Buy Quess Corp, target price Rs 360: Motilal Oswal

Motilal Oswal has given a buy rating to Quess Corp with a target price of Rs 360 based on 14 times FY22E EPS.

The brokerage says the management has indicated that impact on operations in Apr-May’20 was not as bad as initially feared. Having large enterprises as customers and limited exposure to SMEs has helped the company in navigating through the crisis. According to the company, Excellus, Digicare and BPO are the worst hit. While facilities management may witness some headwinds due to Work from Home (WFM), formalisation in the industry should help offset it. Monster is expected to witness growth and margin challenges in the near term as renewals (typically happen in the last week of March) are hit. As recruitment picks up, this segment is expected to recover.

Investment Rationale

The stock had corrected 66 per cent from pre-Covid-19 level on concerns of severe impact on (a) general staffing and
collections/receivables, (b) liquidity position, and (c) potential legal liabilities in outcome-based businesses in the event of massive employee lay-offs. However, according to the brokerage, these concerns were exaggerated as the business/ cash collections (both mark-up and outcome-based) did not witness any major dislocation over Mar-Apr’20.

As the economy prepares for a gradual re-opening and enterprises look to dodge supply disruption, the brokerage believes the company/sector has already passed the peak of uncertainty. As both the central and state governments look forward to liberalising and formalising the labour markets, Quess should be among the biggest direct beneficiaries. The brokerage expects 13 per cent/21 per cent revenue/EPS CAGR over FY20–22E.

Using residual income approach, the brokerage has arrived at a target price of Rs 360. The brokerage adjusted FY20 book value for appropriate share of outstanding goodwill/inter-company loans on the balance sheet. It has welcomed corrective steps being taken by the new management toward addressing some of the investor concerns around governance, prompting the brokerage to reduce the equity charge to 15 per cent in its residual income model (v/s 16 per cent earlier).

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 2994.59 crore, up 1.51 per cent from last quarter sales of Rs 2950.02 crore and up 30.50 per cent from last year's same quarter sales of Rs 2294.77 crore. The company reported net profit after tax of Rs -620.79 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 54.86 per cent stake in the company as of March 31, 2020, while FIIs held 14.61 per cent, DIIs 16.55 and public and others 13.9 per cent