Brokerage firm Edelweiss Securities is positive on the stock of Teamlease Services as it sees the stock now building in an adequate margin of safety.
The brokerage firm has a buy call on the stock with a target price of ₹4,660, implying a 48% upside from the stock's September 27 close of ₹3,151.50.
"Our estimates show that the current stock price discounts nearly 12% EBITDA CAGR for the next five seven years, while, in our view, Teamlease is capable of delivering 16–18%, more so given the recovery in headcount addition. At a one-year forward PE of 30 times (historical low) and with a combination of 15%+ growth and 20% RoE, we find Teamlease ripe for a re-rating," said the brokerage firm.
The stock is down more than 24% this year so far against a 2% fall in the benchmark Sensex.
Edelweiss said its recent interaction with Teamlease’s senior management bolstered its belief that the structural changes that the company has undertaken in terms of senior/mid-level hiring and re-verticalisation are bearing fruit in headcount addition growth.
"While general staffing Q2FY23E addition would be lower than Q1’s at 8,000–10,000, it is still very healthy and puts Teamlease on track to clock 35,000–40,000 addition for FY23E (18–20% growth)," said Edelweiss.
"Importantly, with growing headcount, margins should directionally continue to improve throughout FY23E as wage hikes are also largely done. Furthermore, management is also very confident of getting a clean chit regarding the 80JJ notice issued by the IT department," said Edelweiss.
The brokerage firm highlighted that over the last few months, the stock has de-rated (down 22% in six months) largely on concerns of lower margins and uncertainty regarding the 80JJ tax exemption claimed by the company in past years.
Edelweiss believes both these concerns are fading, and this coupled with rising headcount momentum makes Teamlease an attractive opportunity.
"In our staffing coverage, we reiterate our preference for Teamlease over Quess, given the positive triggers in place. A 20% RoE (return on equity) profile should make the case stronger," said the brokerage.
According to a MintGenie poll, an average of 13 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.