Quess Corp’s Isaac: We are addressing the conglomerate discount through the demerger plan

Ajit Isaac, chairman of Quess Corp said that the plan will help simplify organisation structure and help investors.

By Swaraj Singh Dhanjal & Deborshi Chaki

On Friday, Canadian billionaire Prem Watsa-backed Quess Corp announced a major restructuring of its business, which will see the company split into three independent businesses - workforce management, facility management, and technology solutions. In an interview, Ajit Isaac, chairman of Quess Corp Ltd, spoke about the rationale behind the demerger, how it will remove the conglomerate discount on the stock and the independent growth path that these three independent entities can chart. Isaac added that the simplified group structure will give investors and analysts a clearer picture of the investment opportunities that these businesses offer. Edited excerpts:

Could you take us through the rationale for this demerger?

We started in 2007-08 as a human resources company, added general staffing and then professional staffing through acquisition and then at the start of the second decade of the 21st century, we decided to be a business services enterprise. In 2013, Fairfax invested in our company and became our largest shareholder. Then, we took ourselves to an IPO in 2016. And, through the capital we raised, we acquired a customer lifecycle management business, which essentially became the basis of our GTS segment, and that was a very good business.

So, progressively, we evolved into a company with three segments of work. One is human resources, which is what we started with; technology, which we added post the IPO; and facilities and asset management, which we’ve been doing all along. Each one of them went on to become an industry-leading player in their space; the human resources business is now about 440,000 people strong, the GTS business has almost 50,000 people today, and the facilities business is close to about a lakh.

Also Read: Quess Corp stock surges 13% as investors cheer demerger plan

They’re all scaled up, are mature businesses, and are all market-leading entities, and each one has its own rhythm, cyclicality and nuances. A one-size corporate strategy will not fit all of these three companies. They have their own nuances in capital allocation, compensation structure, the shared services structure that goes behind it, and the IT investments required. The focus that’s required for each company that will come through this demerger that we’re doing.

Lastly, also in our market cap, we suffer from a conglomerate discount and, that we hope to remove through this process.

Could you elaborate a little bit more on the timing of this demerger exercise? Why now?

This will take about 12 to 15 months because we’ve to get Sebi and NCLT approvals, and these regulatory approvals will take that much time.
Over the last 12 to 13 months, we did an exercise with the BCG to analyse our current set of business, and we set up an agenda to go forward. How do we unlock value? How do we make our business run more optimally? Where do we release costs from, etc.?

And through that process, even over the last four quarters, you’ll find our performance and our business results have been steadily going up. So from an average of about Rs140 crore of profit per quarter, we’ve now reached about Rs.180 crore. And if you take the current and extrapolate the run rate, we could grow by another 10% over time. So it’s a 40% expansion in our profit run rate in the last four quarters.

The second point is that we’ve run businesses in Quess in a decentralised way. So each company has its own President, each company has its own staff functions and its own back end, and the path to being listed flows from a natural start of being decentralised as they are today. And from there on, it’s fairly easy for them to become listed, so I think the timing is right.
We’ve done the heavy lifting in terms of putting all of this together, and now’s the time to move forward.

Is the idea behind the demerger also to make it easier for these individual businesses to tap investors for their capital requirements, as many investors would not be comfortable coming into a conglomerate of businesses?

The demerger gives a clarity of investment thesis to an investor so they know they’re coming into a facilities company or an asset maintenance company or a customer lifecycle company or a human resources company, and different investors will have different priorities.

Some of them may not want to be in a human resources company and will want to be only in the facilities management company because, let’s say, it’s running on the back of the new infrastructure built out in India. So somebody could take a punt on that through us.

On the other hand, analysts would have difficulty deciding where to place our company. We are a business services enterprise, but there’s no other competitor with the same scale in India. So, to form a comparison base for us would have been difficult for them.

So I think, in many ways, this is a helpful move that we’re doing for both investors who would want to be invested in us and analysts who track our company.

What will be the capital allocation plan for the demerged business going ahead?

We have certain principles of capital allocation, and we want to ensure that they are institutionalised inside the new entities as well. First is that we want a 20% return on capital.

Second, we’ll only do friendly deals. We will not do anything hostile, much like Fairfax.

The third one is that we have the principle of additionality: every time we do a transaction, it should bring something to us, either a new business, a new service line or a new geography. If it’s more of the same, it’s unlikely that we will make an investment.

The fourth point is that we are looking for companies that come with management teams, not owners who sell business and go away and then have nothing to do with it. So we want to get a management team because we are investing in the people that run those businesses.

So unless these four characteristics are settled, we will not look at any capital allocation in the future.

But having said that, the new boards will take charge of this decision about what to do with the capital.

We have a dividend policy in place right now. We pay 1/3 of the free cash flows of the company accrued in every three years back to shareholders.
We’ve paid back almost Rs 400 crore in the last three years or so as dividends to shareholders.

My sense is that companies like Quess - Workforce management business and Bluspring - facilities, infrastructure, telecom and investments business will have cash that they will give back to shareholders because they will not have any need for excessive inorganic play.

Digitide BPM, HRO and insurtech business may make one or two small acquisitions for technology that they may want to infuse into the company, but otherwise our aim will be to increase cash flows, retain it inside the company for whatever period we need it, and then give it back to shareholders.

Will there be any shared brands, royalties or related party transactions, or will these three businesses be largely independent entities?

It’s a clean deal. We could have a small transition team that we set up of 8 to 10 people to help, for example, with staff functions that are centrally run right now - legal, marketing and communication, investor relations, internal audit, etc.

So, for some time, to help with those things, we’ll have a small transition team, but after that, they’ll all be very independent. Our aim is to get independent as quickly as possible.

How are you going to be involved in all these three businesses going ahead? Do you see yourself taking up a more mentoring role, or would you be actively working with them?

So, first of all, as a shareholder, there is no change in the shareholding. We’ll continue to keep whatever we’ve got. There is no intention to sell any equity in any business.

We’ll be participating in the boards. The boards are yet to be created. I’ll have representatives on the boards of all three companies, and we’ll be available to each of these three management teams whenever they need.
I think it’s more of a mentoring role. We have Presidents who have been with the company for long periods of time. Almost all our presidents have been there for in excess of five years or sometimes even for the last seventeen years.

So they’re very well settled into their jobs, and they’re veterans in their field, so they will need some support only in exceptional moments, let’s say, in a business planning process and a capital allocation moment or a key hiring situation.

So we’ve defined three situations where we’ll help with: Capital allocation, performance goal setting and review, and leadership development. These are three things that I’ll continue to help them with.

What are the key messages you will want investors and analysts to look at when evaluating this demerger decision?

There are three to four central messages in this whole process. We’ve actively pursued simplifying our structure because we had 23 acquisitions and three businesses built into the platform.

So, over the last three years, we’ve actively pursued simplifying our structure, and this is the logical conclusion of that. Shareholders and the market should see that we’ve stayed true to our promise of simplifying the structure.

The second one is that with a management focus, we hope to increase RoE, margins, and cash generation in the company. Capital allocation will stand better defined for each company because each of them has different needs. So, we will get to a more finely crafted capital allocation strategy.
And lastly, the investment thesis for each of these platforms and new companies will be more clarified. So analysts and investors will have a clearer view of where they invest.

In workforce management, we have 440,000 people, the world’s largest staffing companies, with between 600,000 and about 650,000 associates. So we really have the opportunity in Quess to create India’s first and most significant global scale company in the staffing business.

So these are larger targets that we’ll pursue now. I think it frees us to do a lot more things.

We are a much better platform for growth right now, sufficiently capitalised with a strong promoter group, and we think that this demerger will set us up well for the future.