Ladies and gentlemen, good day, and welcome to TeamLease Services Limited Q3 FY 2024 results conference call, hosted by Motilal Oswal Financial Services. As a reminder, all participants' line will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Mukul Garg from Motilal Oswal. Thank you, and over to you, sir.
Thank you, Riya. Good evening, everyone, and welcome to the Q3 FY 2024 earnings call of TeamLease. You know, thank you, TeamLease management, for giving us the opportunity to host you today. Today, we have with us Mr. Ashok Reddy, MD and CEO; Mr. Sunil, CEO, Specialized Staffing; Mr. Kartik Narayan, CEO, Staffing; Ms. Ramani Dathi, CFO, with us. Then I'll now hand over the call to the management to start off, you know, with their initial commentary, and then after that, we can hand over the floor for Q&A. Ashok, to you now.
Thank you, Mukul. Good evening, and welcome to the call. I think we've maintained another quarter of growth in line with the element of demand that we are seeing in the market. Overall, we added about 8,000 headcount from an associate perspective, growth in revenue of about 7% and EBITDA of 13%. We have continued to maintain our core headcount numbers and costs while working the productivity improvement as a function of associate growth to the core headcount cost being flat. In staffing, broadly, maintaining the PAPM as a function of growth that is coming in, but with various other initiatives that we have taken on that front. We continue to lose the NEEM numbers in the degree apprenticeship business. We expect that we will see a comprehensive sunset towards Q1 of next year.
But we have been adding numbers in the non-NEEM scheme, and I think we've had the first quarter of a net positive growth in headcount in the DA front in the last quarter. We believe that that should sustain as net growth going forward. While this growth is at a lower PAPM, we do look to the entry with clients on this front of apprenticeship and potential to upsell on the learning as we go forward. On the specialized staffing front, the market headwinds in terms of demand still play out. The translation of the services sector coming for growth is still not on the table, but we are continuing to target the captives and product companies, which have a higher margin demand, but lower volume, to kind of drive the element of sustainability.
We are also continuing to take the call on lower margin mandates. We continue to maintain the operating cash flows and working capital control at our end, and I think that discipline will continue to play out. I'll have my colleagues run the details of the specifics, and then we can move into the questions. Sunil?
Thanks, Ashok. Good evening, everyone, and thank you for joining our investor call today. Before we delve into the specifics of our specialized staffing business unit's performance this quarter, I would like to take a moment to discuss a few critical aspects of the IT sector that have a direct bearing on our business. The IT sector has been experiencing a period of cautious and selective hiring, with a notable decrease in hiring by IT services companies over the past several quarters. Although GCCs or Global Capability Centers have seen some hiring, it has not been sufficient to offset the decline in IT services. However, this shift has been beneficial for us, enabling us to increase our market share in the GCC space. At the end of Q3, 66% of our net revenue is now coming from GCCs.
Q3 is typically a weaker quarter for IT hiring, which was further impacted by fewer billable days and the need to manage furloughs. Despite these challenges and a generally weak macroeconomic environment, we have achieved growth both quarter-over-quarter and year-over-year in terms of revenue and EBITDA. This growth is largely attributable to our continued focus on cost optimization and capturing a greater wallet share of the available opportunities. In line with our strategy to improve the quality of our business, we made the decision to transition 650 resources from our low-margin telecom business to general staffing business. This move is not expected to significantly impact our net revenues, as our business teams have been effective in rapidly acquiring some high-margin customers to compensate for this low margin exit.
Additionally, we have secured four strategic accounts, which we anticipate will boost our revenue run rate in the nearest future. Overall, our revenue has grown by 12% year-over-year and 9% sequentially, driven partly by some one-time incentive payouts and vendor consolidation mandates from our strategic customers. Our EBITDA has increased by 15% year-over-year and 13% sequentially, thanks to the combined effects of these one-time revenue boosts and our exit from low-margin business. While the benefits of exiting low-margin businesses will continue and play out on the long term, it's important to note that one-time benefits are non-recurring. This strategic shift, along with lower hiring levels, has resulted in a reduction in headcount both year-over-year and sequentially. As we look ahead, we recognize that uncertainties remain in the market, and overall hiring is likely to continue with caution.
However, we are beginning to see some positive signs. In this environment, we remain committed to focusing on portfolio correction, sales enhancement, cost optimization, and further digitization. Our goal in the short term is to maintain an EBITDA margin between 6.5%- 6.7%, and we can go back to the normal level of 8%-9% once the demand is back. Thank you for your continued support and confidence in our execution capabilities.
Yeah, thanks, Sunil. Good evening, everyone. Q3 is a core festive quarter, hence, during this quarter, a temporary surge occurred in revenue with one-time festive billings. It's also a quarter that by December, enterprises recalibrate their workforce to align with current demand trends and expectations of growth going into Q4. General staffing had had a net addition of 7,500 associates this quarter. With this, our year-to-date net incremental associate growth is 35,000, and overall net growth on a year-on-year basis is 20%. We experienced a 28% year-on-year growth in gross revenue and a 9.4% on a sequential basis, reflecting the positive momentum in our business in the market. We saw growth coming in from consumer, telecom, retail, e-commerce, and some green shoots in our manufacturing business.
We saw relatively subdued growth in our BFSI vertical in Q3 as some customers held up on hiring. Financial services and consumer goods continue to be our top two segments in terms of associate base, closely followed by telecom and retail. Our sales efforts resulted in 36 new logo signups, primarily in the consumer, retail, and manufacturing segments. At the gross level, we hired around 23,000 odd associates during Q3 through our sources, which is a 21% increase from the same period last year. On the operational front, initiatives around digitization and process improvements have led to an improvement in FTE to 366 in Q3 versus 355 in Q2, driven by a 3% increase in associate headcount. Efficiency improves our ability to service a larger associate base with the existing core headcount.
We see this trend continuing to play out in Q4, resulting in both faster client servicing and higher operating leverage. Coupled with anticipated growth, we shall be on track towards further improvement in FTE during Q4 of this financial year. Some of you do recall that we've spoken about initiatives around cross-selling and upselling into our base. As Ashok mentioned, we are seeing some initial results coming through. This is which PAPM has registered a marginal improvement. Last quarter, we informed that it was 634, and this is marginally improved to 688. As we move forward, we see positive signs around hiring in BFSI, consumer telecom, and the manufacturing vertical. We see increasing signs of enterprises wanting to formalize their extended workforce and move towards more established and compliant players.
Looking forward to Q4, we have a healthy pipeline, and see emerging demand across most customers, while the challenges in specific sectors persist. We believe in the opportunities presented by continued formalization, along with the anticipated capacity to be, you know, positive for us. In summary, we are really excited about the opportunity in front of us, led by growth and formalization in the economy. As I've spoken before, we're dedicated to creating a top-notch business with a strong focus on excellent customer management and solid sales strategies. At the same time, we are putting effort into improving our hiring processes. We are starting to see improvements from going digital and improving our processes, and we are excited about what this will mean for us down the line. Thank you, and Ramani?
Thank you, Kartik. Good evening, everyone. EBITDA improvement, as we have indicated earlier, is on a consistent track led by operating leverage in businesses. We expect strong operating performance from HR services in Q4, driven by EdTech verticals. We have received INR 2.5 crore of interest income during the quarter on tax refunds. Total outstanding income tax refund receivable as of 31st December 2023 is INR 236 crore. We are duly receiving tax refunds without any disallowance on applicable claims. During the quarter, we have received INR 3.5 crore towards incremental settlement of old investments in IL&FS. This receipt has been recorded as an exceptional item in the financial statements. Core employee headcount remained mostly flat for the nine-month period of the financial year 2024. Our cash conversion ratio to EBITDA can be maintained to 80% on an annual basis.
Total free cash as of 31st December 2023 is INR 250 crore. Thank you. Mukul, we can open to questions now.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may, may press star and one on their touchtone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. A reminder to all participants, you may press star and one to ask questions. The first question is from the line of Alok Deshpande from Nuvama Institutional Equities. Please go ahead.
Yeah, good evening to the team. One question on staffing margins. You know, we have seen very good growth, Q1, Q2 as well as year-on-year. But when you look at the EBITDA margins on the general staffing side, you know, at least in percentage terms, that seems to be sort of, sort of going down. Any thoughts on that? You know, I mean, was there any sort of one-off there, or... And how do you see the direction going forward?
Hi, Alok. There is no one-off element in this quarter, as we have indicated earlier. So the salary inflation for our associates has been much higher than what we are seeing as inflation in our PAPM. So that's directly leading and diluting our EBITDA margin. However, we have been making consistent efforts to improve the PAPM, both in absolute terms as well as percentage terms. And in absolute EBITDA profits, we are confident of improving it quarter on quarter.
Okay. Ramani, one, have you disclosed PAPM this quarter? Is it flat compared to last quarter, or how should we look at it?
Yeah. We, we have disclosed it in the investor deck. So there is an INR 4 improvement in this quarter, and
Okay.
Yeah, it's a, it's a marginal improvement.
684-688.
Okay. So basically, it's more of a mathematical thing, where you're looking at that 688 on a much larger salary base of associates, and that's why the percentage is looking lower, right?
That's right. Yeah.
Okay, understood. As we sort of, you know, go into this quarter, you know, I mean, any sort of color you can give us on... You know, this year has been fantastic, I mean, in terms of, you know, I mean, almost 35,000 added so far in terms of associates. Would we be looking at a similar sort of number next year? Better number? How is the demand environment like, you know, going into this calendar year?
Yeah. So as of now, Alok, the demand is quite positive. Like as, Kartik had just called out earlier, I think, BFSI, consumer and retail has largely driven the volume growth this year. I think there was a little bit of a tempering towards the end of Q3, but as we look at Q4 and have a view ahead, at this point in time, I think from most sectors, the demand looks quite positive, with also manufacturing coming into play as we go forward. So I would say that at the back end, from the team's focus and drive, it would be to sustain aggressive growth into the future.
Understood. Thank you. Thank you so much for the opportunity, and all the very best to the entire team.
Thanks, Alok.
Thank you. A reminder to all participants, you may press star and one to ask questions. The next question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Thank you for giving me the opportunity. Sunil, just wanted to check, in the prepared remarks, you mentioned about some non-recurring one-time boost during this quarter. What was that in reference to, and if you can quantify that as well?
So, typically, we get these incentive payouts or some, you know, one-time bonus, which is paid to the employees. So it normally doesn't come in Q3, but due to some timing difference, this time, it came in Q3. So, this was related to that, and that's a one-time activity. It may not happen the next quarter. It might happen any of these quarters, or sometimes it may come in another year, you know. So that's the thing which I called out.
Is it possible to quantify the impact of that on, you know, on our profitability this quarter? You mentioned that, you know, some telecom workforce was shifted to general staffing. You know, should we expect margins to moderate in the near term or stay in a kind of this range going forward?
So just, from a profit impact perspective, the one-time would account for about INR 1 crore, from a bottom-line perspective. The lower margin business that has shifted out, will kind of, take away the some of the top line and the bottom line, so margins should sustain hereafter.
Great. So, there will be some top-line impact because of that in the near term?
Yes, yes.
Okay, understood. The second question was for Kartik. Kartik, you know, I know you guys have been trying to mitigate the impact on profitability from all the changes in the industry, which has happened over the last two years. But the growth continues to remain fairly strong, but you know, we have seen a bit of a continuous erosion in profitability on an ongoing basis. So you know, if you can just share your perspective on how should we look at FY 2025 and FY 2026 from margin perspective. Is it the case right now that you know, a slowdown in growth will be the necessary conditions for margins to meaningfully improve for us?
Or, you know, are there other measures which can also help us, you know, kind of maintain both growth as well as improve profitability?
Yeah. So let me, Mukul, let me just, chip in here a little bit, and then I'll give it to Kartik. So one element, obviously, is the fact that, you know, the large clients are growing larger, driving growth. And we have all- we've called out that the large clients have a lower, realization PAPM as against, the other clients. So I think growth per se is something that will be a key focus. How to mitigate the impact on PAPM and the percentage realization is still work in progress. While we are able to kind of continuously sustain the PAPMs as a percentage realization, it has been coming down. So I think that's a key area that is being worked on as a combination to marry with growth.
So looking at the mid, mid segment and the smaller client segment also growing, which kind of have higher realizations but lower volumes. The back-end focus around cost, productivity and those variables, we have seen a considerable improvement on that front. So the teams are in place. There's a little bit of rejig in structure that Kartik is looking at, to create more delivery focus at locations, get a higher productivity from some of the hiring teams and so on. So I think those initiatives will continue to play out, wherein we hope that the productivity angle will complement the growth angle, leading to some element of margin clawback around the bottom line.
Yeah. Mukul, adding to what, you know, Ashok has mentioned, I think there are two aspects to, you know, the growth which has taken place this year. Obviously, there is demand, but I think more importantly, there is increasing formalization, which is taking place in the economy, and we have benefited, you know, from that entire, you know, trend. So I think that's one aspect of it. I think that there are, you know, a couple of other aspects as well, you know, going into next year. We are obviously focused around the aspects of hiring, attrition and productivity. And I mentioned briefly, you know, in my opening remarks about, you know, cross-selling and upselling initiatives that we are taking. Early days for us, but to your question on, you know, what is it that we can do differently?
Obviously, volume is one part of it that we're addressing. But clearly, solutions that are, you know, helping large enterprises to be able to address productivity, and help them retain their associates better, are solutions which we are seeing customers, you know, engaging with us on. So I do see some of those, kind of paying back as, you know, going into next year.
Also, on staffing margins, compared to last year, the dilution is also on account of DA business, because with the withdrawal of NEEM scheme, we lost close to 40,000 headcount, which are at a much higher margin. So that has impacted at the vertical level. Now, the DA has turned net positive on headcount growth and consistently adding on numbers. So we expect improvement in margins, getting contributed by DA as well.
All right. You know, thanks for the detailed answer, and sorry to, you know, push back a bit. You know, just wanted to, you know, kind of rephrase the question. You know, while we have seen very strong growth on our top line, and, you know, as you guys mentioned, a higher portion of that is coming from larger clients where, you know, actually, the impact is dilutive on margins. Do you think, you know, while you have articulated that the focus will be on absolute profits, do you think it makes a bit sense to start kind of, you know, trying to push back a little, you know, especially to the larger accounts, to either revise the prices?
Because our productivity continues to go up, our PAPM continues to go up, but our margins continues to trend downwards. So, you know, is there a thought process from a client, you know, kind of communication perspective, which we can also start to put into effect, which might be dilutive on growth in the near term, but can help us over the longer term period?
So I mean, totally do that on a running basis, Mukul, about going back to clients for discussion on revision upwards, the element of trying to price back certain elements of a service that customers ask for and everything else. And I think partly doing all of that is really what is kind of sustaining the PAPM on a weighted average basis. However, some of the large customers, while you know the PAPMs are low, are still profitable from an account perspective, the absolute profit. And hence while we do have dialogues with all customers, with certain customers we are price takers, but looking at how we can upsell certain things to them to try and cover the shortfall on this side.
Understood. Thanks again for the explanation. I'll get back into the queue. Thank you.
Thank you. The next question is from the line of Vikas Ahuja from Antique Stock Broking. Please go ahead.
Yeah, hi. Thank you for the opportunity. I have two questions. One is, any particular reason for low addition in staffing headcount? I understand in the last two quarters we have been doing around 6% kind of sequentially run rate, and this time it has come down to 3%. So it was largely on the base, or there was any other particular reason? And the second question is, in the opening remarks, you had talked about the EBITDA margin for specialized staffing to go back to 8%-9% once demand is back. So any early indications we are seeing there on, I mean, any sector timelines where you think, you know, the demand for IT staffing is going to come back?
Is it also possible to quantify the, you know, the margins we make on through GCCs or through the other third-party vendors? That's about it. Thank you.
So I think on the staffing side, Kartik had called out that Q3 has some element of seasonality impact towards the end of the quarter. The element of some slowdown on the hiring in the BFSI sector, coupled with the seasonality and weaker festival season for consumer, was the reason for the less than the other quarters growth that we saw in Q3. As things stand, I think Q4 demand is looking quite upbeat from the market, and we will work to deliver on that front. On the specialized staffing front, I think as Sunil has called out, the demand is still not in the market. I think the demand still stays quite muted.
We are kind of balancing that with the demand that we get from GCCs and product side. The services companies are still at best replacing attrition, but not really bringing new demand to the table. Pramam?
Yeah. In terms of margin, both on IT services and GCCs, overall, the margins that we make are almost on the same line, so there isn't much of difference. Even though GCCs have a higher rate card, but comes with lower volume, on a net basis, it's the same level of margin of 8%-9% that we are expecting.
The bill
rates are higher.
Bill rates are higher in the GCCs, which effectively leads to higher realization. So that's the-
Okay. That's helpful. One, you know, final clarification regarding that 1.5% EBITDA we have reported. I mean, so that is a clean number, right? And the one-off we have given that comes below that. So, or that 1.5% includes that one-off itself. It's... And thanks a lot.
Yes, yes. That INR 1 crore one-time billing impact is also part of the EBITDA for the specialized staffing business.
Okay, thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. Next question is from the line of Amit Chandra from HDFC Securities. Please go ahead.
Yeah, thanks for the opportunity. So my first question is on the DA business. So we have seen stability there in terms of the associate addition. So if you can quantify what is the NEEM and the non-NEEM associate count there, and what has been the gross addition in the DA business? And you said that the drop in NEEM headcount will continue for another one quarter. So what kind of volume growth we can assume or, you know, are we planning on a normalized basis for the DA business? And also, I know Ramani mentioned that the drop in the margins is largely due to the drop in the NEEM headcount, which is higher margin.
So maybe you can, you know, quantify in terms of the margin between the general staffing and the DA, you know, business, what is the, you know, like, difference in margins that we have there?
Yeah. So we are now at about 36,000 headcount in the non-NEEM side, and we have about 7,000 headcount left in NEEM. If I take last quarter, we added about 1,000 net apprentice growth. We are losing about 1,000 NEEM trainees every month, which is why I called out earlier that broadly we expect most of NEEM to exit by Q1 of next year. I think that exit will continue to play out over the next six months. And I think the pipeline in the non-NEEM side has been building up, where we should be able to add numbers net of the NEEM losses.
On average, the NEEM billing was about INR 1,100 per PAPM, and the non-NEEM is at about INR 450 -INR 500 . And that is really where we have to bridge the gap, from perspective of saying that as we lose the NEEM, we are getting the regular apprentice numbers, but how can we upsell on education to them to get a higher realization?
Okay. And, you know, on the specialized staffing, I know you mentioned that, we are seeing some signs of, on a green shoot in terms of, you know, the IT hiring coming back. So if you can, you know, kind of give us some more color in terms of are we seeing some active conversations in terms of, you know, the, hiring getting back? Because it has been now slow for almost five, six quarters. So are we expecting that if it comes back, it, you know, it should have, you know, pretty steep recovery there?
In terms of the market, currently, we are not seeing a huge uptake in hiring, but the GCC, the number of GCCs are increasing, and as I explained, we also have acquired a lot of GCCs. To that effect, we have some additional mandates to deliver. From the IT services, the idea was that they have not been hiring for the past many quarters, while the attrition continuously happened with them. You know, there is a leaking bucket. So, we are anticipating that there will be a slight intake, instead of just replacing selectively, they might go for some you know, higher replacements to manage the existing workforce and also to cater to the new deals which they have been signing up and announcing in their quarterly results. So that was the idea.
But if you ask me, is there enough requirement on the table currently? No, not yet. We are not yet reached there, but, you know, we are hoping that things will turn out in next one or two quarters.
Okay. So now, lastly, on the HR, HR services business, obviously, you know, we are seeing some decline there, but, you know, you mentioned that we can see some recovery there. So in terms of the breakup that we have given, you know, EdTech and HR Tech, you know, seems to be the bulk of the revenue. So what's happening there in terms of EdTech, HR Tech, you know, if you can give some more color, how we are seeing it from, say, the next year perspective?
Yeah. On EdTech front, we are consistently seeing a 30% year-on-year growth on revenue. And, also in terms of margins, we are confident of maintaining 8%-10% of EBITDA margin within EdTech vertical, including this year. HR T ech is still in terms of overall profitability, it's still in investment phase. And we are expecting a 20% kind of growth on top line, and, for next year, it can still be at slightly breakeven or marginal profitability.
Okay. Thank you, and all the best.
Thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions.
Mukul, if there are no more questions, we can give the closing remarks.
Yeah, yeah, I think we can close the call.
Okay.
Yeah. Yeah, so if I... I mean, as we've just been calling out, I think we continue to see demand for volume growth in staffing, and we are working our structures to ensure that we continue the delivery on that front. I think the NEEM reduction in numbers will continue to play out over the coming quarters, coming two quarters. But our focus on the sales side to the regular apprentices across different organizations otherwise should enable net apprentice growth on that side. However, we'll have to look at further upselling the education side for a realization play to continue.
I think on the specialized staffing, a lot of the correction on low volume mandates and acquiring the GCCs, will continue to play out, and, we should stay flat, at least as a function of the demand we see, as of today. Overall, I think, in aggregate, we should expect another quarter of growth, as we look ahead, given the current, demand outlook that we have. I think from our perspective, we will continue to focus on our core headcount, our costs, our productivity, and scale, will be the key variables that we will work on. With that, thank you very much.
Thank you. On behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.