Motilal Oswal 's research report on Quess Corp
Quess Corp’s (QUESS) quantum of goodwill/intangible write-downs (38%-49% of the outstanding) taken during 4QFY20 is a positive surprise. This reinforces our assessment (refer our earlier note) that the new management is making encouraging efforts to address investor concerns around areas like governance, capital allocation, etc. We see the balance sheet rationalization, progress on exit from unrelated businesses (e.g. East Bengal Club) and the resultant RoE improvement also as key positives. Despite the lockdowns and sharp spike in unemployment, key portfolio businesses have remained more or less stable and are doing better than initially feared. A material displacement is unlikely as the economy goes into phased re-opening and firms try to dodge supply-side disruption. We upgrade our FY21-22E EPS by 12-13% as we adjust (a) amortization run-rate, and (b) EBITDA margin trajectory of Monster. Our TP increases by ~29% as we tweak the book value and equity charge assumptions (15% v/s 16% earlier) in our Residual Income valuation model. Over the medium term, we expect QUESS to be the biggest beneficiary of the recently announced labor law reforms (refer our note). Reiterate Buy.
We expect 13%/21% revenue/EPS CAGR over FY20–22E. Using residual income approach, we arrive at a TP of INR360. We adjust FY20 book value for appropriate share of outstanding goodwill/inter-company loans on the balance sheet. Welcome corrective steps being taken by the new management toward addressing some of the investor concerns around governance prompt us to reduce the equity charge to 15% in our residual income model (v/s 16% earlier). Our TP implies 14x FY22E EPS, still a steep 60% discount to TeamLease.
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