Can I sail through the changin’ ocean tides?
Can I handle the seasons of my life?
In 1975, Stevie Nicks and Lindsey Buckingham (of Fleetwood Mac) were performing their hit song Landslide on stage. Backlit, Nicks’ golden hair was framed by a halo, while Buckingham remained a silhouette in the background. They were singing about their failed romance, even occasionally smiling at each other.
This song is Quess Corp founder Ajit Isaac’s all-time favourite, he had told Outlook Business, in our 2019 Secret Diary series. “It is about coming to terms with the curveballs life throws at you,” he had said. It is about accepting it with grace and maybe even humming a tune, or strumming a guitar. Now, Isaac has been served a curveball. Quess was growing at a healthy clip, with FY17 to FY20’s revenue CAGR at 38%, till the ‘landslide’ slowed things down. The lockdown following the pandemic has hit staffing services (and Quess is the largest in this space in India) with companies trimming costs and letting go of temporary staff. Isaac’s company makes 79% (Q4FY20) of its money from workforce management, which is mostly staffing, and then skilling and other services. The rest of its revenue comes from operating asset management and technology solutions (See: A ‘hire’ purpose).
Isaac was introduced to flexible hiring when he was working with the first staffing company he had founded called PeopleOne Consulting (earlier Go4careers). One of their clients, the Sterlite Group, had wanted to flexi-hire for their optic-fibre-cable factory in Atlanta. Isaac observed how this choice in staffing helped the Group during the 9/11 crisis, when they had to scale down, and rightly recognised flexi-hiring’s potential in a volatile environment. In 2007, when he invested in and grew Ikya, which later became Quess, Isaac had a winner on his hands.
Over the past twelve years, it has grown to become a $1.5 billion company, employing 380,000, and serving over 100 clients across nine sectors and 10 countries in the Asia Pacific, Middle East and North American regions (See: Steady climb). Even for FY20, the numbers were looking good — revenue was up 29%, Ebitda was up 42%, operating cash flows (OCF) had grown 16% and RoE (adjusted) was 11%. But in April, their staffing business saw a 5% decline in headcount in the first month of the lockdown. Alok Deshpande, research analyst at Edelweiss Securities says, “During such situations, contract workers are let go first and when things worsen, companies start firing their own employees, like we saw in 2008 and 2009.” Back then, staffing headcount fell by 20-25% at some of the largest global companies such as Adecco and Randstad in the US. Deshpande adds that Quess will also have to deal with similar pain this year.
Analysts at Kotak Securities agree. A report by analyst Sumit Pokharna (after the Q4FY20 result) states that “the near-term business outlook remains bleak”. It notes that the revenue from Excelus (Quess’ learning business) had fallen to zero and added: “We believe the decline in workforce volume will significantly impact the revenue from workforce management.” While maintaining a ‘buy’ rating, the brokerage revised its earnings estimate from ₹26.2/share to ₹15.6/per share on grounds of weak revenue growth, margin pressure and extended credit cycle.
In line with estimates, the company saw 15-20% decline in staffing headcount in FY21 and quarter-on-quarter revenue was down 20%, even though it remained flat year-on-year. But the staffing company had already identified its weak links and was fixing them. The management had noticed how the pandemic was unfolding in their other markets, such as Singapore and Philippines, and they moved fast to mitigate its impact. After putting in place procedures to secure the safety of their and their clients’ employees, such as setting up home offices, the company put up three task forces — around customers, cost and cash — to chase revenue, but protect cash flow.
To regain revenue, the customer task force is pursuing new clients. In the latest quarter, they onboarded 200 new customers, who according to the management, have “realised the benefits of working with a player of Quess’ scale”. In the Q4FY20 earnings call, Motilal Oswal Financial Services’ analyst Sudheer Guntupalli wondered how the company’s existing clients, particularly in retail, coped with employees’ absenteeism after the lockdown. Some of the retail companies had reported that 70% of their frontline staff simply didn’t show up. Quess CEO Suraj Moraje agreed that their clients had reported such instances initially, but added that Quess was able to replace them immediately. At some of their larger retail clients, more people marked their attendance in April than they did in March. Also, the staffing company is ramping up its sourcing capability to backfill (replace absentee/missing associates) faster.
To protect cash flow, Quess’ second task force cut down their indirect expenses by terminating lease agreements of 15 of their 58 offices across the country, reducing travel expenses even for senior management and e-invoicing customers. With these, they managed to cut down their indirect costs by 20% in Q1FY21 compared to the previous quarter. Lastly, to save cash, they reduced the working hours required from each associate and pumped this freed-up money back into the company. The company also had a task force to get bills cleared, from governmental and non-governmental agencies, and companies. In the Q4FY20 earnings call, Moraje said that the company is expecting a “dramatic difference” in operating cash flow of Excelus, by reducing the vertical’s exposure to the government business.
In the initial years, Quess’ cash flow was impeccable. But, over the years, as it pursued acquisitions more aggressively, its cash flow has been a matter of concern. In FY20, the company’s gross debt increased by ₹3.63 billion to ₹11.47 billion, primarily due to acquisitions. Edelweiss’ Deshpande says, “When Quess Corp started its business, it was only into staffing — one which has high return on capital employed (RoCE) and return on investment (RoI). And then they started making these acquisitions, in which some were loss-making businesses that they hoped to turnaround.”
One of the most challenging acquisitions for the company was in 2018, when it bought the loss-making job staffing company Monster India for $7.5 million and its businesses in Singapore, Hong Kong and Malaysia for $6.5 million. Compared to 2016-2017 as the company started acquiring businesses, Deshpande adds, “Higher growth and return on capital businesses started seeing a declining share in the company and it became a complex business for investors to track." This, he believes, hurt the company’s valuation since investors became unsure about the company’s future direction. Thus, from Q12019, the Quess Corp stock began to lose altitude.
The company took cognizance of changing investor sentiment. As a February 2020 Investec report notes, it began consolidating existing acquisitions and bringing its focus back to cash generation. The company has, in recent times, maintained that it will not be acquiring any new company. In fact, it recently completed the merger of its subsidiaries and let go of loss-making deals such as its football JV with East Bengal. It also completed the consolidation of four of its wholly-owned subsidiaries — GoldenStar, Greenpiece, MFX India and Trimax Smart Infra. With healthy operating cash flow in Q1FY21, driven by strong collections and release of working capital, the company saw its gross debt reduce by ₹1.7 billion to ₹9.77 billion. Deshpande believes that if the management keeps its strategy consistent over the next two to three years, the perception over the stock can improve. “For example, if the company sticks to the strategy of not doing any more acquisitions, then the market is likely to reward them. That is where the value can get unleashed,” he says.
For now, Quess is using its size to gain a bigger market share. Analysts say one advantage it has over competitors is that it provides a diversified range of services and it is the market leader or at least second in many of these categories. “Besides benefit in terms of margins and profitability, Quess should be able to grab market share from smaller players, which are finding it tough to survive during this painful time,” says Deshpande.
Once things stabilize, revenue from staffing, security and facilities management will see 15-16% revenue CAGR for six to seven years, according to his report. That is, of course, assuming India will be back on the growth track. “Once normalcy returns, flexi-staffing models are likely to be preferred for scaling up and Quess as a market leader should benefit,” it mentions. Another report from IIFL Securities’ states, “Quess has the unique advantage of being able to provide a complete life-cycle suite of services under one roof; there is no competition in such bundled services.”
Meanwhile, Quess is expecting the gulf between the small and big players to widen. As Moraje said in the Q4FY20 earnings call, “We believe formalization is going to set in even more with the new labour laws.” Therefore, the company is accepting lower mark-ups during this tough period (with a clear sunset clause that ends this arrangement after 60 to 90 days) but is asking clients to give them more work, even work the clients had earlier assigned to smaller, “not-so-defined” players.
Quess is also getting clients to accept tougher credit terms and is using these discussions to cross-sell. The company has been cross-selling over the past two to three years and Isaac said, during the call, that in FY20 they have managed to grow around 15-18% of their revenue from existing clients. The current negotiations have only furthered these efforts. Deshpande says in his report, “Lower mark-ups will be temporary, but market share gain could be permanent.”
The growth story, IIFL Securities’ VP Abhijit Akella believes, is a long term one. “That remains intact, if one is prepared to look beyond near-term turbulence created by the pandemic,” he adds. Analysts agree that Quess is well placed to survive and come out stronger from this crisis. The company is using this opportunity to deepen its hold over the market, make its operations leaner and improve its cash position.
Nicks sings of gathering the courage to change, when the time comes, and Quess is doing that admirably well.