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As COVID-19 impedes growth, Quess Corp steps-up focus on cost optimisation

Shares of business services provider Quess Corp Ltd have gained 9% in the last two trading sessions after the company reported better-than-expected results for the March quarter.

Revenue and operating earnings grew 28-30%, in line with the double-digit growth the company clocked in recent quarters.

Excluding the benefit of acquisitions, revenue grew 27%, which is up 2% sequentially. The performance was driven by the workforce management division, which registered strong double-digit revenue growth.

New customer additions led growth, says Suraj Moraje, executive director and group chief executive officer, Quess Corp.

The company added 27 new clients in the general staffing business and headcount of associates jumped 30% from the year-ago quarter.

But covid-19 has sent things in reverse direction.

The number of associates fell 5% in April when compared to February. The months of May and June are estimated to see similar dips. Given that the company’s earnings are linked to the number of associates it employs for its customers, the sequential fall in associates can have sizeable impact on Quess Corp’s earnings in current quarter.

“Management indicated headcount decline of 10-15% during Q1 FY21 but our base case assumes 20-25% dip for FY21 based on our channel checks,” brokerage firm Edelweiss Securities Ltd said in a note.

That said, Quess Corp sees new opportunities emerging from changing spending patterns of consumers. It sees greater staffing requirements from companies ramping-up home deliveries.

The elongated working hours (from early morning to evening) in the retail sector is estimated to drive need for staff in retail sector, although closure of malls remains a major headwind. Even so, much of the new opportunities are contingent on easing of lockdown restrictions in major cities.

Concurrently, the company is rationalising costs.

Indirect costs have been cut by one-fifth (20%) in April. Travel and office expenditure have reduced significantly. According to Sharekhan Ltd the company aims to save Rs. 60 crore through several initiatives. The cost reductions measures coupled with release of working capital from lower business volumes should help Quess Corp lower the impact on operating earnings.

Near term volatility notwithstanding, the management is hopeful of achieving 20% return on equity (RoE) by FY23 and an identical growth in annual operating cash flows.

“The new management is making encouraging efforts to address investor concerns around areas like governance, capital allocation, etc. We see the balance sheet rationalisation, progress on exit from unrelated businesses also as key positives,” Motilal Oswal Financial Services Ltd said in a note.

While the focus on costs and returns optimisation can help the company withstand the current slowdown better, business recovery is crucial for the stock. Quess Corp shares have recovered some of their losses in recent sessions, but are still down about 65% from their highs earlier this year.


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