TeamLease Services Limited (TEAMLEASE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the TeamLease Q2 FY '27 Conference Call hosted by HDFC Securities. [Operator Instructions] I now hand the conference over to Mr. Arjun Savla from HDFC Securities. Thank you, and over to you.

Thank you. Good evening, everyone. On behalf of HDFC Securities, we welcome you all to the TeamLease Quarter 2 FY '27 Earnings Call. Today, we have with us the management team of TeamLease represented by Ms. Suparna Mitra, Managing Director and CEO; Ms. Ramani Dathi, CFO and CEO; Ms. Neeti Sharma, CEO, Specialized Staffing; and Mr. Balasubramanian Narayanan, Senior VP Staffing. I will now hand over the call to Ms. Suparna Mitra for the opening remarks, post which we can open the floor for Q&A session. Thank you, and over to you, Suparna.

Thank you so much. Good evening, ladies and gentlemen, and thank you for being with us today. I'll share my perspective on the quarter and the priorities, after which, of course, we will take your questions. The first half of FY '27 has been a period of deliberate reset for TeamLease. We recognize that this quarter's results fell short of our own aspirations and of the expectations of our stakeholders. At the same time, the actions we are taking will position the business on a stronger and more profitable footing in the future. The revenue for the quarter was INR 3,086 crores, which is up 1% sequentially and year-on-year. For the half year, revenue grew 4% to INR 6,142 crores. Operating EBITDA was INR 44 crores, up 17% sequentially and 5% year-on-year. For the half year, it grew 11% to INR 82 crores. It is encouraging that our operating businesses are growing profit faster than revenue. Reported EBITDA was INR 36 crores, a margin of 1.2% and higher sequentially. Year-on-year, it reflects our investment in brand and marketing revamp and buyback-related costs held in unallocated. Profit before tax was INR 30 crores, up 2% year-on-year. For the half year, it was INR 66 crores, up 19%. For clarity, this includes other income such as interest on income tax refund received in quarter 1. Operating EBITDA remains a better indicator of underlying progress. Profit after tax was INR 26 crores. Our headcount moderated to about 333,200. We added 114 new logos, including 32 in General Staffing, of which more than 3/4 were onboarded under the variable engagement model. 30% of the associates we hired were first-time job seekers, which remains central to our focus of putting India to work. DSO held at 6 days. Specialised Staffing continues to be a strong contributor. Revenue was INR 190 crores with EBITDA growing in double digits sequentially. The India business earned a 7.6% EBITDA margin and global 4.3%. GCCs contributed over 69% of segment revenue, and we now serve more than 135-plus GCC clients, up from over 110 at the end of last year. This is the profile of business we intend to grow. In HR Services, revenue rose sequentially on EdTech seasonality with a segment EBITDA margin of 3%. We are focused on strengthening the commercial engine of HR Tech solutions where the opportunity is significant. Our priorities rest on three pillars: first, a sharper focus on higher-margin businesses. We will direct capital, talent and leadership attention to businesses with the strongest returns, including international geographies while pursuing growth in General Staffing. Second, disciplined portfolio management. Every business and investment will be assessed on returns, strategic risks. The divestment of our 50% stake in Crystal HR completed this quarter with no loss on capital invested is an early example. We may have to weed some of the non-aligned businesses, which allow bandwidth to seed new verticals. Third, to establish TeamLease as a holistic talent solutions partner. We bring recruitment, staffing, apprenticeship, productivity, compliance and HR technology under one relationship, and we believe this will deepen client accounts, improve cross-sell and lift margins over time. To enable this, we are investing in sales productivity, hiring, AI and digital capability, our brand and leadership there. Our core team has grown to about 2,790 from about 2,500 in March. These investments weigh modestly on near-term margins and on productivity per core employee. We expect them to build a stronger platform for the years ahead. Our balance sheet remains a source of strength. After completing the INR 258 crores buyback in July, we hold INR 350 crores worth of net free cash with about INR 160 crores of TDS receivable outstanding. Funding exposure in staffing was 16%. The long-term opportunity is compelling. The formalization of India's workforce is deepening. The central rules and the labour codes have been notified and GCCs continue to create demand for specialized talent. TeamLease is positioning itself to lead in that environment. Thank you for your continued support. I now hand over to my colleagues for their comments and happy to take your questions after that.

Thank you, Suparna. Good evening, everyone. In Q2 FY '27, we closed the quarter at approximately 2.85 lakh associates, which is a net reduction of about 5,500 associates. On our Q4 call, we had guided an exit of roughly 10,000 associates across low-margin mandates through Q1 and Q2. One client within that book, which was running at a negative margin exited this quarter with over 7,000 associates. Adjusting for that, the underlying business still added about 1,500 associates. And since that mandate was margin dilutive, the exit is accretive rather than being neutral. Gross hiring was at our highest in three quarters at about 62,500 associates. So fulfillment was not so much a constraint. The underlying addition was nonetheless thin and one of the reasons is BFSI. Sectorally, BFSI declined for us in aggregate, but not because we lost the ground commercially. We gained wallet share in select private banks, small finance banks and midsized NBFCs and continue to shift Tier 2 Tier 3 markets. That progress was outweighed by reductions in a few large accounts where clients ran their own productivity and cost optimization programs. This is visible across the industry, not just in our book and our commercial position in BFSI is stronger than the headcount line. Consumer was the offset and it was genuinely strong. Durables ran well ahead of last year through the summer and into the build and our retail and e-commerce volumes both grew led by quick commerce. Those gains were large enough to absorb the BFSI decline and still leave the underlying book positive. Just one small callout on the festive calendar because it affects how the closing number vary. Diwali fell almost three weeks later this year compared to last year, and the season arrived in distinct clusters rather than one continuous buildup with a quiet stretch at the end of September. So our September 30 headcount was therefore measured between clusters. Looking forward, the lower peak and the longer deployment window would lift the billable days for associate across Q3 and the demand now runs deeper into Q3 this year than it did last year. From a commercial standpoint, we added 32 new logos with about 75% of them under variable markup or outcome-based pricing. The GST 2.0-driven exits that we flagged last quarter also played through as expected with nothing instrumental. We also continue to shift towards non-metros where average salaries run 20% to 30% below urban markets. On sourcing, over 19,000 joinees or about 31% of the overall gross joinees came through our own hiring efforts against 28% in Q1. We had said at the start of the year that rebuilding own sourcing was a priority for H1, and this is that work coming through. In telecom, the direction of travel seems to have changed. As last year, operators have expected automation and autonomous networks to steadily reduce frontline headcount. But for a large set of field and customer-facing roles, human deployment in the cost context remains both more effective and cheaper. Hiring has ramped up in multiple pockets as a result, and we gained wallet share in several of them. In industrial power transmission and distribution rollouts are resuming where approvals have stalled though unevenly and the structural opportunity is unchanged with a large awarded order book still to execute. On the regulatory front, the EPF wage ceiling went up in September and state changes under the labour codes continue to be notified. Both raised employer cost, which is contractually recoverable from our clients under existing agreements. So we do not expect a P&L impact on the associate book. We have readied our systems ahead of this, and we are able to implement these changes immediately. Our attention is instead on associate take, which these changes reduced and retention is the real exposure we are managing upon the account. Operationally, technology remains the core of the thesis and three investments are worth flagging. We are partway to a ground-up overhaul of our associate life cycle system with some elements already live, more going live in Q3 and a full rollout expected in Q4. Alongside that, secondly, we are integrating our clients and associate databases so that commercial and workforce intelligence would be available on demand rather than assemble on request. And last but not the least, we continue to apply AI and automation to simplify process heavy workflows, which is where the operating leverage comes from. Our associate care offerings continue to expand and continue to build nonlinear revenue. Looking ahead over the next three to six months, we entered Q3 with the festive deployment in hand and the longer season behind it, over 16,000 open positions and a healthy pipeline. Clients are planning in shorter cycles than they used to. So we expect them to stay deliberate. What we are confident about is the engine underneath. The commercial discipline, cost to hire reduction and the technology investment built over the last two years convert into earnings growth, whether or not volumes land ahead and that is what FY '27 rests on. Thank you, everyone. And with that, I would like to hand over to Neeti.

Thank you, Bala. Good evening, everyone. Hiring across the IT services companies in the last quarter has still stayed cautious. Most of it has been replacement hiring rather than new roles. However, the roles that have been hired were more skilled and of higher value. While the net additions in this sector are still not showing up, each of the IT services companies are hiring AI talent at every level, whether it's at core AI work, AI adjacent roles or support roles. Demand during the quarter was led largely by AI/ML engineers, data engineering roles, cloud DevOps, cybersecurity and SaaS skills, while hiring for legacy and generalist roles largely stayed moderate. We are also seeing rising demand for composite skill sets such as FDEs and graph engineers increase quarter-on-quarter. Against this backdrop as well, we've maintained our growth trajectory of previous quarters. EBITDA grew 15% over last quarter and operating margin went up by 90 basis points. Three things drove this: better pricing, a richer mix of skills and improved productivity at our teams. We ended the quarter with 7,670 associates across IT and specialized skill sets and our PAPM has gone up by about 10% over the last year. Customer acquisition remained healthy with about 60 new logos added in the last two quarters. About 16 GCCs are included in the 60 new logos that we brought on board. We also grew our wallet share with existing customers through multiproduct deployment and broader partnerships, which gives us better revenue visibility for the coming quarters. Earlier this year, we launched our AI talent learning advisory and services program called ATLAS, which brings together everything we offer to help companies with their AI transformation. Under the ATLAS program, we've placed more than 800 AI professionals in H1 and work with over 25 clients on their AI learning, advisory and transformation programs. Outside of technology hiring, we've kind of hired for domain specialists that continues to grow in demand in engineering, R&D, automotive, healthcare, life sciences, BFSI and SME skills. GCCs are still the biggest driver of demand for us. We now work with more than 130 GCCs across industries, up from 110 at the end of last financial year. Together, they make up for about 60% of our associate headcount and about 69% of our net revenues. Our full stack GCC offering, TeamLease CapQ supports GCCs at every stage. When they are launching, we help them with their hiring strategy along with their compliance, legal and infrastructure requirements. As they grow, we help them scale, keep their talent and build new capabilities for expansion and transformation. This is helping us engage with GCCs in their nascent stages and grow alongside with them. Our global business is growing as well with revenue up by about 51% over last year. We stepped away from some low-margin mandates globally, and our global operating margins have gone up to 5%, up from 3% in the last quarter. We now have more than about 100 people outside of India, and we are continuing to strengthen our global delivery from India for our global requirements as well. For the second half of FY '27, we will keep building depth in high-value areas such as AI, GCC, specialist domains and global business. At the same time, we will keep pushing profitable growth through better pricing, a better skill and product mix and a higher employee productivity. Q3 usually has furloughs for us, and we have already planned that in our numbers for the year. As companies move from trying out AI to actually using it at scale, they will need more specialized AI-ready talent. Our investments in building capabilities for hiring AI talent at scale, stronger GCC relationships, a growing global business and steady execution, we believe we are well placed to keep growing profitably and to create long-term value for our customers, associates and stakeholders. Thank you. And with that, I would like to hand it over to Ramani.

Thank you, Neeti, and good evening, everyone. This is Ramani. Let me take you through the financials for the quarter and the half year, and then we'll open up for questions. Starting with the headline, consolidated revenue for Q2 was INR 3,086 crore, up 1% sequentially and 2% year-on-year. For the half year, revenue was INR 6,142 crore, up 4% year-on-year. Operating EBITDA, which is the business profit before corporate and unallocated costs, was INR 44 crore for the quarter, that's up 17% sequentially and 5% year-on-year. And for H1, it's up 11% at INR 82 crore. The operating line improved, mainly led by Specialised Staffing and EdTech seasonal pickup. PBT was INR 30 crore, up 2% year-on-year and down 18% sequentially, largely because of tax refunds in Q1. Adjusted PAT was INR 26 crore before exceptional items. For the half year, PBT grew 19% to INR 66 crore and PAT grew 14% to INR 60 crore. Operating EBITDA margin improved sequentially. Specialised Staffing EBITDA was up 15% quarter-on-quarter to INR 13 crore. HR Services moved from a INR 2 crore loss in Q1 to a INR 2 crore profit in the current quarter, mainly led by EdTech business. At the reported level, EBITDA was down 6% year-on-year and this gap is mainly on account of unallocated cost. Corporate EBITDA was a INR 8 crore cost this quarter against INR 4 crore a year ago. That reflects buyback-related expenses and some of our planned investments in brand, technology, and people. On PPT front, we had INR 12 crore of non-recurring other income Q1, because of which there is a dip in sequential PBT in Q2. The operating businesses added about INR 5.8 crore, that was more than offset by the INR 12 crore lower other income. On balance sheet front, we closed the half year with net free cash of INR 350 crore after completing INR 238 crore of buyback in July. Cash and investments on the balance sheet were about INR 526 crore against INR 772 crore at March. And the reduction is almost entirely on account of the buyback. TDS receivable stands at about INR 160 crore. We continue to pursue refunds for later assessment years, and we received INR 38 crore in Q1 of this year. Coming to capital allocation, two portfolio actions were completed in the quarter. First, the buyback leading to 8.87% a pre-buyback paid-up capital was completed on the approved terms and funded entirely from the internal accruals. Second, we divested our 30% stake in Crystal HR under the put option. We recovered our full original investment with no loss on capital invested. With INR 350 crore of net free cash, our capital priorities are in order, investment in technology, people leadership in the core, then disciplined margin-accretive acquisitions in adjacencies. We are evaluating opportunities for M&A and have nothing at advanced levels to disclose today. Anything material will be disclosed to the exchanges as and when required. Thank you. We can now open for questions.

[Operator Instructions] We have the first question from the line of Amit Chandra from HDFC Securities.

My first question is on the General Staffing segment. Obviously, we have seen some margin expansion at the overall company level. But if I see the overall addition in terms of net associates, it has been pretty soft. Obviously, we are shifting towards more higher-margin mandates and we are doing some restructuring in some of the accounts which you have mentioned last time. So in the existing base we have for General Staffing, do you think that we have hit the bottom in terms of the headcounts and maybe we can head towards 5% to 6% kind of volume growth on a steady state from here on? Or there is still some kind of restructuring or some kind of exits that is still pending in some of the accounts, especially in the BFSI and the other verticals. And obviously, it's very good to see that you have included a lot of new data points in the PPT regarding the segments. So in that, I see the industrial segment is still high single-digit kind of a number. Maybe if you can indicate that how these segments maybe like in the next one or two years, the focus segments where the incremental growth can come in because if I see the peer performance, they have been growing pretty well and they have been adding a lot of associates -- is it more like increased competition? Or is it more like restructuring at the company level?

Yes. Thanks for that question. I'll start off and then I'll request my colleagues to join. So I think as far as General Staffing is concerned, we are very much focused on headcount addition, profitable one. And the focus and the strive towards adding new clients and mandates and getting the headcount numbers up is very much part of our H2 plan. Yes, there is greater analysis on the kind of mandates on the kind of industry, and we are more careful about what we are pursuing. But it is not only a profitability direction. It is a profitable growth. Growth is very much on our agenda and the growth will come from headcount, and we are totally focused on it. Yes, I will request Bala to add some more points. And then you're referring to a particular slide on the investor deck. We can also take you through a little bit on that since you have mentioned that.

Yes. The softness on numbers really on a couple of quarters, we had some one-off situations because of which the underlying growth in the overall business got completely obscured. But if you were to just look at those numbers aside and look at the underlying growth instead on a stand-alone basis, then clearly, it shows two things. One, that the business is resilient and two, that the growth is also coming from a diversified portfolio that we have been able to build over the last few years. While we started showing these numbers for the last three years, if you were to step back and look at this five years ago, you would find that we were largely indexed on pretty much just BFSI, consumer and telecom. The other three portions pretty much didn't exist at that point in time. But now a healthy 30% comes from the non-BFSI and consumer and telecom portfolio clearly. So that's one call out. And secondly, yes, the other softness from a CAGR standpoint that we are witnessing in the last 18 months compared to the previous, I would say, three or four years is also because of some tentativeness on part of our clients stemming largely from the fact that there is a lot of uncertainty driven by external macro environment. And there was also a lot of positivity with respect to what AI can do for their business and can it really substitute some of the manpower that we have, if not -- I mean, just some of them, not all. But then clearly, it is now seen as a productivity enhancer and not really a substitute for at least the kind of people that we manage in general. Like I called out in my earlier briefing about Q2 as well, specifically in the telecom industry, it's a very clear 180-degree turn that we are seeing, and we are seeing a similar narrative across various other industries as well. So we are confident on us being able to deliver consistent net adds going forward. With respect to what the percentage is going to be, I think it's very difficult to quantify that presently.

Okay. And ma'am, you mentioned about that we are seeing healthy PAPM growth. like you mentioned about 10% kind of PAPM increase. So that is coming mostly from the variable contracts that we have signed? Or is it more coming from the existing clients as well? And in the PPT, we mentioned the number of the INR 600 PAPM as of the quarter 2. So if I'm not wrong, the PAPM used to be around INR 650, INR 670. So the INR 600 is how it adds up for the 10% growth? Can you please explain.

So Amit, hi, Neeti here . I had mentioned about a PAPM growth for Specialised Staffing going by up by 10%. And that is largely subject to the hiring and the profiles that we are hiring. So we are doing a lot of AI hiring, data engineering hiring. So they come at a higher value and higher rate card, which is where our PAPM has gone up by 10%.

And for the General Staffing business, the PAPM has been declining because it used to be in 650,660 range. Now it has come down to 600. So how do you see the PAPM panning out? And where the growth will come from headcount PAPM and if you can give some margin guidance or the EBITDA guidance that you earlier provided in terms of the overall EBITDA growth for the next year?

Hi, Amit, this is Ramani. Staffing PAPM has in fact marginally increased. So staffing, we are currently at INR 700 PAPM. Maybe that INR 600 number you are referring to is for apprenticeship business. So in BA, it's about INR 600 average PAPM. Staffing is INR 700.

And my last question is on the divestment that we did. Obviously, you mentioned that you have not had any capital loss and you also had the exceptional item, some amount of exceptional item in this. But the whole rationale because it's been a transaction which is not even two years old. And initially, we spent like INR 30 crores -- sorry, INR 25 crores for the 30% stake, and we are now selling it for INR 10 crores. So there is no capital loss?

Amit, we have invested about INR 10 crores to acquire the 30% stake and we recovered that INR 10 crores. So there is no principal loss on this investment. And the reason for divestment is also the fact that the SaaS businesses at this stage, especially with AI and other digital interventions that are happening, many of the SaaS businesses are undergoing very difficult situation. And we thought it's better we take the call right away while we still have the call option because we are a minority shareholder in the company. Otherwise, if we extend it for a few more quarters or months, we may have to acquire balance stake. So that's why it's a call that we have taken to exit while being on minority front and come out of the SaaS side of the HR.

Okay. And any plans for the existing HR business because that is also being loss-making for a very long period of time. So any plans for either restructuring or exiting that business?

Definitely, Amit, as Suparna mentioned in her opening remarks, we are doing a lot of realignment to our portfolio. We may have to bring in some of the new offerings that we're currently not having as well may have to be some vertical where we don't see any major uptick in the demand.

We have the next question from the line of Bhargav Buddhadev from Ambit Asset Management.

So ma'am, in your opening remarks, you did mention about pursuing some M&A opportunities. So is it possible to elaborate a bit on them in terms of which areas are you looking at? What could be the size, minimum ticket size which you could be looking at? And also in terms of time lines, what could be the time lines that you can work with?

So it's still in very initial stages, and it's really we are working on a framework on what kind of opportunities in M&A we will pursue. I think at the very top level, we are looking for opportunities that are either scale already in that business and we can scale up through M&A or we are also looking at some opportunities which will allow us to enter a new business vertical in the larger solutions business that we are in talent solutions, staffing, et cetera. So anything which is adjacent and which can give us entry to new businesses, obviously, the -- I mean the ticket size and all is still very early to talk about it. But I think one guiding principle that we are using is it needs to be a high-margin business compared to our current overall weighted margin of the organization.

Understood. And in terms of -- if I look at your competition, your competition is reporting much better volumes in terms of headcount. So is it that you are deliberately leaving those businesses to them because of lower margins? Or how should we read into that?

In an earlier question I answered this, we are very much focused on growth and growth comes from headcount. I think this was a particularly weak quarter, but that's not the intent. The intent is to grow the headcount. And I think we will be back with more robust headcount growth in the quarters to come.

And lastly, in terms of the benefits from the labour code implementation, I guess we had spoken that there could be some consolidation in the industry. When do we see that? Any color on that which you can provide?

Bala here. Yes. Even now, not 100% of the clients in the ecosystem have gone live with the labour codes. In fact, implementation started in earnest only in the beginning of this financial year, while they were actually notified in November of 2025 itself. And like I said, even at this point in time, there is still some ambiguity with respect to how exactly clients want to do it. In fact, many clients chose to do it along with their annual appraisal cycle. Some have it in April, some have it in July, some even have it in October in sync with the festive season, which is why now we are at the tail end of labour codes getting implemented. And then like I had called out as well in September, we had this announcement of the ceiling going up to with immediate effect. So that's just throw sort of one more complication into the way in which clients are going about factoring in their budgets for this financial year. So we need to really wait for these things to settle down and for clients to really see how things are panning out post the implementation of both these aspects. And only then we'll be able to start seeing the true benefits of large-scale formalization, acceleration of the pace of formalization, hence room for consolidation. So in the immediate upcoming quarters, we don't really see that happening in terms of the market consolidation that you just spoke of.

[Operator Instructions] We have the next question from the line of Dipesh Mehta from Emkay Global.

Yeah. Thanks for the opportunity. A couple of questions. First question on the General Staffing headcount additions, so associate addition. If I look, let's say, since FY '24, H1 number if you look at it, CAGR perspective, it is only less than 2 percentage kind of CAGR. Now it is 2.5-year kind of journey I am referring to, not one, two quarter. How to look this trajectory from medium-term perspective, and how you expect H2 to play out from headcount addition perspective? Because in one of the question answers you said headcount addition is the priority. So if you can give some sense about how to expect this to change. Second question is, what is the open mandate at the end of quarter two we have? And considering that open mandate and festival period and all those things, from mix change perspective, how one should expect some of the composition? This time you disclosed some of the vertical mix as well. How you expect it to evolve from medium term perspective considering two factors. One is your margin aspiration and second thing is market opportunity available. So considering both the things, how you expect it to evolve in over medium term? And related question is the progress on direct sourcing, particularly let's say when you want to address manufacturing, construction kind of vertical which are relatively high margin, less penetrated so far. So if you can give some sense how you are trying to, let's say, develop capability to tackle that part? Thank you.

Good. No. So from what you asked, I was able to break your question down into five distinct aspects, and I'll try and quickly answer them one by one. So with respect to the numbers, as you all know, these numbers are reported, we were able to double our headcount in General Staffing over a period of four years from March '21 to March '25. In the last 12 months, specifically, like I said, there were a couple of large opportunities. One was an absorption which was initiated by one of our large clients, the largest NBFC client at that point in time because of an RBI regulation where the total impact was about 28,000 associates. And then there was one more callout of a low margin or a negative margin account, which went up with about 7,000 associates or so, which happened in the last really easy in the present softness that we see in the macro environment for the reasons that I called out earlier with respect to...

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