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TeamLease aims to raise Rs 450-500 crore

The IPO would be a combination of fresh issue of shares worth Rs 150 crore and an offer-for-sale (OFS) for 3.22 million shares

Equity markets are not looking promising at the moment and initial public offerings (IPOs) that listed last year are in the red. But that hasn't stopped companies such as staffing firm TeamLease Services Ltd from going in for an IPO.

The company has announced plans to raise ₹450-500 crore through its IPO. Incorporated in 2000, the company offers human resources (HR) services, including flexi staffing or temporary staffing, and permanent recruitment. The promoter group holds close to 52% in the company. The IPO would be a combination of fresh issue of shares worth ₹150 crore and an offer for sale (OFS) for 3.22 million equity shares.

OFS is a mechanism that helps promoters of a company sell or dilute their existing shareholdings. While 10% of the fresh issue is reserved for retail investors, 15% is for other non-institutional investors.

Ten thousand shares are reserved for employees. The proceeds of the IPO would be used for working capital, acquisitions and other corporate purposes. The IPO is priced at

₹785-850 per share. "It is priced to benefit the private equity investors who are offering their stake for sale," said Sanjiv Bhasin, executive vice-president-markets and corporate affairs, India Infoline Ltd. The IPO is open 2-4 February.

Crisil has assigned it a 4/5 rating, indicating that it is above average compared to peers. The staffing industry has shown promising growth in the past. "There has been an increase of 400,000 in the flexistaff industry size in India over the past two years, an annual growth rate of 14%. The industry is expected to grow to 9 million and represent 10% of the organised workforce by 2025," said Suchita Dutta, executive director, Indian Staffing Federation (ISF).

TeamLease gets most of its revenues (98%) from the flexistaffing business. Increase in the penetration of flexi-staffing and possible favourable amendments in labour laws are expected to contribute to growth. "With labour reforms, the boost could be much higher. Due recognition to the flexi staffing industry is being suggested by ISF to the Ministry of Labour and Employment," said Dutta.

Where it stands

The company crossed the ₹100 crore mark in revenues in financial year (FY) 2005-06. According to the Red Herring Prospectus, its total revenue was ₹2,018.5 crore and profit after tax was ₹30.78 crore in FY15. The company has an associate employee strength of over 100,000 and 1,200 staffing clients across eight offices.

The company has also diversified its business in terms of the industries that it serves as well as individual clients. A Crisil report on TeamLease states that the top six end-markets served by the company form 55% of its overall billings. The maximum exposure is pegged at 20% (this constitutes the consumer goods industry). The top 10 clients account for less than 20% of the total revenue, which is low.

What are the risks?

The staffing industry is large but also sees much competition from various companies. "The size of the Indian flexi-staffing industry is 1.7 million, with temporary work being 75% of it," said Dutta.

Crisil estimates that 70-80% of the staffing industry is unorganised. This means that there are fewer entry barriers but also that there can be many competitors in the same space.

Another risk to the company is that many of its peers in the organised space are global giants such as Manpower and Randstad. Therefore, to survive and keep growing, TeamLease might have to consider acquisitions in the coming years. Capital infusions might also be needed to maintain the growth momentum.

The other concern is that the staffing industry is highly fragmented and unorganised. "Out of 397.4 million in the workforce, 347.7 million are in the informal sector," said Dutta. Since the value addition by a particular company is difficult to estimate, staffing companies' margins might remain low. Operating margins, which were at 1.6% in 2014-15, have narrowed to 1.4% this fiscal.

"Staffing is an exciting vertical but now with immense competition, returns have fallen sharply," said Bhasin.

If favourable changes in the labour law don't materialise in the coming years, the company's stock price may be affected.

Mint Money take

At the upper end of the price band, the company is valued at ₹1,445 crore, which is high when compared to peers such as Ikya. "The aggressive pricing leaves little on the table for a 'listing pop'. Retail participation may not meet the expectations of merchant bankers as equity sentiment and timing are weak," said Bhasin.

It would be best for investors to consider investing in the company after listing rather than at the IPO stage.

In arrangement with HT Syndication | MINT