About the Company:

Quess Corp is one of India’s leading integrated providers of business services. Quess is focused on emerging as the preferred business function outsourcing partner for enterprise customers across a wide range of industries.

Quess Corp’s revenue grew 53% CAGR over the last 5 years while PAT grew at a huge 71% CAGR over the same period.

Quess’ services and product offerings are currently grouped under 3 operating segments:

  1. Workforce Management
  2. Global Technology Solutions
  3. Asset Management

1. Workforce Management

This segment provides comprehensive staffing services and solutions including general staffing, recruitment and executive search, recruitment process outsourcing and also provides training and skill development services. The company derives 62% revenue from this segment but has the lowest EBITDA margin (5.35%). Quess has a headcount of ~200k in this segment alone. This segment gives the highest Return on Capital Employed (RoCE) across all segments at 52%. New logo addition doubled over FY16-FY19 period to ~ 160 in people services and total logo count in FY20 is 800+.

India has amongst the lowest penetration in general staffing industry at 0.5% of the working population vs. the global average of 1.6%. This reflects the size of the opportunity for the industry especially for an organized player like Quess. Client concentration is distributed evenly with top 5 clients contributing 32% of revenue whereas sectoral distribution is highly diversified with Retail forming the biggest piece of the pie at 27%. Quess’ margins in its general staffing business are higher than those of Team Lease, its listed peer.

Quess also provides training and skill development services through 95 plus centres spread across 12 states in India under Quess’ Excelus brand, in partnership with the Government of India. With nearly 12 million youth joining the workforce in India every year, the country is witnessing a huge skill gap in employability. Quess is among the largest training and skill development partners for the Ministry of Rural Development and National Skill Development Corporation.

2. Global Technology Solutions

The Technology Solutions segment provides a host of IT services like customer lifecycle management, IT staff augmentation, IT infrastructure managed services and after-sales support services. Quess offers these services across India, South-East Asia and North America. It forms around 18% revenue share and has the highest EBITDA margins (7.7%). This segment has a headcount of around 30k. It has a RoCE of 20%

The Indian IT Staffing industry, while standing 4th in the world at $3.1 bn, is still at a nascent stage and the industry is expected to grow between 14%-16% for the next three years. Through Magna, a subsidiary company, Quess provides temporary staffing solutions to IT and ITeS clients in India. Magna is India’s largest IT staff augmentation provider, based on the number of employees.

With over 80 lakh college-going students in 2016, and the addition of ~30 lakh graduates every year to the Indian job market, this presents a huge opportunity for the online recruitment market. The internet business segment at Quess consists of its acquisition of Monster India and its business in South-East Asia & the Middle East. Monster has 72 million registered users and it has a Traffic market share of 10% which is the second-largest in India.

3. Asset Management

Quess is the leading integrated facility management provider in the country. Quess provides facility management & security services to companies operating across many sectors but is prevalent in education & healthcare sector. This segment forms 20% of the revenue and is expected to grow the fastest in the next 5 years.

Security services is a growing business in India with market size ~$11 bn and ~8.5mn guards. Quess has a market share of just 0.6% in this sub-segment. With more and more clients preferring organized players, Quess can potentially tap a huge chunk of this market. Quess also has presence across industrial facility management with clients from metal, energy, telecom and Oil & Gas industry.

Quess Corp has acquired more than 22 companies in recent years. Even though its organic growth is significant, most of its growth is now inorganic. Its most recent acquisition was Monster Jobs which was acquired for low valuations of 0.6x EV/Revenue ratio. Monster is a loss-making business but the industry is essentially a duopoly and there is huge potential for growth. But these acquisitions have resulted in a lot of debt on their books and they may have to continue with acquisitions to post strong growth in the future. The company also has very thin margins and any disruption across any segment will hurt earnings.

Quess has kept its risk exposure low by rolling out their services across multiple sectors and keeping client concentration balanced across all segments. It has continuously increased its revenue by cross-selling and up-selling.

With newer technologies coming up and the rising costs associated with training and development, skills improvement, etc. companies are choosing to outsource non-core organisational work to professionals. Thus, reducing the costs related to the training of employees, HR-related activities, etc. While Quess has already invested in the required technology and digital platforms, they can service multiple clients through these existing channels.

Key risks:

The staffing business, in particular, is very competitive with low-entry barriers. Therefore, there are a large number of staffing firms that often compete aggressively on costs.

Demand for staffing and other business services is subject to the state of the overall economy. Pronounced softness in the economy in India or Quess’ other markets could, therefore, dampen demand for the company’s services.

Final Thoughts:

The economic impact of COVID-19 is expected to be unprecedented. With that development, a lot of corporates will be hit and may lay off a significant portion of their workforce. As most of Quess’ businesses are through corporates, it will see a significant slowdown in growth. At the same time, it is trading at an all-time low PE of 12x compared to 34x before the COVID outbreak, creating a strong entry point.

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