Quess Corp IPO Review: The Quest ends here

Quess Corp IPO – the 12^th main board IPO to hit the Indian markets this year – will open for subscription on 29 June and will close on 1 July 2016. The upcoming IPO has been priced in the range of INR310 – 317 per share. Applications can be made for 45 shares and in multiples thereafter. The company has not said how many shares it will sell but it aims to raise at least INR4 billion (INR400 crore) from the IPO. According to the price band, Quess Corp IPO will involve sale of at least 12,618,297 shares while up to 12,903,226 shares may be sold at the upper end of the price band. Axis Capital, ICICI Securities, IIFL Holdings, and YES Securities are the book running lead managers of the upcoming IPO while Link Intime India Private Limited is the registrar.

Quess Corp IPO is a highly anticipated one as it is promoted by Thomas Cook and human resources industry veteran Ajit Isaac. Besides, expectations of retail investors are running high after the stellar listing of industry peer TeamLease in February this year.  Read more to find out in this IPO review if this public issue can match the magic of TeamLease. Shares of Quess Corp are proposed to be listed on BSE and NSE and listing is expected on 12 July. Here is a quick snapshot of Quess Corp IPO before we delve deeper in the analysis.

Quess Corp IPO details

Use of proceeds

Unlike the last five IPOs which involved offer for sale (OFS) component from existing investors, Quess Corp IPO comprises of fresh issue of equity shares. Out of the total INR4 billion, the company plans to use INR1.59 billion for funding its working capital requirements while INR800 million are proposed to be used towards acquisitions and other strategic initiatives. Acquisitions form an important part of Quess Corp’s strategy (more on this later) and thus, it is a crucial allocation. INR717 million are proposed to be used to meet capital expenditure of Quess Corp and its subsidiary MFX US and another INR500 million will be used to reduce debt.

Quess IPO Structure

Quess Corp is a closely held company as promoters Thomas Cook and Ajit Isaac hold a combined 85.95% of the equity capital. Another 13.56% is held by Net Resources which is a promoter group firm. This effectively takes the combined promoter and promoter group holding to 99.51% with only 0.49% with public as of now.

Net Resources is a healthy firm and gets almost all of its revenue in the form of rent payment by Quess Corp which does not own any of its 47 offices across India. It helps to understand that Ajit Isaac owns 99.99% of Net Resources. This means Ajit Isaac effectively owns 29.8% of Quess Corp.

Quess business background

Headquartered in Bengaluru, Quess Corp has operations spread across 47 offices across 26 cities in the country. The company also undertakes business operations in South East Asia, Middle East and North America. Quess offers comprehensive solutions including recruitment, temporary staffing, technology staffing, IT products and solutions, skill development, payroll, compliance management, integrated facility management and industrial asset management services. As of 31 March 2016, Quess Corp’s clients included some of the world’s largest, reputable organizations, including 20 companies ranked in the 2015 Fortune Global 500 list. The company has over 120,000 employees and serves over 1,300 customers.

Quess Corp was started as IKYA Human Solutions in 2007 by Ajit Isaac who had earlier established and sold PeopleOne Consulting to staffing major Adecco in 2004. Since Ajit had established himself as an industry expert with fire in the belly (read an excellent article on Ajit by Prof Sanjay Bakshi), Fairfax’s Prem Watsa was attracted to pick a big stake in Ajit’s new venture which was already doing well. The investment was channeled through Thomas Cook India in 2013 and the company was subsequently renamed as Quess Corp in 2015. Thomas Cook India is owned by Fairfax Financial Holdings.

Read Also: Quess Corp IPO price band fixed at INR310-317, issue opens 29 June

HR consulting and staffing is a vastly fragmented market in India and acquisitions become an integral part of any growing player’s strategy. This is not different for Quess Corp which has carried out nine acquisitions in the last eight years. Some of its important acquisitions include Magna Infotech, Avon, Hofincons, Brainhunter, MFX, Aravon Services, Randstad Lanka, and TSQ. The company categorizes its businesses in four broad segments:

Global Technology Solutions (GTS) – The segment provides IT staffing, IT product solutions and services in India, North America and South East Asia, under Magna Infotech, Brainhunter, Mindwire and MFX brands. The segment contributed 26.77% to Quess Corp’s revenues in FY2016.

People and Services (P&S) – The segment provides comprehensive staffing (excluding IT staffing) services and solutions including general staffing, recruitment and executive search, recruitment process outsourcing, as well as payroll, compliance and background verification services under IKYA and CoAchieve brands. The segment contributed 56.64% to Quess Corp’s revenues in FY2016.

Integrated Facility Management (IFM) – The segment provides integrated facility management solutions to corporates and other organizations such as hospitals and schools across India. We provide the entire range of facility management services including janitorial services, electro-mechanical services, pest control as well as food and hospitality services under Avon and Aravon brands. The segment accounted for 10.82% to the company’s topline in FY2016.

Industrial Asset Management (IAM) – The segment provides industrial operations and maintenance (O&M) services and related asset record maintenance services under our Hofincons brand across various industries, including power, energy, oil and gas, chemicals and ferrous and non-ferrous metal industries. Quess Corp generated 5.61% of its revenues from the business in FY2016.

Financial Performance

Quess Corp has turned in tremendous business growth in each of the last four years in terms of revenue growth as well as earnings. This is evident by looking at the financial figures, although the numbers are skewed as the company changed its reporting period from Apr – Mar to Jan – Dec in 2013 but reverted to the old system in the subsequent year. Thanks to the steady growth in operations, the company has posted higher profits in each of the last four years. More importantly, it has managed to improve its margins as well. Although low single digit margins may appear unattractive, it is worth noting that these are above average margins of the industry. Growing profitability of Quess Corp is reassuring for IPO investors and it is important to highlight that these margins are better than TeamLease on a like to like basis.

Read Also: TeamLease IPO review: A combination of low margins and high valuations

Another noteworthy point here is revenue recognition (read an excellent explanation here). In simple words, Quess is presenting a low margin scenario by booking all the revenue it gets from clients without deducting the salaries it pays to people on its payrolls.

Ok, but is there money to be made?

A positive with Quess Corp is that it had long term debt of only INR354.8 million (INR35.48 crore) as of 31 March 2016. However, the company relies extensively on short term borrowings for its business requirements and had INR3.39 billion (INR339 crore) in current debt. Short term borrowings are largely in the form of cash credit, overdraft and working capital loans from banks. Expenses in this regard will come down after the IPO as the company reduces its working capital loans.

Quess Corp had diluted earnings of INR7.67 per share in the year ended 31 March 2016. This serves as the base case and values the company’s IPO at a PE (price to earnings) ratio of 41.3 on the upper end of the price band. The valuation ratio declines to 40.4 on the lower end. These figures may appear high but it helps to know how competitors are valued. Quess believes it has no competitor with the same portfolio of services, it nevertheless sticks to TeamLease Services as reference. TeamLease is currently available at a PE ratio of more than 60 which is much higher than the valuation Quess is asking for. It is also helpful to know that TeamLease brought its IPO at a PE of 44 times and it was lapped up. Subsequently, shares of TeamLease have traded significantly above the IPO price, indicating that the market has high appetite for high growth plays.

Apart from PE ratio, Quess also appears a better bet on the return on net worth (RONW) parameter. Quess has RONW of 25.6% compared to nearly 8% for TeamLease. For a high growth and a relatively better placed company like Quess Corp, the valuations appear justified.

Finally, here is a word about management. Ajit Isaac is not only a veteran in the HR outsourcing industry but also a well-respected figure. Despite being a first-generation entrepreneur and the founder of the company, Ajit appears to have set up systems and processes at Quess Corp that help in maintaining good corporate governance. Ajit drew a reasonable annual remuneration of INR14.5 million in FY16. The tendency of not overpaying is also reflected in the takeovers Quess has made. Except in the case of Magna Infotech and Avon, Quess has always paid lower than or equal to the fair value of the respective entities specified in the independent valuation reports. Prem Watsa is an astute businessman and when he acquires a business, it is only after a thorough due diligence of not just the business but also of the management. Watsa has a Buffett like philosophy of offering a permanent house to acquired businesses and does not interfere with day to day management.

Overall, Quess Corp IPO comes across as a high growth and prudent play on India’s scattered and highly fragmented HR outsourcing market. Since this nature of the industry is likely to continue offering consolidation opportunities, players with solid execution skills are expected to emerge as winners. Management of Quess Corp has an edge over smaller competitors in this regard and thus, Quess Corp IPO may end up rewarding investors well.