Quess Corp: Expect EBITDA growth of 30% in FY20E.

Update on the Indian Equity Market:

On Tuesday, NIFTY50 closed 0.3% lower. The decline was led by Zee (-7.3%), Bharti Infratel (-6.5%) and Grasim (-4.4%). NIFTY50 gainers included ICICI bank (+3.1%), GAIL (+2.5%) and Dr. Reddy (+1.9%). MEDIA (-3.6%), IT (-1.2%) and REALTY (-0.9%) were the top losing sectors while PVT BANK (+0.6%), BANK (+0.5%) and FIN SERV (+0.4%) were the only sectors that gained.

Quess Corp: Expect EBITDA growth of 30% in FY20E.

Excerpts from an interview with Mr Ajit Isaac, Chairman and MD, Quess Corp. The interview was published in Mint dated 26^th November 2019.

• In 1HFY20, Quess Corp has hired about 59,000 people to their workforce against 56,000 people hired in the whole of FY19. The size of the workforce as of November 2019 is 380,000.
• Second half is usually a period of lesser headcount addition as large part of addition is for the festive season that ends towards October-November. December-January is a slow period and then February onwards there is a pick-up again.
• Fourth quarter tends to have a better EBITDA growth as certain activities peak in that period such as collections in banks, academics, consumption of food, etc.
• Quess Corp will likely end FY20E with close to 400,000 headcount. Addition in the 2HFY20 will be about 20,000-25,000 people.
• Quess Corp is benefiting from a few sources. Firstly it is gaining market share from competition. Second is the benefit from movement of employment from the informal sector to the formal sector. Quess Corp is able to benefit from this transition due to its nationwide presence.  Thirdly, companies are preferring players that are more compliant and have no regulatory issues. As a result, Quess Corp workforce size is expanding.
• Quess Corp will see 30% growth in EBITDA in FY20E.
• Employment trend is better in non-IT than in the IT sector.
• IT sector can be broken down in parts. It includes the Indian IT services companies, product companies, captives such as JP Morgan, Goldman Sachs which set up large campuses here to service their international requirements, and lastly, e-commerce and related ventures. Out of the above four segments, IT services has seen least growth in employment. Largest growth is in captives followed by e-commerce.
• In the non-IT sectors, Quess Corp has added a lot of people in Banking and financial services sector and consumer sector. Consumer sector is doing well as companies want to shift to variable costs in the economic slowdown.

Consensus Estimate (Source: market screener website)

• The closing price of Quess Corp was ₹ 532/- as of 26-November-19. It traded at 26x/ 19x/ 15x the consensus EPS estimate for FY20E/ FY21E/ FY22E of ₹ 20.3/ 27.6/ 35.8 respectively.
• Consensus target price of ₹ 714/- implies a PE multiple of 20x on FY22E EPS of ₹ 35.8/-.