Investors can skip the primary offer of Quess Corp, a provider of staffing solutions. While it has the backing of a strong parent, Thomas Cook, low margins and entry barriers in this business are of concern.

Moreover, while the company has grown at a rapid clip, it has taken the inorganic route through a spate of acquisitions, some of which are yet to turn profitable. The management will face challenges in streamlining the operations of the loss-making subsidiaries and integrating them into the existing businesses.

At the price band of ₹310-317, Quess Corp is asking for a price-to-earnings multiple of 45. While this is lower than the latest PE of its peer, Teamlease (57), it is higher than the valuation at which its global peers are trading. Quess Corp competes with Adecco, Manpower and Randstad which are quoting at multiples of 40, 13 and 15 respectively.

In terms of enterprise value to operating profit (EV/EBITDA), the company is asking a multiple of 25 , as against 51 for Teamlease.

Price competition The company earns bulk of its revenue from two businesses. The Global Technology Solutions (GTS) segment meets the staffing demands of IT companies in India, the US and Canada, that operate in specialised areas such as cloud computing, data analytics and mobile connectivity.

This segment also provides IT solutions to insurance companies in the US. The People and Services (P&S) segment is into staffing for non-IT companies, providing payroll services and training and development. The above two businesses contributed 83 per cent of the company’s revenue and 75 per cent of the operating profit in FY-16. The GTS business accounted for 27 per cent of the revenue and the P&S business 57 per cent.

Operating margin for GTS was 7.1 per cent in FY-16, down from 8.7 per cent in the previous year. The margin in the P&S business that accounts for a larger share of the revenue, was however lower at 3.5 per cent.

The company acquired Magna Infotech in 2010 which focuses on Indian IT staffing and BrainHunter in 2014, which is into IT staffing in North America. It recently took a 51 per cent stake in MFX, which focuses on IT products and solutions, primarily for insurers (property and casualty insurance).

While low penetration of staffing business in India offers potential, intense price competition from unorganised players, coupled with low entry barriers for new players, is depressing margins. To increase its operating margin as well as diversify its business, Quess Corp entered into the business of industrial asset management as well as integrated facility management. However, it is yet to scale up these businesses.

Inorganic growth In the last four years, the company grew its revenueat an annual rate of 52 per cent, while its profit grew at an even higher 81 per cent. In the last two years, it made eight acquisitions, including Hofincons, Brainhunter, MFX, Randstad Lanka, Aravon, Styracorp and IME Consultancy and TSQ. According to the management, new acquisitions have only aided 20 per cent of its overall growth. However, the worry is that some of its acquisitions such as Brainhunter and MFX are still loss-making.

Some of the acquisitions such as MFX, Styracorp and IME Consultancy, that were loss making, are yet to be fully reflected in consolidated financials. This can weigh on profitability in the coming quarters.

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