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Jun 29, 2016 01:24 PM IST | Source: Moneycontrol.com

Subscribe or avoid? Analysts say Quess Corp IPO fairly valued

Most analysts are optimistic on the IPO and advice to subscribe it betting on the company's performance and sound management. However there are concerns about its major acquisitions not yielding intended benefits, pricing competitiveness and foreign exchange rate fluctuations.


Quess Corp’s initial public offering (IPO) will open for subscription today. The staffing firm company is aiming to raise Rs 400 crore through the issue which will close on July 1. With a price band of Rs 310-317, the IPO comprises fresh issue of shares. It aims to use proceeds of funds raised towards incremental working capital, acquisitions and other strategic initiatives, debt repayment and other general corporate purposes.


The company is raising funds to repay debt (Rs 50 crore), funding capex for itself & its subsidiary(Rs 72 crore),funding its incremental working capital requirement (Rs 158 crore),acquisitions & other strategic initiatives(Rs 80 crore). 

Promoted by Ajit Isaac and Thomas Cook (India), the company was set up in 2007 which offers comprehensive solutions, including recruitment, temporary and technology staffing, and IT products and solutions, among others.


So, should an investor subscribe it?


Most analysts are optimistic on the IPO and advice to subscribe it betting on the company’s performance and sound management. However there are concerns about its major acquisitions not yielding intended benefits, pricing competitiveness and foreign exchange rate fluctuations.


Hem Securities finds the issue to be attractively priced. It says that that the company looks reasonably priced when compared to its peer Teamlease and hence attractive to subscribe it. At price band of Rs 310-317 per share ,the p/e multiple will turn out to be Rs 44-45 on post issue FY16 eps of Rs 7.03 of company, it adds.


The brokerage firm is also positive as financial health of Quess Corp is sound with the company posting CAGR of more than 50 percent in its topline and bottomline growth at CAGR of more than 90 percent from FY12 to FY16 .Also, it has performed better than its peer on margin front which infused optimism in company.


However, it is a bit concerned about integration of all its acquired entities. Certain acquired entities like Brainhunter and MFX, were loss-making entities when acquired. “An inability to integrate or manage these acquired businesses or entities may result in increased costs and adversely affect co's results of operations.” Hem Securities points out.


Ajcon Global recommends subscribing it stating that at the upper end of the price band of Rs 317, the IPO is valued at 45x at FY16 post issue price to equity (P/E) which is at a premium owing to robust growth track record. Factors that the brokerage firm likes in the company are track record of successful inorganic growth with improved financial performance, improved operating efficiencies and margins through business cycles, robust recruitment capability lean balance sheet with favourable debt/equity, strong return on equities (ROEs) and debtors cycle at 45 days.


Spa Research recommends investors to subscribe to the issue for long term gain. It believes that there is significant growth potential for Quess considering its diversified presence in all sectors, strong presence in under penetrated Indian staffing market, increasing working population in India and track record of successful inorganic growth. The brokerage firm says that Quess manages to turnaround its major loss making companies in next two years (highly probable considering its track record), net profit is likely to grow at CAGR of 42.1 percent.  Price competition and slowdown in economy may pose threat to its potential growth.


Agrees Motilal Oswal that the company is reasonable valued at a diluted P/E of 45x its FY16 EPS which is at a discount to its listed peer Team Lease which trades at 58x FY16 inspite of QCL's better growth track record and superior return ratios. However, it had negative operating cash flows of Rs 44 crore in FY16, primarily due to growing working capital requirements fueled by revenue growth. "The working capital requirement is largely funded through debt. Continued negative cash flows will have an adverse impact on the company's business and its growth plans in the near term," the brokerage firm says in a report.


GEPL Capital recommends subscribing to the issue.


ICICIdirect.com is worried that acquisitions may not yield intended benefits which could negatively affect its financial performance. Also it adds that benefits from  part of the issue proceeds that are proposed to be utilised in MFX, may not be  entirely available to investors. Quess Corp’s subsidiary Quess US and Quesscorp  Holdings  Pte  Ltd, acquired MFX from Fairfax Financial Holdings (FFHL) under a share purchase agreement on November 3,  2014.


Its revenues, EBITDA, PAT have grown at 52.4 percent, 57.1 percent, 80.7 percent CAGR respectively, in FY12-16. In FY16, revenue, EBITDA and EBITDA margins were Rs 3,442 crore, Rs 164.1 crore and 4.8 percent, respectively.

It has four business segments namely, Global Technology Solution (26.8 percent of revenue, EBITDA margin-7.2 percent ), People & Services (56.6 percent of revebue, margin 3.5 percent), Integrated Facility Management (10.8 percent of revenue, margin-5.9 percent) and Industrial Asset Management (5.6 percent, margin-11.3 percent). Quess Corp has pan India presence with 47 offices across 26 cities. It also has presence in North America, Middle East and South East Asia (International segment accounts for 14.3 percent of revenue).

It has presence across 26 cities in India, as well as operations in North America, the Middle East and South East Asia. As of February 2016, it has more than 120,000 employees. As of March 2016, it has more than 1300 clients.

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