. While open positions remain lower YoY, growth was supported by increased wallet share, formalization, and steady traction in Tier-2/3 cities (~65% of gross hiring). Management expects better volume growth in 2Q, which, along with operating leverage, should aid margins.
* Specialized Staffing continues to face pressure from weak IT hiring, leading to a decline in headcount and margin compression. However, steady GCC demand (46% of headcount, 64% of net revenue) and a shift toward highervalue mandates should support gradual margin recovery. Inorganic contributions also helped to deliver double-digit YoY revenue growth.
* The company expects HR Services and EdTech to clock strong revenue growth of 25-30%, though quarterly EBITDA was impacted by seasonality in EdTech. Degree Apprenticeship continues to gain momentum, with broader sectoral adoption and deeper client integration; 1,700 net apprentices were added during the quarter.
* Overall, while near-term demand remains patchy across select verticals, the company’s disciplined focus on high-margin clients, formalization, and cost optimization should support a steady improvement in profitability. We expect EBITDA margins to recover to ~1.4% by FY27, with earnings compounding at a healthy pace over FY24-27E.
Valuation and revisions to our estimates
* We remain positive on the medium- to long-term opportunities owing to gains from the formalization of the labor market. We keep our estimates largely unchanged. We reiterate our BUY rating with a TP of INR2,200 (20x FY27E EPS).
Miss on revenue and in-line margins; 118 new logos secured
* Revenue growth of 1% QoQ/12% YoY was below our estimate of 16% YoY.
* General Staffing grew by 2% QoQ, while Specialized Staffing grew 12% QoQ. HR Services declined 41% QoQ.
* General Staffing associate addition was up 1% QoQ at ~295k. Specialized Staffing headcount was up 1.6% QoQ. At the group level, net impact of ~5k headcount addition.
* EBITDA margin of 1.1% was in line with our expectation of 1.1%. EBITDA declined by 35% QoQ.
* 118 new logos were added during the quarter.
* Adj. PAT at INR250m was up 29% YoY/down 34% QoQ
Key highlights from the management commentary
* FMCG and Telecom sectors expected to remain muted; BFSI likely to pick up pace.
* IT hiring remains cautious, with muted demand from traditional IT services. However, growth is visible in Tier-2 IT firms and product companies.
* Onboarded 11 new clients during the quarter, including five global capability centers (GCCs). GCCs continue to be a cornerstone of the business, especially across BFSI and Hi-Tech. Total GCC client count stands at 75. GCC hiring remains steady.
* In General Staffing, in PAPM (per associate per month) model, the enterprise segment has a larger revenue share, but at lower PAPM. Recent variable model signings will take time to reflect in metrics.
* Open positions are lower YoY due to softness in BFSI and Retail. Growth is currently coming from increasing wallet share.
* Headcount grew 5% YoY, while revenue rose 11% YoY. 44 new logos were added, over 60% under the variable model.
* Growth is being driven by both deeper penetration in existing accounts and formalization of clients.
* In Specialized Staffing, IT hiring remains cautious, with muted demand from traditional IT services. However, growth is visible in Tier-2 IT firms and product companies.
* Gross revenue grew by 22% on YoY basis, including inorganic contributions. Broad-based IT hiring is facing challenges due to evolving tech trends; It expects resilience to return in coming quarters.
* Organic YoY growth was 13%. Net headcount addition stood at 110, including 20 from TLD Singapore
Valuation and view
* As both the central and state governments look to liberalize and formalize the labor market, TEAM should be among the biggest direct beneficiaries in the medium term.
* Healthy growth and expected margin recovery should help TEAM deliver a CAGR of 13%/28% in revenue/earnings over FY25-27. We reiterate our BUY rating with a TP of INR2,200 (20x FY27E EPS).
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