To Quess or Not to Quess - An IPO Analysis

Yet another week, yet another IPO; Quess Corp, the integrated business services provider arm of Thomas Cook India, is coming out with its IPO next week. The company is issuing shares worth Rs. 4000 Million in the price band of Rs. 310 to Rs. 317. The IPO will be open from 29-Jun-2016 to 01-Jul-2016. Shares can be applied in lots of 45 shares and the retail investors will be allotted 10% of the total issue. The company has not provided the number of shares it is going to issue rather have informed that they are expecting to raise a minimum of Rupees 4000 Million. Considering this, they are going to issue at least 12, 618, 297 shares and utmost 12, 903, 226 shares. 

The company intends to do the following with the proceeds of the IPO:

•  Repayment of Debt – Rs. 500 Million;
• Capital Expenditure – Rs. 717 Million;
• Incremental Working Capital Requirement – Rs. 1,599 Million;
• Acquisitions & Strategic Initiatives – Rs. 800 Million.
  

The company operates in 4 major segments:

1. Global Technology Solutions – IT Services, IT Product solutions contributing to 26.77% of the revenue;
2. People & Services – Staffing services and solutions including general staffing, recruitment and executive search, payroll, compliance and background verification services contributing 56.64% of the revenue;
3. Integrated Facility Management – Facility management services to corporate, hospitals and schools contributing 10.82% of the revenue;
4. Industrial asset Management – Industrial operations and maintenance services to industries generating 5.61% of the revenue.

There aren’t many listed competitors of Quess available. The closest competitor is Teamlease India Limited. Like Teamlease, Quess also operates all over India providing all of these services.

The revenue of the company has had a 52% CAGR for 4 years from 2012 to 2016 which is phenomenal.

Quess Corp’s consolidated financial performance (in INR Million)
Details	FY12	FY13	FY14 (Apr 13 – Dec 13)	FY15 (Jan 14 – Mar 15)	FY16
Total revenue	6,394.00	10,043.00	10,081.00	25,727.00	34,424.00
Total expenses	6,263.00	9,800.00	9,792.00	24,685.00	33,176.00
Net Profit	62.00	120.00	178.00	672.00	885.00
Net Profit Margin	1.00%	1.20%	1.80%	2.60%	2.60%

However, their profit margin is quite low at 2.60% for the year ending March 2016. This is definitely a cause of concern. This may be completely wiped out if the costs increase in the future. However, since the company is headed by Ajit Isaac, who is an industry veteran, who has been managing the company professionally and consistently increasing the margin from 1.00% in 2012 to 2.60%. He has also ensured that the company, even though he owns nearly 40% of the company, adheres to high standards of corporate governance. His compensation is also at not too high at Rs. 14.50 Million for the year ended March 2016. 

Another good thing is that the company has a long term debt of only Rupees 354.80 Million. However, they have a high short term borrowings in the form of Cash Credit, Overdraft and Working Capital loans from bank for their business requirements to the tune of Rupees 3390 Million. With part of the proceeds being used to repay these, short term borrowings are expected to reduce to more manageable levels at around Rupees 1800 Million.

The company had a diluted EPS of Rs. 7.67 per share for the year ending March 2016 giving a PE (Price to Earnings) range of 40.40 and 41.30 at the lower and higher spectrum of the issue price. This compares to a PE ratio of about 60 for Teamlease. There is a huge upside expected when the company lists compared to the issue price of the company. The company also has a very high RONW (Return on Net Worth) of 25.60% compared to 8.00% of Team Lease.

Considering that Quess operates in the highly fragmented HR outsourcing market with a high growth prospects and is relatively better placed than its competitors, the offer price looks competitive. This is another IPO that I am going to subscribe to with a long term view in mind.