Ambit - Staffing (POSITIVE) - Errclub - This Is Just The Beginning!

STAFFING
August 2017
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This is just the beginning!

Research Analyst:
Sudheer Guntupalli
sudheer.guntupalli@ambit.co
Tel: +91 22 3043 3203
Staffing
CONTENTS
This is just the beginning! …………………………………………………………..3
Under-rated and under-penetrated ……………………………………………….4
The more laws, the less justice …………………………………………………….8
Labour market reforms – boon or bane? ……………………………………….13
Industry is at an inflection point ………………………………………………….17
Disadvantaged, yet disciplined players ………………………………………….28
Security services – Key niche within staffing ……………………………………32
Headline multiples misleading …………………………………………………..37
Company profiles …………………………………………………………………..42
August 08, 2017 Ambit Capital Pvt. Ltd. Page 2

Staffing
POSITIVE
THEMATIC August 08, 2017
This is just the beginning! Key demand drivers for staffing

0% 20% 40% 60% 80%
Flexi Staffing is one of the most under-rated and under-penetrated
industries (0.5% vs 4% in China, 9% in South Africa) that emerged post Flexibility 63%
liberalisation. Often perceived as a conduit for firms to avoid the Admin efficiency 49%
complexity of colonial labour laws, survival of the industry remains a Uninterrupted hiring 41%
question mark in the event of regulatory easing. Our scenario analysis Focus on core 39%
indicates staffing is 6-11% cheaper than permanent hiring factoring in Try out hires 34%
friction costs (hiring, termination et al). Further, labour law reforms will Complex labor laws 20%
only increase staffing penetration as evidenced in proxy markets. JIT availability 17%
Formalisation and exit of unfair competition could harbinger inflection
in both volumes and margins. We like Quess and Teamlease for Source: Indian Staffing Federation, Ambit Capital
workforce management processes and the former more for its portfolio
mix. Reverse DCF on CMP indicates that current valuations of TL factor in CMP of Quess factors in…
just 4% headcount growth over FY17-37E (vs 20% over FY11-17 & 9% of 50% 12%
Adecco over CY94-16); Quess valuation factors in 10% headcount growth
(vs 33% over FY11-17). Key risks: Automation and wage inflation. 40% 33%
30% 26% 7%
Will narrowing of regulatory arbitrage result in the industry’s death?
9% 1%
Not at all! A survey of senior HR leaders indicated that 63% of firms engage 20%
10%
staffing agencies for flexibility in manpower planning and only 20% for concerns 10%
over labour laws. Our channel checks indicate that most internal HR teams are
lean staffed with leadership building and knowledge management as their top 0%
FCF
HC (FY11-17)
HC
Wages
Wages (FY07-16)
Cash con
priorities rather than managing bottom of pyramid workforce. Combined with
Margin
cost savings (6-11% based on pre-reform/post-reform scenarios), demand for
staffing services will only show an uptick irrespective of regulatory easing.
Organised players will be the biggest beneficiaries
Proposed labour law reforms in conjunction with GST rollout are expected to Note: Value drivers over FY17-37, HC=Headcount
increase the pricing power of organised players (20-30% of the industry). In
addition, trend of outsourcing in Government jobs at Group C level (~91% by CMP of Teamlease (TL) factors in…
volume), public capex (12.4% CAGR over FY12-16) driven incremental job
40%
creation, uncertainty in key sectors like IT/ITES (~6% of GDP), and upward 12%
mobility into professional staffing (gross margin 10-15ppts higher than general 30%
staffing) will drive volumes and margins in the long term. 19%
4%
20% 19%
Quess and Teamlease outperform global peers on our framework 9% 2%
Quess Teamlease Adecco Randstad Manpower 10%

Scale 4%
Process efficiency 0%
FCF
HC (FY10-17)
HC
Wages
Wages (FY07-16)
Cash con
Margin
Portfolio breadth
Pricing Power
Overall
Source: Primary data checks, company, Bloomberg, Ambit Capital research
Note: - Strong; - Relatively Strong; - Average; - Relatively weak
Note: Value drivers over FY17-37, HC=Headcount.
Factors highlighted are potential drivers for rerating
Multiple moving parts of value creation; headline multiples misleading
The Indian staffing industry is still nascent and most of its value drivers (volume
growth, margin and cash conversion levels) are still sub-optimal. However, it is
well-positioned to tread the growth trajectory of Adecco over CY94-16 and value
drivers should reach steady states in the long term. In addition, we assume
revenue growth of Indian players will also be supported by strong wage inflation Research Analyst
of 9% p.a. (vs 12% CAGR over FY07-16 and 1-2% in developed economies). Sudheer Guntupalli
Looking at reverse DCF on CMP of Quess/Teamlease in conjunction with sudheer.guntupalli@ambit.co
structural drivers of volumes over the next two decades, we conclude that the +91 22 3043 3203
valuations of Quess are sustainable and those of TL are attractive.
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Staffing
Under-rated and under-penetrated

One of the most under-rated changes in post-liberalised India is the
evolution of the flexi staffing industry (FSI). Employing around 2.1mn people
in 2015, Indian FSI is the fourth biggest in the world and has grown at 10%
CAGR over FY13-15. However, with a penetration of just 0.5%, India lags
behind the global average of 1.6% and other emerging markets like South
Africa (9%) and China (4%). Manufacturing (15% of India’s flexi staff), BFSI
(12%), and infra & construction (11%) are the top-3 client verticals. The
industry is highly fragmented with unorganised firms constituting the bigger
chunk (70-80%). MNCs like Addecco, Randstad and Indian firms like
Teamlease, Quess Corp and Innov are the major organised players. With the
core value proposition of providing flexibility to firms and security to
employees, FSI employs around 4% of formal work force in India.
Nevertheless, the industry is yet to be formally recognised by the
Government of India.
Uberisation of workforce
In the flexi staffing business model, human resources are hired by a Flexi Staffing From on-premise software to
Company (FSC) and then leased out to perform work at a user company (client of cloud, from owning property /
FSC). Employees remain on the payroll of FSC and have no direct employment vehicles to sharing them, the next
relationship with the User Company. Other than providing safe working conditions, wave of Uberisation will be with
the User Company has no direct obligation towards the flexi resource. none other than humans
FSC enters into a contract with client and receives fees for the services provided by
flexi resource. From the payments received from the client, FSC pays wages and other
social security benefits to the flexi resource. In essence, flexi staffing is a tripartite
arrangement providing flexibility to the User Company and security to the employee
at a cost (commission charged by FSC). Flexi staffing enables clients to ramp up and
ramp down talent according to the changing business needs, thereby converting fixed
costs into variable costs.
Exhibit 1: Tripartite arrangement of the flexi staffing model
Source: Ambit Capital research
Evolution of flexi staffing industry

Flexi staffing as a phenomenon started gaining ground during Christmas and Flexi staffing as a concept started
Thanksgiving seasons when demand for different products and services used to be off in US in 1940s when staffing
high. Over the last seven decades, the flexi staffing industry expanded and flourished agencies started placing
in other developed countries besides the United States. housewives as part time workers in
client offices.
Apart from just the flexibility in human resources planning, flexi staffing also offered
(1) management bandwidth to focus on core business, (2) lower cost of hiring, (3)
choice to try out potential hires and (4) compliance efficiency.

Staffing
Exhibit 2: Flexi staffing penetration in India is much lower than that of South Africa and China
Flexi staffing penetration

10.0% 9.2%
8.0%
6.0%
3.9% 3.6%
4.0%
2.2% 2.1% 2.0% 2.0%
2.0% 0.5% 0.3% 0.1%
0.0%
Japan
China
S Africa
UK
France
India
Brazil
USA
Germany
Mexico
Source: Indian Staffing Federation, Ambit Capital research. Note: Flexi staffing penetration is defined as the size of flexi staffing industry as percentage of overall
workforce in the country. Data used above is of 2014, except for India (2015 data), Mexico & Germany (2013 data), S Africa & China (2012 data).
The flexi staffing industry in emerging countries like China and India is nascent and
started post the liberalisation of these two economies (China in the 1980s and India
in the 1990s). Given the concept is relatively new in India and value judgments
imposed on permanent (good to have) and non-permanent job (not so good to have),
it took time to gain acceptance from different segments of the work force.
A highly fragmented industry
Flexi staffing industry in India today is highly fragmented and dominated by small and
medium players (~70-80% market share). Data from FY16 annual report of
Teamlease suggests that the company is the market leader with a share of 5-6%
followed by Adecco (4-5%), Randstad (4-5%) and Quess Corp (2-3%). Despite a
history of ~25 years, the industry is yet to be formally recognised by the Government.
Absence of a regulator has resulted in the proliferation of unorganised players, which
often get the cost benefit over organised players by circumventing labour laws.
The industry mainly operates in three segments: (1) professional staffing – involves
highly skilled and technically proficient workers, (2) white collar staffing – workers
with basic or generic training, and (3) blue collar staffing – minimum wage workers
who work in factories and plants. While the industry makes ~15-20% margins on
professional staffing, margins on blue collar and white collar staffing are on the lower
side, ranging from 1-10%.
Exhibit 3: Market share by number of associates
Company Market share
Teamlease 5-6%
Adecco 4-5%
Randstad 4-5%
Quess corp 2-3%
Genius consultants 2-3%
Manpower 2-3%
Global Innov 1-2%
Needs manpower 1-2%
GI staffing 1-2%
Others 70-80%
Source: Annual report of Teamlease, Ambit Capital research
Increasing penetration in key sectors

Currently, manufacturing (15% of total flexi staff), BFSI (12%) and Infra (11%) are the
top-3 sectors, employing ~40% of India’s overall flexi staff. Key drivers of demand in
each of these sectors are: (1) manufacturing - economic cyclicality, volatility in order
flow and delivery schedule, (2) BFSI - business seasonality, (3) Infra/construction
sector - uncertainties in project flow, project to project variation in scope of work and
skill requirement. ITES (17%) and IT (15%) was at the forefront of FSI in terms of
annualised growth rate in the number of associates over CY13-15.

Staffing
Exhibit 4: Manufacturing & BFSI are largest employers… Exhibit 5: …while IT/ITES is fast catching up
Share of flexi staffing CAGR over CY13-15
ITES, 7% Manufacturing 19% 17%

, 15% 17% 15%
15%
IT, 10% 13% 11%
10% 9%
11%
9% 7%
7%
5%
BFSI
Logistics
IT
Manufacturing
ITES
BFSI, 12%
Infra
Logistics, 10%
Infra, 11%
Source: Indian Staffing Federation, Ambit Capital research. Manufacturing Source: Indian Staffing Federation, Ambit Capital research. CAGR in the
includes manufacturing machinery and non-machinery number of flexi associates
The work force in India is characterised by a significant presence of the informal

sector (~88% of overall work force). Informal sector contains entities beyond (1) The presence of informal workforce
Government and quasi Government bodies (like PSUs), (2) private and public limited is more pronounced in sectors like
companies and (3) other registered organisations such as co-operatives, trusts and agriculture (~100%), retail
societies. (~98%), consumer durables
(~91%) and FMCG (~86%)
The informal sector generally maintains no records related to their businesses
(invoices, registers, muster rolls, pay slips etc.) and remain largely outside the ambit
of tax and labour laws. Illegal practices like child labour, bonded labour, salaries
below statutory minimum wages, prolonged delays in wage pay-outs, and employing
workers in hazardous conditions is rampant. Employees here are often deprived of
job and salary security keeping aside social security benefits like provident fund,
gratuity and employee insurance etc.
Beyond just the staffing services
Beyond the core staffing services, most of the players in the industry expanded the
breadth of their services to payroll processing, permanent recruitment services,
regulatory compliance services, and training & development. A few players also offer
allied services like facility management services, industrial asset management etc.
Though these offerings currently contribute just 1-5% of revenues for the players in
the industry, they typically yield higher margins.
Billing models include more than just mark-ups
Two types of billing models are currently in practice: (1) cost plus and (2) outcome-
based. Cost plus is usually a low risk business model where the flexi staffing company
charges a pre-negotiated mark-up (in the range of 5-20%) over the salary of
associate and has no responsibility to manage the services.
Outcome-based business model embraces higher risk where pricing is negotiated at
a project level and FSC is paid on successful completion of project scope. This model
is a double edged sword and can result in either higher or lower margins depending
on the ability of FSC to optimise resource deployment. Article 246 of the Indian
Inter-state differences in flexi staffing penetration constitution puts labour in the
concurrent list allowing both
Dynamics of flexi staffing across states is mostly a function of differences in regulatory central and state Governments to
complexities and ease of doing business. Maharashtra, Karnataka and UP currently enact legislations on the subject.
employ ~36% of overall flexi staff. In terms of adoption, Maharashtra, Delhi and AP
are leading with CAGR of 13-15% over CY13-15.

Staffing
Exhibit 6: Share of flexi staffing Exhibit 7: Most states are witnessing rapid adoption
16% 15%
Maha, 14%
14% 14% 13%
12% 11% 11%

UP, 8%
10%
Others, 8%
50% TN, 8% 6%
6%
Karnataka 4%
, 7%
AP
Karnataka
UP
Delhi
TN
Maha
AP, 7%
WB, 6%
Source: Indian Staffing Federation, Ambit Capital research Source: Indian Staffing Federation, Ambit Capital research. CAGR over
CY13-15

Staffing
The more laws, the less justice

From regulations relating to height of urinals in employees’ washrooms to
dismissal of employees found sleeping in office, Indian labour laws are over-
protective of workers. 44 central laws, 100 state laws, numerous cases,
administrative laws and lack of uniformity in their definitions created a legal
entanglement for firms in the manpower intensive businesses. 9 out of 44
central laws date back to 1947 and only 3 of them were enacted post 1990. Factories Act 1948 prescribes
Chapter V B and section IX A of Industrial Disputes Act and section 10 of sanitary types for all latrines and
Contract Labour Act are just a few examples of draconian laws which, in an urinals at work place. The floors
attempt to protect existing jobs, reduced the scope for creation of new jobs in and internal tiles up to a certain
formal sector. At the cost of compliant firms, the informal sector thrived in the height shall only be laid in glazed
economy. Rather than accommodating changing needs of businesses, Indian tiles.
labour laws reflect a patch work on our colonial inheritance. One of key
value propositions of staffing agencies is compliance to all labour laws.
A wake up call: The case of Uttam Nakate vs. Bharat Forge co.
Uttam Nakate, employed as a helper in Bharat Forge, was found sleeping in his work
place at around 11.40AM in August 1983. That was the fourth occasion when Nakate
was found guilty of misconduct. While on the prior three occasions he was let go with
minor punishments, the company initiated disciplinary proceedings against him in
Aug 1983. The internal enquiry found him guilty of repeated misconduct despite
warnings from the company. He was dismissed from services w.e.f January 1984.
Nakate filed a complaint of unfair labour practice before labour court in Pune. In July
1985, the labour court held that the punishment of dismissal was harsh,
disproportionate and no reasonable employer could impose such punishment for
proved misconduct. Bharat Forge was ordered to reinstate Nakate in his original post
with continuity of service and 50% of back wages. After multiple judicial escalations,
the Bombay high court in 1995 ordered Bharat Forge to pay a compensation of
`250k in addition to his reinstatement in service.
It took ~22 years of legal battle for Bharat Forge before the Supreme Court finally
upheld the dismissal of Nakate in 2005. This case was very significant as it exposed
multiple flaws in Indian labour laws to the world and gave a wake-up call to the
Indian legislature for a complete reform of labour laws. Given the absence of political
will for a complete labour reform, Indian labour laws continue to remain a drag on
the overall ease of doing business in the country.
Exhibit 8: Cases related to unfair labour practices often languish for decades in Indian courts
Date Event
Aug-83 Uttam Nakate was found sleeping in the workplace in the first shift at around 11am
Aug-83 Bharat Forge ordered an internal investigation and disciplinary proceedings against Nakate
Jan-84 Enquiry found Nakate guilty of repeated misconduct despite warnings from the company
Jan-84 The company dismissed Nakate from services with effect from 17th January 1984
Nakate complained of unfair labour practice by the company and challenges his dismissal under schedule IV, Maharashtra recognition of
Jan-84
trade unions and prevention of unfair labour practices act
May-85 Labour court observed that enquiry against Nakate was proper, transparent and he was guilty of repeated misconduct at work place
Labour court held that punishment of dismissal imposed upon Nakate was harsh, disproportionate and no reasonable employer could
Jul-85 impose such punishment for the proved misconduct. Bharat Forge was ordered to re-instate Nakate in his original position with continuity
of service and 50% of back wages for the period from dismissal till reinstatement
Dissatisfied with the amount of compensation awarded, Nakate filed a revision petition before industrial tribunal. Separately, the company
Jul-85
filed a revision petition challenging the order of labour court.
Jun-87 Tribunal dismissed revision petition of Nakate and accepted that of the company
Jul-87 Nakate challenged this decision of tribunal through a writ petition in Bombay High Court
Feb-95 Writ petition filed by Nakate was dismissed by a single judge of Bombay High Court
Nakate challenged this further through a letters patent appeal (appeal from a decision of a single judge to another bench of the same
Feb-95
court).
Feb-95 Bombay High Court in 1995 ordered Bharat Forge to pay a compensation of `250k in addition to his reinstatement in service
Jan-05 The Apex court upheld the dismissal of Nakate and overruled the judgements of lower courts regarding compensation payment
Source: Indiakanoon.org, Ambit Capital research
In India, the process of labour dispute conciliation is an invariably time consuming
process. In USA there is only one level of mediation which helps in reducing time to
resolve disputes. In most of the developed countries, the conciliation levels are either
one or two. However, in India employees can take conciliation at four levels.

Staffing
Exhibit 9: Complicated labour dispute resolution process in India
Source: EXIM Bank of India’s research paper on comparison of labour laws, Ambit Capital research
Section VB of Industrial Development Act (IDA)

This mandates every entity employing more than 100 workers to obtain prior
permission of appropriate Government before resorting to any lay-offs, retrenchment
or even closure. Before giving approval, the appropriate Government is expected to
take both the employer and employees into confidence. Since retrenchment is a
sensitive issue, the consent of workmen thus becomes an important precursor to
getting an approval.
When this clause mandating prior permission was first introduced, the threshold
number was initially pegged at 300. However, in 1984 the threshold was reduced to
100, making the provision even more restrictive. Since obtaining permissions for
closure or termination of employees involves bureaucracy and red tape, it is argued
that employers are reluctant to hire workers whom they cannot easily get rid of. In
addition, firms are obliged to consider alternatives prior to retrenchment or closure.
Exhibit 10: Cross-country comparison of required procedures before collective dismissal of employees
Country China India France Germany UK USA
Prior consultation with trade unions required Yes Yes Yes Yes Yes No
Notification to public administration required Yes Yes Yes Yes Yes Yes
Notification to workers representative required Yes Yes Yes Yes Yes Yes
Approval by public administration or judicial bodies required No Yes No No No No
Consent of workers' representatives No Yes No No No No
Employer's obligation to consider alternatives prior to dismissal Yes Yes Yes Yes Yes No
Source: International Labour Organization, Ambit Capital research
Section IX A of Industrial Disputes Act (IDA)

This provision mandates every firm making any change in the conditions of service to
notify the employees 21 days prior to such a change. There are eleven service
conditions like usual wages, allowances, leave, work hours etc. for which notice of
change is required. The most prominent and restrictive of these changes is
rationalisation, standardisation or improvement of plant or technique which is likely
to lead to retrenchment of employees. This provision is often abused by employees to
resist the adoption of new technology in the firm in the fear that it may lead to mass
retrenchments.

Staffing
Exhibit 11: India fares poorly on co-operation in labour employee relations
5.6
5.4
5.4
5.2 5.1
5.0
5.0
4.8
4.6
4.6
4.4
4.4
4.2
4.0 3.9
3.8
UK Germany USA China India France
Source: Global competitiveness report 2016-17, Ambit Capital research. Note: Absolute scores with a higher
score implying better rank on the metric.
Factories Act
Firms with 10 or more employees that use electric power are mandated to keep
records and file regular reports on matters like overtime work, wages, attendance,
sick leave and workers fines. Compliance with these requirements and regular
inspections result in huge cost for the firms. This has encouraged firms to stay small
so that they can circumvent labour laws. Small and Medium enterprises (SME) in India
usually break down their operations into several small separate units to avoid the
compliance cost of labour laws.
Severance pay
Labour law provisions related to severance pay are more stringent in India than in
developed countries like USA and UK. While severance pay for employees laid off
due to redundancy depend on number of years of service with the firm, on an
average Indian workers command 4 months of salary as severance pay vs. no
severance pay in US and 2 months of salary as severance pay in UK. Labour laws in
China and Germany are even more stringent on this aspect.
Exhibit 12: Severance pay is dependent on experience Exhibit 13: Indian laws demand higher severance pay
12 in months of salary 8 7 in months of salary

10 7
10 6 5
5 4
8
4 3
6 5 3 2
2
4 1
2.5 0
0
2
China
India
France
UK
Germany
USA
0.5 0.5
0
20 years 10 years 5 years 1 year < 1 year
Source: EXIM bank’s research report on comparison of labor laws, Ambit Source: Global competitiveness report 2016-17, Ambit Capital research
Capital research.
The abovementioned three examples are just the tip of the iceberg representing the
rigidity of Indian labour laws. Multiple regulations covering similar areas and lack of
uniformity across different legislations are not uncommon. For instance, terms and
conditions of employment are covered under Industrial Disputes Act 1947, Industrial
Employment (Standing Orders Act) 1946 And Trade Unions Act 1926. In addition to
central legislations, there are numerous state laws, case laws and administrative
orders that increase the cost of compliance for the formal sector.

Staffing
Exhibit 14: Multiple legislations governing a single area

Employment Wages Employee welfare Social security
Industrial Disputes Act, 1947 Minimum Wages Act Factories Act 1948 EPF Act
Industrial Employment Act, 1946 Payment Of Wages Act, 1936 Shops And Establishment Act ESI Act
Trade Unions Act, 1926 Payment Of Bonus Act Maternity Benefits Act Payment Of Gratuity Act
Employees' Compensation Act
Contract Labour Act
Source: India kanoon.org, Ambit Capital research
Excessive protections by the current labour law regime resulted in lower hiring by the
Indian formal sector. The World Bank in its world development report 2014 observes
that large Indian firms use less labour than is justifiable given the low minimum
wages. As a result, nearly 88% of Indian employment comes from the informal sector
which provides little or no social or fringe benefits to employees. This informality in
employment is also associated with lower productivity at the work place. For instance,
World Bank estimates value added per worker in India’s informal manufacturing
sector is one eighth of that in the formal sector.
Exhibit 15: India is a laggard in terms of labour market flexibility and formality
Source: World development report 2014, Ambit Capital research
India lags behind developed countries like USA, UK and emerging countries like
China in terms of overall labour market efficiency. Among ~130 countries surveyed
by the World Economic Forum (WEF), India ranked 84th vs. China at 39th. Key aspects
considered in this ranking are co-operation in labour employee relationships,
flexibility of wage determination, hiring & firing practices, redundancy costs, and pay
& productivity.

Staffing
Exhibit 16: Labour market efficiency scores across countries
5.8
5.6 5.5 5.5
5.4
5.2
5 4.9
4.8
4.8
4.6 4.5
4.4
4.4
4.2 4.1
4
USA UK Japan Germany China France India
Source: Global competitiveness report 2016-17, Ambit Capital research. Note: Absolute scores with a higher
score implying better rank on the metric.
However, realising the negative impact of labour market rigidity on the ease of doing
business, the current NDA Government is contemplating a consolidation of multiple
existing labour laws and relaxation of a few draconian provisions. Post the successful
rollout of GST, a uniform tax code across the country, news reports suggest that the
Government is pressing for passage of twin codes on wages and industrial relations.
One of the major proposals in these reforms is an amendment to section VB of IDA
allowing entities employing up to 300 people to retrench / lay off workers and/or
close down without Government approval.
Exhibit 17: Hiring, firing and administrative costs to come down slightly post implementation of twin codes
Subject Current structure Proposed structure Estimated impact
Governed by Industrial Disputes Act 1947, Industrial
Industrial dispute resolution to
Industrial relations Employment Act 1946, Trade Unions Act 1926, Single code for industrial relations
become easier
numerous other state, administrative and case laws
Every entity employing more than
Every entity employing more than 100 workers should 300 workers should obtain prior
Increased formalisation and
Section VB of IDA obtain prior permission from Government before permission from Government
employment generation
resorting to lay-offs or closure before resorting to lay-offs or
closure
Governed by Minimum wages act, Payment of wages
Slight reduction in payroll
Wages act 1936, payment of bonus act, numerous other Single code for wages
processing-related costs
state, administrative and case laws
Minimum wage to be made a
statutory right and extended to all
Minimum wages apply only to scheduled
employees. Central Government Slight reduction in payroll
Minimum wages employments. Disparity in minimum wages across
to notify a national minimum processing-related costs
states and sectors
wage below which no state can fix
their minimum wages
Payment of wages in time and only
Payment of wages No guidelines on mode of payment Increased formalisation
through bank accounts
Increased flexibility to better
Fixed term adjust for seasonal demand and
Applicable only to textile and garment industries To be extended to other industries
employment better recognition for flexi staffing
industry
45 days’ wages for every Limited headroom for reduction in
Severance pay 15 days’ wages for every completed year of service
completed year of service hiring and firing costs
Source: Media reports, Ambit Capital research
Until now, businesses are reluctant to hire workers on their payroll given the rigidity
of IDA and higher severance pay in India relative to other developed and emerging
countries. This labour market inefficiency became a blessing in disguise for contract
labour and flexi staffing agencies. Compliance to IDA became ‘one’ of the value
propositions for Indian flexi staffing industry.
Firms with uncertainty of business growth started taking the flexi staffing route to
meet their manpower needs and to be able to shut down quickly. This eventually
resulted in a conception that flexi staffing agencies are just playing a regulatory
arbitrage game, raising questions about survival and sustainability of the business
model. In the following sections we analyze the future prospects of flexi staffing given
the current Government’s focus on labour law reforms.

Staffing
Labour market reforms – boon or bane?

A survey of senior HR officials in 15 sectors shows that 63% of India Inc. uses
flexi staffing for greater flexibility in manpower planning and only 20% for
concerns over labour laws. Headline cost-benefit analysis suggests that flexi
staffing is at least 15% more expensive than permanent staffing on an hourly
basis given the mark-up of the staffing agency. However, if friction costs like
hiring & termination, training, fringe benefits, attrition, bad hires etc. are
factored in, flexi staffing turns out to be cheaper by at least ~11%. An
exhaustive labour law reform as highlighted in Exhibit 17 can bring down
hiring costs by ~10% and offer slightly more flexibility to firms in terms of
retrenchment. Even under such a scenario, flexi staffing turns out to be 6%
cheaper than permanent hiring. In addition, it offers flexibility of quick
ramp-up / ramp-down of manpower to match uncertainty and allows internal
HR teams to focus on high value add activities.
Flexibility is the key value proposition

A survey of senior HR professionals from select `5bn+ companies from 15 different
sectors of the economy concluded that the key demand driver for flexi staffing
services is companies’ requirement of flexibility in manpower planning. Volatility and
structural changes in global economy are resulting in a great deal of uncertainty and
apprehensions about long-term planning. Flexibility offered by staffing agencies
allows companies to better cruise through seasonal and volatile demand.
“With the help of these agencies, we get flexibility that enables us to react quickly when
there is a sudden demand, especially when we need to kick-start any project on an
urgent basis”
- HR manager of an IT company
Outsourcing compliance-related drudgery like payroll processing, administration,
identification and payment of social benefits like PF, ESIC, attendance monitoring,
background checks, keeping track of absconding employees etc. is another key
reason why internal H` look for staffing agencies. Reduction in
search/recruitment/training costs, avoiding organisational disruption because of
vacancy in positions and freeing up of bandwidth to focus on core business are other
key demand drivers for the services of flexi staffing industry.
“When Samsung decided to aggressively push their smart phones to take on Nokia,
they needed 15k+ on field sales staff on an urgent basis to go to every corner of the
country. It is very difficult for a MNC to go to all Tier-2 towns, recruit those on field
staff, and manage their hiring, retaining and firing related processes. They decided to
try flexi staffing. Samsung will be better off using its employees’ bandwidth in designing
phones and preparing Go To Market strategy rather than manage hiring related
drudgery”
- CFO of a top flexi staffing agency in India
Exhibit 18: Flexibility in manpower planning is the biggest demand driver
65% 63%
“In developed countries like US
55% 49% and UK, firms use staffing services
for quick ramp up and ramp down
45% 41% 39% during peak demand (like in X mas
34%
35% or Thanks giving). However, in
India staffing business is stickier
25% 20%
17% with just 3-4% of business related
15% to peak cycles. For a certain set of
jobs, firms started totally relying on
Uninterrupted
Focus on core
Try out potential
Complex labor
Just in time
Flexibility in
Compliance
availability
manpower
efficiency
planning
business
staffing agencies for the flexibility.”

hiring
laws
hires
-Head of strategy at a top flexi

staffing agency
Source: Survey of senior HR officials of select `5bn+ companies conducted by Indian Staffing Federation, Ambit
Capital research

Staffing
Managing the bottom of the pyramid is not a priority

for HR teams
HR departments in most firms are centralised and lean staffed. It is a misconception
that HR teams are meant only for managing workforce. In fact, workforce
management is a low focus area for internal HR teams as per Deloitte’s 2016
research report on human capital trends. This trend becomes even more pronounced
when it comes to managing ‘bottom of pyramid’ employees. HR teams ideally like to
focus on initiatives like organisational change, leadership, culture, employee
engagement, learning & development etc.
Exhibit 19: Managing workforce is the lowest priority for internal HR teams
“Any HR would like to invest in

110%
knowledge workers in organisation
100% rather than administrative workers.
8% 11% 14% 15% 16% To that extent, even if there is a
90% 21% 22% 23% 26% 29% complete reform of Indian labor
80% laws, we would still outsource
92% 89% 86% 85% 84% management of bottom of
70% 79% 78% 77% 74% 71% pyramid”
60%
HR head at a financial services
Changing HR skills
management
Culture
Engagement
Learning
Design thinking
Digital HR
Organizational
Leadership
People analytics
Workforce
firm in Mumbai
change
Very important Not important
Source: Deloitte’s research report on Global Human Capital Trends 2016, Ambit Capital research
Fixed term employment doesn’t provide job security

Fixed term employment being proposed by the Government as part of labour market
reforms is unlikely to impact business of flexi staffing agencies for three reasons. (1) It
would be more expensive for firms to reach out to fixed term employees directly. (2)
Employees would still prefer flexi staffing given the job security. (3) Given the
importance of reference checks and criminal behavior, firms are unlikely to put their
reputation at stake by hiring directly.
“Especially when we are dealing with administrative employees, it is very important to
know the prior employment behavior and track record. Criminal record, absconding
behavior are rampant at this level of workforce. In this context, hiring directly will not
give us the same comfort as hiring them through a reputed vendor.”
- Senior manager at a luxury hotel chain
Business model is here to stay

It is a common myth that flexi staffing is more expensive than permanent hiring as
the former includes a mark-up charged by the flexi staffing agency and service tax
paid to the Government. We start our analysis by taking example of an employee
who is currently earning an hourly wage of `50 for working for nine hours a day.
From our interactions with HR professionals across sectors, we assume 15% increase
in hourly wage rate because of mark-up. Service tax paid on staffing services is
available as an Input Tax Credit (ITC) and hence a complete pass-through. This
difference of ~15% in cost of permanent employee vs. flexi employee makes flexi
staffing appear an unviable business proposition.

Staffing
Flexi staffing is cheaper than permanent hiring

However, the cost structure will change in favour of staffing companies if overhead
costs like (1) hiring and termination expenses, (2) training costs, (3) workforce
management costs like attendance monitoring, payroll processing, new hire reporting
and compensation audits, (4) attrition and (5) cost of bad hires are included. Attrition
and cost of bad hires are especially higher in general staffing.
Our interactions with staffing consultants indicate that hiring cost is around 10-22%
of an employee’s annual salary. Since most of the staffing done by flexi staffing
agencies are for bottom of pyramid employees, we assume 10% of first year’s salary
as cost of hiring. In addition, we assume another 5% of first year’s salary as
termination expenses related to HR time during termination, administrative paper
work, and lower efficiency during notice period. Based on the above assumptions, our
analysis concludes that flexi employees will be ~11% cheaper than permanent
employees over the average life time of an employee in the organisation (~3 years).
Flexi staffing will remain cheaper even post labour law reforms
In the scenario of an exhaustive labour law reform by the Central Government, we
assume hiring and termination expenses will be 8% of the employee’s first year’s
salary vs. a base case assumption of 15%. Similarly, as the audit and inspection costs
ease, we expect administrative costs to be 8% of the hourly wage rate vs. 11% in the
base case. Even in this new scenario, flexi staffing turns out to be at least 6% cheaper
than permanent recruitment over average life time of an employee in the
organisation (~3 years). A client would still be better off engaging a flexi staffing firm
as that would enable him focus on the core job.
Exhibit 20: Permanent hiring can never be cheaper than flexi staffing
Scenario I: With the current labour laws Scenario II: Post labour law reforms
Temporary Temporary
Internal employees ` ` Internal employees ` `
employees employees
Hiring and
Hiring and Hiring and firing Hiring and firing
termination 28,087 - 14,585 -
termination expenses expenses expenses
expenses
Cost of advertising Cost of advertising Cost of advertising Cost of advertising
Resume screening Resume screening Resume screening Resume screening
Skill or assessment Skill or assessment Skill or assessment Skill or assessment
testing testing testing testing
Employment Employment Employment
Employment paperwork
Paperwork paperwork paperwork
Background Background Background
Background verification
verification verification verification
HR time during HR time during HR time during HR time during
termination termination termination termination
Termination related Termination related Termination related Termination related
paper work paper work paper work paper work
Lower efficiency Lower efficiency Lower efficiency during Lower efficiency
during notice period during notice period notice period during notice period
Hourly pay rate 50 Hourly pay rate 58 Hourly pay rate 50 Hourly pay rate 58
Fringe benefits 1.50 Fringe benefits - Fringe benefits 1.50 Fringe benefits -
Training costs 16,918 Training costs Training costs 16,918 Training costs
Administrative costs 5.5 Administrative costs - Administrative costs 4.0 Administrative costs -
New hire reporting New hire reporting New hire reporting New hire reporting
Payroll processing Payroll processing Payroll processing Payroll processing
Compensation audit Compensation audit Compensation audit Compensation audit
Attendance Attendance Attendance
Attendance monitoring
monitoring monitoring monitoring
Over 36 months 561,735 Over 36 months 566,663 Over 36 months 546,953 Over 36 months 566,663
Cost of bad hire 21,533 Cost of bad hire - Cost of bad hire 19,690 Cost of bad hire -
Perm employee cost Flexi employee cost Perm employee cost Flexi employee cost
628,273 566,663 598,146 566,663
over 3 years over 3 years over 3 years over 3 years
Difference 11% Difference 6%
Source: Ambit Capital research

Staffing
Exhibit 21: Key assumptions of our cost benefit analysis

Current labour law regime Post labour law reforms
Hiring & firing expenses 15% of first year salary 8% of first year salary
Fringe benefits 3% of hourly wage 3% of hourly wage
Mark up of staffing agency 15% of hourly wage rate 15% of hourly wage rate
Training costs 10% of first year salary 10% of first year salary
Administrative costs 11% of hourly wage 8% of hourly wage
Cost of bad hire 10% of first year salary 10% of first year salary
Attrition 33% per annum 33% per annum
Source: Ambit Capital research, Primary data checks
In addition, it is empirically observed that permanent employees spend as much as

15-20% of their work day on non-productive activities like water cooler chats, chai pe
charcha (meeting over tea) and web surfing etc. Flexi employees have fewer such
distractions as they are motivated to work hard in order to secure a permanent job or
to get absorbed on the pay roll of client.
Permanent employees working in administrative and blue collar roles have minimal
scope of moving up the career ladder and accordingly lower motivation levels to work
hard. In a survey conducted by the Indian Staffing Federation, 54% of the sample said
they see flexi staffing jobs as a stepping stone towards permanent employment.
Exhibit 22: Securing a permanent job is the motivational driver for flexi staff
60% 55% 54%

50%
40% 35% 34%
29% 27%
30%
20%
10%
0%
Step to permanent
To gain experience
Increased access to job
No better alternative
Occupational skill
Supplemental / extra
employment
training
income
market
Source: Indian Staffing Federation, Ambit Capital research

Staffing
Industry is at an inflection point

Indian staffing industry is at an inflection point both in terms of volume
growth and margin expansion. Evidence from developed countries like US
and UK, emerging countries like China, and a few states within India suggest
that regulatory easing in labour markets would result in increased
formalisation and eventually increased flexi staffing penetration. In addition,
GST and proposed mandatory payment of wages through bank accounts
would accelerate market share gains by organised players in the industry.
(1) Trend of temporisation in bottom of pyramid Government jobs (Group C
and erstwhile Group D), (2) shift of Government from casual employment to
tripartite arrangements, (3) decent incremental job creation in the economy
and (4) uncertainty in key sectors like IT would be fundamental drivers of
volume growth over next ten years. Increased pricing power because of
parity with unorganised players and upward mobility into professional
staffing will be the key margin movers for the industry.
Labour law reforms to drive formalisation

Existence of labour market rigidities imply that the formal sector is less able to adjust
to the business cycle as the cost of compliance with labour laws dents the profitability
of firms. Hence, economic policy which was originally designed to protect employees
is in fact driving the informalisation of work force. An IMF working paper on
“macroeconomic impact of product and labour market reforms on informality and
unemployment in India” suggests that labour market deregulation will result in a
structural decline in hiring costs of formal sector.
This decline in hiring costs in the long run will result in an increase in both formal and
informal employment, but to a larger extent in the formal sector, leading to higher
formality in the labour market. Reduction of wage premium for the formal sector will
incentivise informal firms to go legal on a voluntary basis.
Exhibit 23: Labour law reforms should increase labour formality in the long run
Source: International Monetary Fund, Ambit Capital research
Other than the prospective labour market reforms, recent rollout of the Goods and
Services Tax (GST) and push towards a cashless economy will also accelerate the shift
from an informal to formal economy.

Staffing
Formalisation a key driver of flexi staffing volumes

Evidence from developed countries like US, UK, emerging countries like China, and
Indian states with a high share of formalised workforce (Delhi, Maharashtra and
Karnataka etc.) suggests that formalisation is a key driver of flexi staffing penetration.
As end-user markets become more formal, access to illegitimate practices like child
labour, bonded labour, and paying in kind (food and cheap liquor) will end. This will
result in a structural increase in demand for flexibility and flexi staffing volumes.
Exhibit 24: High formal sector penetration results in… Exhibit 25: …high flexi staffing penetration
35% 31% 3.0% 2.7%

30% 2.5%
25%
2.0%
20% 18%
15% 15% 1.5%
14%
15% 0.9% 0.9%
10% 8% 1.0%
10% 0.6% 0.6%
0.4% 0.4%
5% 0.5%
0% 0.0%
AP
AP
K'taka
UP
Gujarat
Delhi
K'taka
UP
Delhi
Gujarat
TN
TN
Maha
Maha
Source: Indian Staffing Federation, Ambit Capital research. Note: Penetration Source: Indian Staffing Federation, Ambit Capital research. Note:
is calculated as percentage of total work force Penetration is calculated as percentage of total work force
A similar trend is observed in verticals. IT/ITES with highest penetration of formal

sector (80-84%) also enjoys the highest penetration of flexi staffing industry (9-11%).
Exhibit 26: High formal sector penetration results in… Exhibit 27: …high flexi staffing penetration
90% 84% 80% 12% 11%
75%
65% 9% 8%
70% 9%
50% 6%
50% 6%
3%
30% 18% 3% 1%
10% 0%
BFSI
BFSI
Logistics
Logistics
E-commerce
E-commerce
IT
Manufacturing
ITES
IT
Manufacturing
ITES
Source: Indian Staffing Federation, Ambit Capital research. Note: Penetration Source: Indian Staffing Federation, Ambit Capital research. Note:
as percentage of total work force is used Penetration as percentage of total work force is used
GST to be a game changer

Indian labour laws were designed to address only a bipartite environment of direct
employment relationship between employer and employee. Force fitting such laws on
the tripartite environment involving a flexi staffing agency led to legal confusion
where rights and responsibilities of three contracting parties remained in a grey area.
Despite a legacy of two decades, the flexi staffing industry in India is neither
recognised nor regulated by the Government, providing enough loopholes for
unorganised firms to flourish at the cost of organised players, flexi staff and the
Government. However, extending fixed term employment to industries beyond textile
and garment manufacturing can be considered as a first step by the Government in
recognising the formal need for staffing.

Staffing
Exhibit 28: Unorganised players flourished due to lack of regulation
Source: Randstad Annual Report 2016, Ambit Capital research
Prior to implementation of GST, unorganised staffing / contract labour agencies used

to have an advantageous cost structure by evading service tax (charged from client)
payment to Government and EPF/ESIC to associates.
Exhibit 29: Proforma cost structure of organised Exhibit 30: Proforma cost structure of unorganised
ESIC
Service tax
EPF 5%
16%
14%
Mark up Mark up
4% 39%
Take
home
61%
Take home
61%
Source: Ambit Capital research Source: Ambit Capital research
This cost saving was often passed on to the clients engaging in a price war with
organised players. Lack of awareness among employees about social security benefits
like EPF, ESIC etc. and payment of salaries mostly in cash without generation of
salary slips resulted in unorganised players engaging in unfair competition with
compliant firms in the industry over the last two decades.

Staffing
However, with implementation of GST and proposed focus on salary payment

through bank accounts and generation of payslips, evasion of service tax, PF and
ESIC becomes difficult. As this reduces the price differential between organised and
unorganised/contract labour agencies, clients will migrate to organised vendors,
resulting in a non-linear growth for the organised flexi staffing players. This would
also result in pricing power for the organised players in the industry providing scope
for steep margin expansion.
Seamless integration of Input Tax Credits (ITC) to drive pent up demand
ITC as a concept is not entirely new. It existed in the pre-GST regime for service tax,
Value Added Tax (VAT) and excise duty. However, the GST rollout widens the ambit of
ITC to central sales tax, entry tax, entertainment tax, luxury tax and other taxes. In
addition, cross credit of VAT against service tax / excise tax or vice versa was not
allowed before GST rollout. This had put firms in industries like manufacturing,
entertainment etc. at a disadvantage as they did not have enough output tax liability
against which they could have set off their ITC.
However, this situation will ‘largely’ change with the implementation of a single
uniform tax code under the GST regime which subsumes most of the indirect taxes
mentioned above. This will result in a structural decline in the cost of employing
staffing services, making it an even better value proposition than hiring permanent
employees. Our channel checks with a few firms in the above industries also signal
pent-up demand for staffing services.
“Post GST roll out, we are contemplating the option of hiring flexi staff as we can now
set off the ITC received on service tax. Earlier this was not possible as our tax liability
was mainly entertainment tax and VAT against which we could not have set off the ITC.
This will help us reduce our wage cost.”
- Management of a leading multiplex chain
In addition to implementation of reforms, availability of cheap mobile phones, data
and ongoing information revolution in the country will ensure employees themselves
become more aware of their rights, responsibilities and proactively move away from
unorganised staffing agencies and contract labour firms to organised staffing
agencies. Key differences between an organised and unorganised staffing agency
from an employee perspective are as follows:
Exhibit 31: Discovery of employee rights to trigger voluntary migration
Organised flexi staffing Unorganised staffing agency /
Subject
agency contract labour agency
Compliance to minimum wages act
Compliance to PF act
Contract labour regulation and
abolition act
Employees' state insurance act
(ESIC)
Industrial Disputes Act
Gratuity Act
Charging employees for placement
Generating salary slips
Auditable payroll system
Paying salaries through bank
accounts
Issuing appointment letters
Grievance redressal mechanism
Additional group mediclaim &
accident insurance
Skill development opportunities
Rewards and recognition program
Source: World Development Report 2014, Indian Staffing Federation, Ambit Capital research
Note: - All firms; - Most of the firms; - Some firms; - Very few firms

Staffing
Increasing outsourcing by Government a huge

opportunity
Data from Ministry Of Labour And Employment suggests the total number of jobs in
the Government sector in the country declined at an annualised rate of 1% over
FY95-12. This was despite strong growth in GDP contribution from the Government
sector and population of India during the period. Except in FY06 and FY09, when
implementation of certain social security schemes like Mahatma Gandhi National
Rural Employment Guarantee Act (MNREGA) etc. resulted in one-off increases in
hiring by states and local bodies, most of this period witnessed either flat or negative
hiring by Government sector net of retirements.
Exhibit 32: Employment in Government sector declining despite growth in GDP
20,000 2%
1% 1% 1%
19,500 0%
0% 1%
19,000 0%
0%
-1%
18,500 -1% -1% -1% -1%
-2%
18,000 -2% -2%
-2% -2% -2%
17,500 -3%
FY95
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Total employment (in 000s) Growth (RHS, %) FY12
Source: Ministry of Labour and Employment, Ambit Capital research. Note: Growth rate shown in FY01 is the
CAGR over FY95-01. Primary axis is shown in thousands of employees Government sector includes employment
in Central Govt., State Govt., Quasi Govt. and local bodies.
Almost half of this decline was contributed by a sharp and secular reduction in the
number of central Government jobs (~2% decline on an annualised basis over the
same period). Despite an increase in the number of states, urban and rural local
bodies and declaration of several social security programs which are predominantly
executed through state governments and local bodies, employee count in these two
segments together remained almost stagnant over FY95-12. Trend in quasi
Government bodies, which witnessed an annualised decline of ~1% over FY95-12, is
more reflective of the secular decline like in the case of Central Government jobs.
Exhibit 33: Secular decline in central govt. employment Exhibit 34: States and local bodies no net hirers
4% 3%
3,400 9,600
2%
3,200
9,450 1%
3,000 0%
-2% 9,300
2,800 -1%
2,600 -4% 9,150
2,400 -6% 9,000 -3%
FY95
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY95
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Central Govt employment (in 000s) States + local bodies (in 000s)
Growth (RHS, %) Growth (RHS, %)
Source: Ministry of Labour and Employment, Ambit Capital research Source: Ministry of Labour and Employment, Ambit Capital research
A further analysis of the trend in the number of Central Government jobs over the
years indicates that most of this decline was because of negative net hiring by the
Central Government at the bottom of the pyramid (Group C and erstwhile Group D
jobs). While the number of jobs in Group A and Group B positions showed a robust
increase, the number of jobs at the bottom of the pyramid declined. This indicates
that the Government is increasingly adopting the temporary route for hiring at the
bottom of the pyramid, very similar to trends in the private organisations.

Staffing
Exhibit 35: Reduced hiring at bottom of pyramid by the Central Government
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
Total
Group C*
Group A
Group B
Group C
Group D
Source: Pay and allowances report, Ministry of Finance, Govt. of India, Ambit Capital research. Note: Erstwhile
Group D was abolished and subsumed into *Group C
As per estimates of NSSO, the Government (includes Central and State Government
employees, quasi Government employees and employees in local bodies like
municipalities and panchayats) currently contributes around 58% of formal
employment within the country and 44% of temporary employment within the formal
sector. However, the Government’s contribution to the flexi staffing industry is
currently lower, at below 25%.
This divergence mainly arises as the Government is predominantly relying on the
casual route (without any work contract or an employer-employee relationship) for
staffing at the bottom of the pyramid as well as in its flagship programmes like
Anganwadi, Integrated Child Development Scheme (ICDS), National Rural Health
Mission (NRHM), National AIDS control organisation (NACO) etc.
Exhibit 36: Temporary hiring by Government is predominantly through casual route
Flexi staffing
3%
Bipartite
12%
Casual
85%
Source: National Sample Survey Office (NSSO) 68th round data, Indicus estimates, Ambit Capital research. Note:
Bipartite refers to employer and employee entering into a direct contract for fixed short term employment for
tenure less than three years. Flexi staffing share shown above mostly comprises regional & unorganised
This higher reliance of the Government on casual hiring resulted in several

inefficiencies such as nepotism, red tape and corruption in filling of these vacant
positions. Responsibility for hiring at this level is mostly delegated to local bodies
where a parallel market is created for these jobs.
Casual hiring is also characterised by higher attrition and higher incidence of
employees absconding, creating disruptions in the Government entity in question.
This is also a reason why many Government entities are run at a sub-optimal capacity
in terms of human resources. Given the opaqueness in casual hiring because of lack
of written contracts, often employees also get exploited by middlemen in terms of
delaying their wages despite receiving it from Government etc.

Staffing
“Around 43% of total workforce dependent on the Government for employment has
temporary jobs and these employees have no income security as they receive
consolidated salary social security contributions by way of PF/ESIC/gratuity are denied
to them. Most do not have any job contracts. They are hired through unscrupulous
vendors who charge money from them. Many of these jobs are often termed ‘voluntary’
or ‘honorary’ where the salary paid is less than minimum wage stipulated by law. This
situation requires immediate attention and organised flexi staffing players can provide
very effective solution to the challenges here”
- Former director at a Top-5 staffing
company
Recent partnerships of different Central Ministries and State Governments with
staffing agencies in areas like training and development, security services mark a
paradigm shift from casual/bipartite/unorganised flexi staffing models towards
organised flexi staffing agencies.
For instance, the Gujarat Government entered a collaborative arrangement with
Teamlease in 2013-14 in setting up a skill university that is a first of its kind. In 2015,
Ministry Of Labour And Employment entered a Memorandum of Understanding
(MoU) with Teamlease to expand apprenticeships in India. In 2015, Maharashtra
Government entered a partnership with Teamlease to offer vocational training
courses. In 2016, Ministry Of Labour And Employment entered a partnership with
Indian Staffing Federation (ISF) to run its National Career Services (NCS) portal.
The Central Government started encouraging security staffing agencies to
complement the understaffed police force. In October 2015, the Union Home
Ministry hinted at working in tandem with private security agencies and providing
training to around 5 million private security guards who protect several
establishments across the country.
“Presently, around 5 million private security guards are providing round the clock
security to offices and other buildings. The government is considering to work in
tandem with the private security agencies”
- Rajnath Singh, Union home minister during IISSM conference in 2015
Indian railways, one of the world’s largest employers in terms of employee strength
also hinted at deploying security staffing agencies on Indian railway networks to
enhance safety and security of passengers which is expected to ease off pressure on
Railway protection force (RPF).
“It is a fact that the RPF has huge manpower shortage. To carry out its tasks more
effectively, the assistance of private security industry is a very good option”
- Suresh Prabhu, Indian Railway minister during IISSM conference in
2015
The Indian Government current employs an estimated ~13mn (6.5x the Indian flexi
staffing industry) in the bottom of the pyramid permanent jobs and ~12mn (6x the
Indian flexi staffing industry) in temporary casual jobs. Over the next ten years, (1)
increasing trend of temporisation of bottom of pyramid jobs, (2) shift of the
Government’s temporary staffing from casual/bipartite mode to organised staffing
mode will be the biggest drivers of volume growth for the Indian staffing industry.
Social infrastructure to support job creation

According to a Harvard research, India will be the fastest growing economy over
FY18-25 with a projected growth rate of 7.0% vs 4.3% of China. Dun & Bradstreet
projects Indian GDP growth over same period to be ~8.8%. Despite the employment
elasticity (defined as employment growth generated by one unit of GDP growth)
declining in the recent years because of factors like automation and production
becoming more capital-intensive because of labour market rigidity, employment in
India should continue showing a modest growth over FY18-25.

Staffing
Exhibit 37: Employment elasticity declining mainly because of automation
0.6 0.57
0.54
0.5
0.5 0.43
0.42
0.4
0.3
0.18
0.2 0.15
0.1
0.01
0
FY 73-78
FY 78-83
FY 83-87
FY 87-94
FY 94-00
FY 00-05
FY 05-10
FY 10-12
Source: Reserve Bank of India, Ambit Capital research. Note: Employment elasticity is an absolute number
Based on the above projections by Harvard research and flat employment elasticity
assumption, employment in India should witness a CAGR of ~1.3% over next decade
vs. ~1.1% over previous two decades. As rigidity in the labour market comes down,
production will shift from capital intensive to labour intensive methods in the short
run (2-5 years). This will pose upside risk for the below employment growth
projections over the next decade.
Exhibit 38: Positive incremental job creation over FY18-25
3.0% Employment growth 2.8%

2.6%
2.4%
2.5%
2.1%
2.0% 1.7%
1.4% 1.3%
1.5%
1.0%
1.0%
0.5%
0.1%
0.0%
FY 73-78
FY 78-83
FY 83-87
FY 87-94
FY 94-00
FY 00-05
FY 05-10
FY 10-12
FY 18-25P
Source: Reserve Bank of India, Harvard center for international development, Ambit Capital research
Despite a slowdown in private capex (1% annualised decline over FY12-16), the
current capex cycle is being supported by public spending. Data from Center for
Monitoring of Indian Economy (CMIE) suggests that Government projects under
implementation grew at 12.4% CAGR over FY12-16. Public capex generally results in
creation of social infrastructure, which in turn spurs job growth.
We expect this spending on social infrastructure to continue over the next decade
given massive under-penetration in key sectors like healthcare. For instance, data
from the Medical Council of India suggests that the doctor to patient ratio in India is
1:1,674, well below the World Health Organization’s (WHO) recommendation of
1:1,000.
Apart from employment generation in blue and white collar segments, creation of
such social infrastructure like transport services, schools, hospitals etc. also drives
demand for allied services offered by staffing agencies like facility management and
industrial asset management.

Staffing
Exhibit 39: Strong growth in public capex to drive social infrastructure
60 45%
48 40%
50
41 35%
38
40 33 30%
29 25%
30 26
20 20%
18
20 13 15%
10 10%
10
5%
0 0%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Public capex (Rs tn, LHS) YoY growth (%)
Source: CMIE, Ambit Capital research
Recent tendering activity in transport services (including airways, roadways, railways,

inland water ways, shipping infrastructure, power distribution and other transport
services) shows strong traction in the value of tenders over the last few quarters (on a
rolling four-quarter basis). This provides good visibility of job creation over the next
few years.
Exhibit 40: Robust tendering activity in transport services tenders (Rs bn)
4,000 Transport services (Rs bn)
3,500
3,000
2,500
2,000
1,500
FY14Q4
FY15Q1
FY15Q2
FY15Q3
FY15Q4
FY16Q1
FY16Q2
FY16Q3
FY16Q4
FY17Q1
FY17Q2
FY17Q3
FY17Q4
Source: Projects Today, Ambit Capital Research. Note: LTM data.
Commercial real estate a leading indicator of job creation

According to CBRE Asia Pacific Occupier Survey report 2017, multi-national as well as
Asia Pacific companies have aggressive expansion plans for India over FY17-20.
India’s commercial real estate is expected to get a big boost because of these
expansion plans. Most of this demand for commercial real estate is coming from new
players in e-commerce, healthcare and technology.
“The outlook for commercial real estate for 2017 is likely to be vigorous with
increasing demand.”
- Dharmesh Jain, CMD, Nirmal Lifestyle, in an interview to HT
This increase in commercial real estate accompanied by an increase in the number of
multiplexes and shopping malls augur well for the job creation in the economy.

Staffing
Exhibit 41: Commercial complex tenders witnessing strong growth
Commercial complex tenders (Rs bn)

40
34
35
28
30
25
20 15
15 9
10
5 2 2 2 2 2 2 1 1 2
-
FY14Q4
FY15Q1
FY15Q2
FY15Q3
FY15Q4
FY16Q1
FY16Q2
FY16Q3
FY16Q4
FY17Q1
FY17Q2
FY17Q3
FY17Q4
Source: Projects Today, Ambit Capital research. Note: Last Twelve Months (LTM) data
Uncertainty, the only certainty

Technology transformation is generating huge uncertainty in key sectors of the
economy like IT/ITES (contributes ~6% of Indian GDP). Needless to mention,
increasing share of the start-up ecosystem in the macro economy is fueling further
uncertainty. In addition, pronounced macro cycles and seasonality in other sectors
would mean firms need greater flexibility than ever to deal with uncertainty in their
business. This provides a significant opportunity for staffing agencies towards an
upward mobility into the segment of professional staffing.
Exhibit 42: Uncertainty in revenue growth of IT industry (QoQ, CC)
5.5%
4.5%
3.5%
2.5%
1.5%
0.5%
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Source: Company, Ambit Capital research. Note: Industry includes TCS, Infosys, Wipro (IT services), HCLT and
Tech Mahindra. Organic Constant-Currency revenue growths of the company re weighted with their revenue to
derive the organic Constant Currency revenue growth of the industry. Dec is a seasonally weak quarter for the
industry.
Historically, reliance of Indian IT firms (like TCS, Infosys etc.) on staffing agencies had
been lower relative to captives of MNCs like IBM and Accenture as (1) these
companies had strong hiring practices in place and (2) they were able to afford
deeper bench given their high growth rates. However, as growth rates taper, firms
are increasingly becoming margin-focused by freezing hiring and optimising
utilisation.
This presents a tremendous opportunity for staffing agencies both in terms of (1)
moving up the value chain into professional staffing and (2) expanding their margins
as IT subcontracting typically leads to higher margins. Some of the Indian staffing
agencies like Quess Corp, Adecco and Manpower group already have a significant
presence in the IT staffing sector while others like Teamlease are just making inroads
into this line of service.

Staffing
Exhibit 43: Headcount growth in IT decelerating… Exhibit 44: …as firms now run a leaner bench
12% 83%
12% 82%
11% 83%
11% 10% 82%
10% 82% 81%
9% 9%
9% 9%
81% 81% 81% 81%
9% 81%
8% 81% 80%
8% 8% 80% 80%
80%
7% 79%
6% 80%
6% 79%
Mar-15
Mar-16
Mar-17
Dec-14
Dec-15
Dec-16
Sep-15
Sep-16
Jun-15
Jun-16
Mar-15
Mar-16
Mar-17
Dec-14
Dec-15
Dec-16
Sep-15
Sep-16
Jun-15
Jun-16
Source: Company, Ambit Capital research Source: Company, Ambit Capital research. Note: Average industry utilisation
ex-trainees used. Industry refers to TCS, Infosys, Wipro (IT services), HCLT
and Tech Mahindra
Robust job creation coupled with continued uncertainty in key sectors of the economy
would imply that most of the incremental jobs are created through the flexi staffing
sector. This marks an inflection point for the flexi staffing industry both in terms of
volumes and margins.
Section 80JJAA is the icing on the cake

Finance Act, 2016 introduced Section 80JJAA to the Income Tax Act, 1961. This
entitles staffing companies a deduction from gross total income to the extent of 30%
of ‘additional’ employee cost incurred in the previous year for 3 assessment years.
This deduction is only available to companies which pay salaries through bank
accounts and contribute to a recognised provident fund.
Section 80JJAA results in a three way benefit to the staffing industry. (1) Generating
employment, (2) encouraging unorganised players to come out with voluntary
disclosures and (3) incentivising compliant firms.

Staffing
Disadvantaged, yet disciplined players

As discussed in the previous sections, organised staffing players are currently
disadvantaged because of (1) lack of recognition and regulations governing
the industry and (2) resultant unfair competition from both informal economy
and unorganised players within the industry. Nevertheless, organised
players retained their discipline in terms of (1) not indulging in price war, (2)
conforming to all complex labour laws, (3) maintaining the highest
management quality & stability, and (4) making small and value-accretive
acquisitions to expand portfolio. Teamlease, Quess, Adecco India, Randstad
India and Manpower are the key organised players in the industry. In this
section, we do a relative positioning of these companies on structural
differentiators in business over long term (15-20 years) in terms of scale,
process efficiency, portfolio breadth and pricing power. We like Quess and
Teamlease for their overall positioning relative to global peers.
Framework for evaluating staffing companies

We do a relative positioning of the top-5 players in the industry (by number of
associates), i.e. Teamlease, Quess Corp, Adecco, Randstad and Manpower group.
While Teamlease and Quess Corp are Indian listed companies, the other three are
subsidiaries of MNCs listed elsewhere (Adecco and Randstad in Europe, Manpower in
USA). For global companies, we take portfolio mix and financial ratios of
consolidated companies as proxies for their Indian business.
Scale begets scale
Scale is the biggest competitive advantage in any staffing business (white collar, blue
collar or even professional staffing). As most of the hiring at this level is through
Word of Mouth referrals by existing employees, scale ensures that a staffing agency is
able to place the right resources at the right time for the client. This reduces
overheads of hiring as referrals are the cheapest route of hiring.
With scale comes the brand name. HR teams are generally reluctant to outsource
staffing needs to a less renowned vendor as they cannot trust them on their
compliance to all labour laws. As highlighted in previous sections, given the lack of
regulations governing the staffing industry there is a number of grey areas about the
rights and responsibilities of a client and vendor. For a client, going to a less known
vendor implies risking their own brand name in case of non-compliance by the
vendor.
“We do not have the same comfort outsourcing our needs to a XYZ staffing agency as
we outsource to Teamlease. If there is non-compliance on part of the vendor, we are
not sure whether there will be a liability attached to us. Even our reputation as an
employer will be at stake. However, with Teamlease we know they are a brand which
complies with all the rules of the game.”
- Senior HR manager at a key client of Teamlease
Our interactions with industry experts and end-users suggest that there will be an
increasing trend of outsourcing requirements at all locations of a client to a single
We use number of associates as a
vendor. This will result in a centralised contract for the client which can provide scope
proxy to gauge the scale of staffing
for better price negotiation and at the same time reduced friction cost of having to
agencies
deal with multiple vendors. In order to be ready for this, staffing agencies should
have the scale and presence across the length and breadth of the country. We believe
such a vendor consolidation will result in regional players losing market share to
players having a pan-Indian presence.

Staffing
Exhibit 45: Teamlease ranks the best on the scale aspect of our framework
151,085
150,000
130,000
110,000 110,000
110,000
90,000
70,000 60,000
50,000 40,000
30,000
Teamlease Adecco Quess Randstad Manpower
Source: Company, Ambit Capital research. Note: Above data corresponds to number of associates in FY17
Processes are key competitive advantages

Processes built over time play a key role in the long-term sustainability of the staffing
business model. Process efficiency is a function of standard operating practices in We take the overhead absorption
place to hire, train, retain, deploy, utilise, appraise associates and optimise roll ratios as a proxy to measure the process
at minimal overhead costs. efficiency of a staffing agency.
Indian listed companies like
Technology is another key aspect of process efficiency. In recent times, most of the
Teamlease and Quess fare better
players are adopting technologies to enable paperless onboarding of employees,
than their global counterparts
remote attendance management, digital training and appraisal, paperless exit
process etc. Ability to control costs by designing processes and employing technology
holds the key for profitability management in the long run.
Exhibit 46: Overhead absorption is the closest proxy to gauge process efficiency
15% 14% 14%

13%
13%
11%
9% 8%
7%
5%
3% 2%
1%
Adecco Randstad Manpower Quess Teamlease
Source: Bloomberg, company, Ambit Capital research. Note: Overhead absorption levels may differ based on the
share of managed services in the overall portfolio and should be read with caution.
Vendors with optimal portfolio breadth win over long term

We gauge the breadth of ‘synergistic’ services (as shown in exhibit 45) that a staffing
agency provides its clients and the relative positioning of different vendors on these
service lines. We notice a similarity with the Indian IT services here. Clients initially
outsourced just the Application Development and Maintenance (ADM) work to Indian
IT companies. As the industry evolved, they started outsourcing other business
processes like Enterprise Resource Planning (ERP), Infrastructure Management
Services (IMS), Business Process Outsourcing (BPO) and Engineering Services (ES)
which have synergies with ADM.
Companies like HCLT (w.r.t IMS & ES) and TCS (w.r.t IMS, ES & BPO) which were
better prepared for this than Infosys and Cognizant are now deriving a significant
portion of their revenues and growth from these new business lines. A similar trend
will repeat in staffing services as the structural driver for both is the same,
outsourcing non-value adding work to a vendor who can do it with better
effectiveness and efficiency.
Staffing
Our relative ratings of each of the companies on these service lines is based on our
primary data checks with industry experts, clients, employees of subject firms and
their peer organisations. Quess fares better than others on this front because of its
diversified presence in allied services also, like facilities management and industrial
asset management.
Exhibit 47: Relative positioning of different staffing agencies on portfolio breadth
Quess Teamlease Adecco Randstad Manpower
White collar / blue collar staffing
Professional staffing
Executive search
Recruitment
Recruitment process outsourcing
Human resources outsourcing
Talent management consulting
Managed services partnerships
Payroll & compliance management
Training & skill development
Employee back ground verification
Business Process outsourcing
Facility Management
Food & Hospitality
Overall portfolio breadth
Source: Primary data checks, Ambit Capital research Note: - Strong presence; - Relatively Strong presence; - weak presence; -Hardly present
Pricing power a barometer of longevity

Players with significant exposure to commoditised services like blue collar staffing or
white collar staffing have lower pricing power in the industry as they are exposed to
higher competitive intensity. On the other hand, as companies move up the value
chain into professional staffing or into other value-added services like training &
development, recruitment process outsourcing or executive search, the bargaining
power with clients increases.
We use the percentage of revenue from commoditised services as a proxy to measure
the pricing power of a player in the industry. Randstad and Quess fare better than
others on this front as they derive just 52% and 56% of their revenues from the
general staffing business. On the other hand, Teamlease fares worse than others on
this dimension as it gets ~97% of revenues from the commoditised general staffing
business.
Exhibit 48: Share of commoditised services in the overall portfolio
120%
97%
100%
80% 75%
60%
56%
60% 52%
40%
20%
0%
Teamlease Adecco Manpower Quess Randstad
Source: Company, Ambit Capital research

Staffing
Overall, Quess and Teamlease fare better than global peers like Adecco India,
Randstad India and Manpower on our framework.
Currently, all of these five
Exhibit 49: Quess and Teamlease outperform global peers on our framework companies are being run by highly
Quess Teamlease Adecco Randstad Manpower qualified and stable management
teams and hence this is not an
Scale
explicit differentiator. However, for
Process efficiency evaluation of staffing companies,
management quality and stability
Portfolio breadth should also be a key consideration.
Pricing Power
Overall
Source: Primary data checks, company, Bloomberg, Ambit Capital research

Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Staffing
Security services – Key niche within staffing

Most of the players in the security services industry offer multiple services on
top of just the man guarding business. These allied services include facility
management services (FMS), cash logistics, event management, executive
protection, janitorial services etc. While manned guarding and FMS are
expected to post robust growth, growth in cash logistics will decelerate given
the Government’s focus on a cash-free economy. SIS Security, Tops, G4S,
Securitas and Peregrine are the key players in the industry. As highlighted in
our pre-IPO note on SIS, we measure the strength of a security services
franchise based on its positioning across structural differentiators in the
business over long term (15-20 years): (1) geographical reach, (2) portfolio
mix, (3) supply chain bargaining power, (4) organisation structure and (5)
management quality and stability. SIS ranks better than peers on most of
these aspects of our framework. However, the promoter’s political links and
the adventurously acquisitive nature of management are key risks.
Geographical reach
Our channel checks suggest that there is an increasing trend of clients looking to
consolidate vendors across different locations that they are present in. Such
centralised contracts will result in better cost optimisation for the vendor as well as
convenience for the client. This puts security agencies with scale and presence in
multiple locations at an advantageous position relative to those whose scale is
limited. This will also accelerate the shift from the unorganised industry, which is
mostly local in nature, to the organised industry.
Exhibit 50: TOPS tops the list in terms of number of branches
300
251
250 229
200
160
150
100 71
50
11
0
TOPS SIS G4S Peregrine* Securitas*
Source: Company, Grant Thorton-FICCI, Ambit Capital research. *Number of offices as data related to number of
branches is not available.
We looked at the number of offices/branches/employees of each of the sample set of

companies as a proxy to rate it on this parameter. With 251 and 229 branches, TOPS
and SIS occupy the first two positions. However, the absence of TOPS in a few key
states like Karnataka, Tamil Nadu, Kerala and Odisha make its positioning weaker
relative to SIS on our framework.

Staffing
Exhibit 51: While SIS has a pan-India presence… Exhibit 52: …TOPS is absent from a few key states
Source: SIS website Source: TOPS presentation
Vendors with optimal portfolio breadth will win over long term
As highlighted in our framework on staffing companies, we like vendors whose
portfolio has a synergistic breadth of offerings. We assign ratings to strengths of
security companies across their different offerings based on our primary data checks.
Exhibit 53: Besides just offering a one-stop solution, allied services are also margin
accretive
Peregrine Securitas G4S SIS TOPS
Manned guarding
Executive protection
Event Management
Consultancy
Electronic security
Recruitment & placement
Facility management
Knowledge based security advisors
Background verification
Cash logistics
Garment manufacturing
Aviation security
Investigation services
Pest & termite control
Training programmes
Emergency response
Canine squad
Overall
Source: Company, Primary data checks, Ambit Capital research
Note: - Strong presence; - Relatively Strong presence; - weak presence; - Hardly present

Staffing
Supply chain bargaining power

Strength of the manpower supply chain and the processes built around it define the
success of a security services company. The ability to hire, train, deploy and retain
security guards at minimal cost determines the profitability and return ratios of the
business. Like in the IT services business, the brand name of a company plays a key
role in attracting and retaining employees. SIS has carefully built that brand name
over decades by building relationships with and gaining the trust of its employees.
“There are security services firms which pay salaries to their employees once in 3-4
months, based on their receivable collection. Very few companies like SIS pay timely
salaries which are not dependent on their client payment. This is the key reason why
guards prefer to join SIS. There are 2-3 other good employers”
- Security guard currently employed with SIS
The most widely used channel of hiring in manned guarding is referrals and word of
mouth. Strong links with ex-Army personnel ensure that SIS is able to hire guards at a
minimal overhead cost.
“SIS is like the TCS of security guards. The way most of the graduates of an engineering
college join the TCS bandwagon together, most of the retired personnel of a regiment
join the SIS bandwagon.”
- A non-core employee at a leading staffing services firm
There is an additional benefit of hiring ex-Army men. They are physically fit (needing
lesser training which lowers overhead costs) and they command higher billing rates.
Banks, high-value retailers and event managers prefer to employ ex-army men and
are willing to pay a premium for that.
Exhibit 54: Optimal absorption of overhead costs results in higher profitability
16%
14%
14%
12% 11%
11%
10%
8%
8% 7%
6% 5%
4%
2%
2%
0%
Sohgo Securitas G4S Quess Corp MSS SIS India Teamlease
Source: Bloomberg, Ambit Capital research. Note: Overhead absorption may differ based on the share of
managed services in the overall portfolio and hence should be read with caution.
“One common myth is that manned guarding is a low-end job which can be done by
anybody. This is totally baseless. Clients have different set of requirements about eye
sight, physical fitness, social, behavioral and emotional intelligence of the guards.
Some of these skills can be imparted in training while others are available in few
people whom we should be able to hire. For example, a luxury retailer will not hire any
security guard who is shorter than 6’ feet. Ability to hire guards meeting these
requirements and retaining them is key challenge. And this is what differentiates a
profitable and non-profitable firm”
- Key managerial personnel at a leading private security services firm
The company employs ~139k associates in its different business lines and one of the
company’s core competencies is its extensive manpower supply chain that has a
capacity to train and certify more than 30,000 guards per year. The company’s
associate to core employee ratio is impressive at 34 vs 36 for Quess Corp. These
supply chain efficiencies are also reflected in the sustained profitability of the
company relative to its peers.

Staffing
Exhibit 55: SIS has an enviable net profit margin relative to the industry
6.0% 4%
3% 3% 4% 3%
4.0% 3%
2.0%
0.0%
-2.0% -1% -1%
0%
-4.0%
-4%
-6.0%
FY10 FY11 FY12 FY13 FY14
Industry profit margin SIS India profit margin
Source: Registrar of Companies, Ambit Capital research. Industry includes Indian divisions of Peregrine, Securitas,
G4S and TOPS.
Similarly, billing and collection efficiency is extremely important as Government, real

estate firms and PSUs form a major chunk of the clientele. Manned guarding is a
working capital intensive business (with receivable days of ~60) and most of the
times when firms in this business fail it is because of working capital stress. This also
acts as an entry barrier for new entrants, because of which there are not many new
players in the Indian context despite attractive RoCE generated by top players like SIS.
Exhibit 56: Cash conversion of SIS superior to even global listed peers
Pre-tax CFO/EBITDA FY12 FY13 FY14 FY15 FY16
G4S 35% 22% 38% 19% 24%
Securitas 23% 58% 41% 46% 46%
SIS 83% 92% 89% 81% 78%
Source: BBG, Ambit Capital research. FY12 for Indian companies refer to CY11 for global companies
Organisational structure
Seamless and responsive service to the client comes with a decentralised
organisational structure. Our channel checks suggest that every branch head at SIS
has a separate P&L and the person is assessed on revenue growth, profit margin and
DSO etc. This also puts the branch managers as close to the client as possible. We
are reminded of TCS here which also leveraged its highly decentralised
organisational structure to outsmart peers in building strong links with clients.
SIS adopted the unique Group Testing Officer (GTO) structure (resembling that of the
Indian Army) for its delivery organisation starting 1980. Around half of the branch
heads of SIS have come from the GTO academy and the branch officer resembles the
site commander. No other competitor of SIS has been able to emulate this structure.
Management quality and stability
Management quality on our framework is objectively gauged by capital allocation
decisions and subsequent return on the capital employed (RoCE). SIS has a good
track record of capital allocation, which is also reflected in its sustainable superior
RoCE compared with its global listed peers like G4S and Securitas.
Exhibit 57: Superior RoCE is reflective of capital allocation decisions
RoCE FY12 FY13 FY14 FY15 FY16
G4S 8% 8% 14% 4% 2%
Securitas 12% 12% 11% 10% 11%
SIS 59% 26% 32% 19% 25%
Source: BBG, Ambit Capital research. RoCE is defined as NOPAT/(Total Assets – Current liabilities – Cash).
Du-pont analysis reveals that deterioration of RoE over FY14-16 is mainly because of
margin compression in cash logistics (~570bps) and Indian manned guarding
businesses (~30bps). Margins of cash logistics have been quite volatile. However, as
this business matures, we expect more stable EBITDA margin (~2% in FY20). Barring
margin volatility in new business lines, management has been disciplined in using
leverage and asset utilisation.

Staffing
Exhibit 58: SIS is more optimal in its asset turns and disciplined in using leverage
RoE Net profit margin Asset turnover Leverage
RoE
FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16 FY12 FY13 FY14 FY15 FY16
G4S 14% 14% 8% 14% 23% 3.1% 2.5% 1.0% 1.9% 2.3% 124% 129% 134% 140% 141% 364% 456% 595% 532% 705%
Securitas 20% 18% 20% 18% 20% 2.9% 2.4% 2.9% 3.0% 3.1% 175% 173% 176% 171% 199% 398% 447% 397% 364% 325%
SIS 31% 17% 20% 16% 15% 3.6% 2.2% 2.5% 1.8% 1.7% 255% 255% 269% 243% 261% 337% 312% 295% 374% 328%
Source: Bloomberg, company, Ambit Capital research
The comfort level of the client varies directly with the stability of the top and second-
level management. This parameter of our framework is measured as a percentage of
the senior management team that has been with the firm for more than five years.
Unlike its Indian peers, the entire senior management team of SIS has been with the
company for a very long time (latest addition was in 2008), which is a key positive.
Exhibit 59: SIS rates the best on our framework of security companies
Peregrine Securitas G4S India SIS Tops
Geographic reach
Portfolio mix
Supply chain capabilities
Organisation structure
Management quality & stability
Overall score
Source: FICCI – Grant Thorton data, Registrar of companies, Websites of above companies, Linkedin, Ambit
Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak

Staffing
Headline multiples misleading

Despite being in existence for ~20 years, Indian staffing is still at a nascent
stage as characterised by lower penetration, fragmented market, unfair
competition and pricing pressure. While global players attained their steady
states, Indian players are still focusing on the journey rather than the
destination. Hence, the industry is operating at sub-optimal growth, margin
and conversion levels. Growth trajectory of Quess and Teamlease over FY17-
37 will be similar to that of Adecco over CY92-16. Given the multiple moving
parts of value creation, looking at headline multiples alone will be
misleading. Reverse DCF of CMP indicates that market is currently building in
10% headcount CAGR for Quess over FY17-37E vs 33% over FY11-17 and 9%
of Adecco over CY94-16. The market is building in a meager 4% headcount
CAGR for Teamlease vs 19% over FY10-17. When looked at in conjunction
with structural drivers of volumes we conclude that: (1) valuations of Quess
are sustainable and (2) Teamlease is still trading at an attractive valuation.
Automation remains a key threat to valuations.
Comparison of P/E or EV/EBITDA multiples of Quess / Teamlease with those of global
peers like Adecco, Randstad and Manpower suggests these stocks are trading at
exorbitant and unjustifiable valuations. However, given the multiple moving parts of
value creation over FY17-37, looking at headline valuation alone will be misleading.
Exhibit 60: Relative valuations
Rev EPS Consensus EPS Consensus Consensus
Mcap Revenue Growth EV/Sales EV/EBITDA RoE
CAGR CAGR Growth P/E EPS
Company
US$ US$ LC
FY18 FY19 FY20 FY18 FY19 FY18 FY19 FY18 FY19 FY20 FY18 FY19 FY18 FY19 FY17
mn FY13-17 FY14-17
Adecco 13,008 2.5% 5.0% 4.1% 3.7% 0.5 0.5 9.2 9.0 9.1% 9.0% 7.6% 5.4% 14.2 13.2 5 5 20.5
Teamlease 376 18.5% 22.5% 22.0% 22.6% 0.6 0.5 32.2 24.7 55.1% 16.0% 20.0% 16.7% 31.4 26.2 45 54 19.2
Quess Corp 1,820 35.4% 48.9% 24.8% 19.8% 1.9 1.5 30.5 23.3 53.6% 64.8% 40.0% 52.4% 61.5 44.0 15 21 19.2
Manpower
7,986 -1.3% 2.6% 4.6% 7.5% 0.4 0.4 9.5 8.7 15.5% 5.3% 11.5% 11.7% 18.0 16.2 7 7 17.8
group
Randstad 10,777 4.9% 11.6% 4.0% 3.4% 0.5 0.4 9.3 8.7 36.6% 14.2% 12.4% 8.2% 14.1 12.6 4 4 15.6
Source: Bloomberg consensus, Ambit Capital research. Note: Consensus EPS denominated in local currency.
In addition to the differences in the stages of evolution of the industry, structural

differences in aspects like extent of formalisation, (tax) regulations governing the
industry, employment growth, and minimum wage growth across countries also
render the multiples incomparable with global peers. For instance, while the
minimum wage growth across most developed countries remains in the range of
~1.5-2.0%, minimum wages in India witnessed a strong CAGR of ~12% over FY07-
16 on an average. For a target revenue growth, this higher growth in minimum
wages implies a lower ask rate of headcount growth for Indian staffing companies vs
their global peers.
It should be noted that there are different minimum wages across states, sectors and
categories (unskilled, semi-skilled and skilled labourers) within India. With the
proposed uniform wage code and a floor by the Central Government, minimum wage
growth is expected to be even stronger. Since wage is a pass-through even for firms
operating on outcome-based projects, like Quess and SIS, wage inflation would not
impact margins.

Staffing
Exhibit 61: Indian industry is characterized by lower margins relative to global peers
Adecco Randstad Teamlease Quess Corp Manpower
Sales (US$ mn) 24,431 25,134 21,334 22,894 381 453 523 620 19,330 19,654
Cost of sales 81% 81% 81% 81% 97% 97% 89% 86% 83% 83%
Gross margins 19% 19% 19% 19% 3% 3% 11% 14% 17% 17%
G&A overheads 17% 14% 14% 14% 2% 2% 7% 8% 13% 13%
EBITDA margins 2% 5% 5% 5% 1% 1% 4% 5% 4% 4%
D&A 1% 1% 1% 1% 0% 0% 0% 1% 0% 0%
EBIT margins 1% 5% 4% 4% 1% 1% 4% 5% 4% 4%
Net Other
0% 0% 0% 0% 1% 1% -1% -1% 0% 0%
income
Pre-tax margin 1% 5% 4% 4% 2% 2% 3% 4% 3% 4%
Net margin 0% 3% 3% 3% 1% 2% 2% 3% 2% 2%
ROE 0% 21% 15% 16% 7% 19% 27% 19% 15% 18%
Source: Company, Bloomberg, Ambit Capital research. Note: Indian industry refers only to Teamlease and Quess Corp. Ratios here for Adecco, Randstad and
Manpower relate to consolidated financials. FY17 for Indian companies refer to CY16 for global companies and vice versa.
We analyzed the growth trajectory of Adecco over CY94-16. The company had
revenues of US$2.6bn in CY94 (vs US$630mn of Quess and US$460mn of
Teamlease in FY17), EBITDA margin of 4.4% and cash conversion (FCF/net income) of
114%. By CY16, the revenue of the firm increased to US$25bn and EBITDA margin
reached a steady state of 5.4%. However, cash conversion deteriorated relative to its
position in CY94. FCF posted a CAGR of 16%. Further breakup of different
contributors to value creation is shown below.
Exhibit 62: Adecco’s trajectory over CY94-16 can be superimposed on

Quess/Teamlease
20% -2%
18%
5%
16% 16%
14%
12% 2%
10% 9%
8%
6%
4%
2%
0%
FCF Headcount Wages Margin Cash conversion
expansion
Source: Company, Ambit Capital research. Note: Adecco has operations in multiple countries and the wage
inflation indicated above relates to blended wages across countries. The above data relates to CY94-16 which
corresponds to FY17-37 growth phase of Indian staffing industry.

Staffing
Reverse DCF on the current market price of Quess suggests that the market is
currently factoring in 26% FCF CAGR over FY17-37. Contribution of different value
drivers to this growth is highlighted in Exhibit 63. Quess is already operating at near
steady state margins (EBITDA margin of 5.4% in line with Adecco) and the market is
factoring in little headroom for value addition on this front. However, in terms of cash
conversion, the company is lagging behind its global peers (FCF/NI = ~32% vs 95%
industry average). Cash conversion reaching steady state is a material value driver.
The market is currently factoring in 9% CAGR in average minimum wages over FY17-
37 vs. 12% over FY07-16. This effectively translates into headcount CAGR ask of 10%
over FY17-37 vs 33% over FY11-17 and 9% for Adecco over CY94-16. When looked
at it in conjunction with the structural drivers of staffing volumes discussed in the
previous sections, we are of the view that these valuations are sustainable.
Exhibit 63: Multiple value drivers imply Quess stock is currently priced to perfection
50%
12%
40%
33%
30% 26% 7%
9% 1%
20%
10%
10%
0%
FCF HC Wages Margin Cash con HC (FY11- Wages
17) (FY07-16)
Source: Bloomberg, Company, CEIC, Ambit Capital research. Note: Average increase in minimum wages over
FY07-16 used. However, currently there are different minimum wages across different states and sectors. WACC
of 11% is used in reverse DCF given higher proportion of debt (D/E ratio of 0.9x). FY17-37 is assumed to be the
high growth phase and terminal growth rate of 5% assumed beyond that.

Staffing
Reverse DCF of Teamlease on current market price suggests that the market is
currently factoring in FCF CAGR of 19% over FY17-37. Contributions of different
value drivers to this growth are highlighted in Exhibit 64. The company is currently
lagging global peers in cash conversion (FCF/NI = 47% vs industry average of
~95%). Improvement in cash conversion will be a material value driver over FY17-37.
Teamlease operates at an EBITDA margin of 1.5% (vs 5.4% of Quess and Adecco).
However, given its higher exposure to general staffing (~97% vs 56% for Quess), the
market is not factoring margins as a major driver of value over the long term. The
market is currently factoring in 9% CAGR in average minimum wages over FY17-37
vs. 12% over FY07-16. This effectively translates into a headcount CAGR ask of 4%
over FY17-37 vs 19% over FY10-17 and 9% for Adecco over CY94-16.
When looked at it in conjunction with structural drivers of staffing volumes and
margins discussed in the previous sections, we are of the view that these valuations
are still attractive and have huge upside risk. Emergence of further evidence
regarding headcount growth / margin expansion will be key drivers for rerating.
Exhibit 64: Teamlease is trading at an attractive valuation; see scope for further
rerating
35%
12%
30%
25%
19% 4% 19%
20%
2%
15% 9%
10%
5% 4%
0%
FCF HC Wages Margin Cash con HC (FY10- Wages
17) (FY07-16)
Source: Bloomberg, Company, CEIC, Ambit Capital research. Note: Average increase in minimum wages over
FY07-16 used. However, currently there are different minimum wages across different states and sectors. WACC
of 13% is used in reverse DCF. FY17-37 is assumed to be the high growth phase and terminal growth rate of 5%
assumed beyond that. Variables in the inset indicate potential triggers for a re-rating.
What can upset valuations?

Automation, the biggest threat
In the book “What to do when machines do everything” authored by Malcolm
Frank, head of strategy at Cognizant, the author foresees a minority of jobs that
involve fairly mundane, rule-based work to get automated over next 10-15 years. For
instance, stenographers who were once widely employed bottom of pyramid workers
are extinct today. The author estimates around 12% of current jobs in the US belong
to this category and are at the threat of being automated over the next 10-15 years.
Rigidity in the labour markets in conjunction with sweeping automation across the
globe would mean the Indian industry aggressively embraces capital intensive
techniques like automation to replace labour. In such a case, we believe 12-15% of
industry revenues will be lost, which may (or may not) be partially offset by creation
of new jobs.
Ceteris paribus, we are of the view that Teamlease is more exposed to the risk of
automation relative to Quess because of its higher presence (97% of revenue vs. 56%
for Quess) in low-end blue collar and white collar staffing. In addition, Quess
engages in outcome-based projects which provide scope to optimise margins by
employing automation and freeing up deployed resources.

Staffing
On the other hand, Teamlease follows a plain vanilla mark-up model and doesn’t
offer managed services, which makes it more vulnerable to automation.
Strong growth in minimum wages to inhibit job creation
Over FY07-16, minimum wages in India witnessed a CAGR of 12% on an average.
Historically, growth in minimum wages across sectors had a high correlation with
GDP growth. Strong projected GDP growth (7% over FY17-25) coupled with the
passage of a uniform wage code (with central govt. setting up the floor for minimum
wages) will likely result in continued strong CAGR in minimum wages over FY17-37.
While this is positive for the revenue growth of staffing companies, growth in
minimum wages not justified by growth in labour productivity will result in shift of
production from labour-intensive to capital-intensive methods. This has the potential
impact of suppressing job creation in the economy, thereby negatively impacting
volumes of staffing companies.
Exhibit 65: Strong growth in minimum wages can suppress job creation
250 45%
40% 40% 199
190
200 177 35%
165
149 30%
150 137
125 25%
109
20%
100 72 78
15% 15%
11% 10%
50 8% 9% 9% 8%
7%
5% 5%
- 0%
Minimum wage Growth
Source: Chief Labor Commissioner (CEIC), Ambit Capital research

Staffing
Company profiles
Quess (NOT RATED)
Quess is a diversified staffing company with revenue of `41bn in FY17. The company
was founded in 2007 and is currently promoted by Fairfax Financial Holdings
(through its Indian subsidiary, Thomas Cook). Ajit Issac is the chairman and CEO.
Quess operates in four segments: (1) general staffing (56% of sales), (2) IT staffing
(29% of sales), (3) facility management (10% of sales), and (4) industrial asset
management (5% of sales). Apart from India, it has operations in ASEAN, American
and Middle East nations. Overall, the company employs ~190k associates with
~110k of them in general staffing businesses.
Exhibit 66: Strong growth (43% CAGR) in sales over Exhibit 67: Well-diversified portfolio relative to Indian
FY13-17 peers
45 42 80% Industrials
42 Facility 5%
34 70%
39 management
36 60% 10%
33
50%
30
27 40%
24 21 30%
21 General
16
18 20% IT staffing staffing
15 29%
10 10% 56%
12
9 0%
Revenue (Rs bn) Growth (%, RHS)
Source: Company, Ambit Capital research. Note: Above growth includes Source: Company, Ambit Capital research
inorganic revenues as well.
Quess is the second-largest player (together with Adecco) in the Indian general
staffing business in terms of number of associates (~110k). It is also the largest IT
staffing provider in India with more than 10k associates. Historically, the company
has been very acquisitive and successfully integrated several value-accretive
acquisitions like Magna Infotech (current day’s IT staffing business). Most of these
acquisitions were funded by debt, which is the key reason why Quess has higher debt
relative to peers (net debt to equity of 0.3x vs. -0.4x for TL). Quess mostly relies on
outcome-based projects unlike Teamlease, which operates on a mark-up model.
Teamlease (NOT RATED)

Teamlease was incorporated in 2002 and is currently the market leader (5% market
share) in organised staffing solutions in India. Founded by Manish Sabharwal (current
Chairman) and Ashok Reddy (current Managing Director), the company employs
~150k associates and reported revenues of `30bn in FY17. Teamlease has
concentrated exposure to general staffing (~96% of revenue). Through acquisitions of
ASAP, Nichepro and Keystone, the company recently ventured into the IT staffing
business (~3% of revenue). Other HR services like Recruitment Process Outsourcing
(RPO) contribute ~1.5% of revenue.
Teamlease operates on the cost plus markup billing model unlike peers which
operate on outcome based pricing. The company has significant presence in learning,
and training & development through strategic partnerships with several State
Governments. For instance, Teamlease Skill University established in Vadodara in
partnership with the Gujarat Government is the first fully vocational education &
training university in India.

Staffing
Exhibit 68: Strong growth (25% CAGR) in sales over Exhibit 69: High exposure to the general staffing business
FY13-17
32 30 40% Other HR
services
35% 2%
28
25 30%
24 25%
20 20%
20 15%
15 10%
16
13 5%
12 0%
Staffing &
allied
Revenue (Rs bn) Growth (%, RHS) services
98%
Source: Company, Ambit Capital research. Note: Teamlease has historically Source: Company, Ambit Capital research
been less acquisitive than Quess and hence its growth over FY13-17 is
mostly organic.
Adecco (NOT RATED)

Adecco group, head-quartered in Zurich, is a Eur23bn company (by revenue, CY16)
providing services in general staffing (75% of revenue), professional staffing (22% of
revenue) and other solutions (3% of revenue). Europe is the core market for the firm
(60% of revenue). Besides Europe, Adecco group has significant presence in North
America (20% of revenue). Adecco India, the Indian subsidiary of Adecco group, is
the second-largest staffing agency (together with Quess) in India in terms of number
of associates (~110k) and contributes around 1% of overall group revenue.
Exhibit 70: Peers in mature markets struggling for growth Exhibit 71: High exposure to general staffing
27.0 4% Other
solutions,
26.5 2% Professional 3%
0% staffing,
26.0 22%
-2%
25.5
-4%
25.0
-6%
24.5 -8%
24.0 -10% General
FY13 FY14 FY15 FY16 FY17 staffing,
75%
Revenue (US$ bn) Growth (%, RHS)
Source: Company, Bloomberg, Ambit Capital research. Note: Adecco global Source: Company, Bloomberg, Ambit Capital research
consolidated revenue. FY17 for Indian companies refer to CY16 for global
companies and so on.
Adecco India has presence in ~55 cities/towns and boasts a client base of ~3700. In
October 2016, the company appointed Priyanshu Singh (former head of Honeywell
building solutions) as the country manager. The group historically made significant
investments in technology to aid service quality. A dedicated organisation structure
was created to support new ventures working on the digital front like Adecco
Analytics (big data analytics tool), Beeple (End-to-end online staffing tool), Talent
today (People Analytics based on big data) etc.

Staffing
Randstad (NOT RATED)

Randstad is a Dutch company headquartered in Netherlands with a presence in 39
countries. The group reported revenue of ~Eur21bn in CY16. It primarily operates in
general staffing (~58% of revenue), in-house staffing (~22% of revenue) and
professional staffing (~20% of revenue). The company has significant presence in HR
services market of North America (23% of revenue), Netherlands (15% of revenue)
and France (23% of revenue). Very aggressive in terms of inorganic growth, the
group acquired Monster.com in 2016.
Exhibit 72: Peers in mature markets struggling for growth Exhibit 73: In-house staffing is a key differentiator of
business
23.0 23 23 10% in-house

staffing,
8%
22%
22.6 6%
4%
22.2 22 22 2%
0%
21.8
-2%
21 -4% General
21.4
staffing,
-6% profession
58%
21.0 -8% al staffing,
FY13 FY14 FY15 FY16 FY17 20%
Source: Company, Bloomberg, Ambit Capital research. Note: Randstad global Source: Company, Bloomberg, Ambit Capital research
consolidated revenue. FY17 for Indian companies refer to CY16 for global
companies and so on
Randstad has been offering services in India through its Indian subsidiary for around
25 years. With ~60k associates, Randstad India is one of the top players in industry.
Indian operations are currently headed by Paul Dupuis, a Randstad veteran whose
prior stint resulted in impressive growth of Randstad Japan.
Manpower (NOT RATED)

Manpower group, established almost 70 years ago, has operations in ~80 countries.
The company reported revenue of ~$20bn in CY16. The group houses four brands to
cater to the HR needs of its clients – Manpower (contingent staffing and permanent
recruitment), Experis (professional resourcing and project-based workforce solutions),
Right Management (global career expert) and Manpower Group Solutions
(outsourcing services for large-scale recruiting and workforce-intensive initiatives).
Europe is the core market for the group (64% of revenue) followed by the Americas
(22%).
Exhibit 74: Peers in mature markets struggling for growth
21.0 4%
20.6 2%
0%
20.2
-2%
19.8
-4%
19.4 -6%
19.0 -8%
Source: Company, Bloomberg, Ambit Capital research. Note: Manpower global consolidated revenue. FY17 for
Indian companies refer to CY16 for global companies and so on.

Staffing
Its Indian subsidiary currently houses ~40k associates and ranks among the top
players in the industry. Our channel checks suggest that the company has competitive
advantages over peers in terms of professional staffing and executive search. It also
has a significant presence in managed services and learning & development. Over
the last five years, the Indian subsidiary is being headed by AG Rao whose prior stint
was as a senior executive at Tata Tele Services (Enterprise Business & Technology).
SIS Security (NOT RATED)

SIS Security is the second-largest security services provider in India in terms of
revenues (`46bn, FY17). Security services (91% of FY17 revenue, includes cash
logistics) is its key business. In India, it also provides allied services like facility
management services (FMS), pest control services, investigation services and
electronic security goods, which together contributed ~9% of revenue in FY17. Its
subsidiary, MSS, which was earlier known as Chubb, is the largest security services
provider in Australia and contributed 52% of overall revenue in FY17.
Exhibit 75: Indian revenue has outgrown that of Australia Exhibit 76: Security services contribute ~91% of revenue
30 0%
24 4%
25 23 22 22 8%
21
20
20 16 35%
15 13
10
10 7
5 53%
-
Indian revenue (Rs bn) Australian revenue (Rs bn) Indian guarding MSS Cash logistics FMS Others
Source: Company, Ambit Capital research Source: Company, Ambit Capital research
Mr. R K Sinha, the current chairman and managing director (also a Rajya Sabha MP
from the ruling party, BJP), founded SIS in 1974. The company established its
international footprint in 2008 when it acquired an Australian security services firm
Chubb (renamed as MSS). From 2011, SIS started aggressively venturing into allied
businesses like cash logistics, FMS, pest control services, investigation services and
electronic security goods, which are also labour intensive like manned guarding. In
2016, SIS acquired Dusters Total Solutions, a leading facility management company
for an EV of ~US$27mn. Uday Singh is the group CEO and Rituraj Sinha, second
generation promoter, is the COO.
TOPS (NOT RATED)

Tops is one of the largest security services companies in India providing services like
manned guarding, event security, facility management, electronic security,
investigation services, flexi staffing and warehousing services. The company has
around 130k guards on its payroll and a client base of around 10k. Our channel
checks suggest that TOPS has the highest market share in specific niches of manned
guarding services like executive protection, celebrity protection, event security and
emergency response (in Mumbai and Navi Mumbai). The company was founded by
Major RC Nanda in 1970 and Diwan Nanda, second generation promoter, is
currently the chairman of the company.

Staffing
G4S (NOT RATED)

G4S is the largest security services provider in the world, based out of UK, with CY16
revenue of ~GBP7bn. The company has operations in more than 100 countries
employing around 585k guards globally. North America is the biggest market for the
company, contributing ~27% of revenue in CY16. Europe (~18% of revenue), UK
and Ireland (~18% of revenue), and Middle East and India (~12% of revenue) are its
other major markets. Our channel checks suggest G4S is the global pioneer in
offering technology-enabled security services (~22% of revenue). Technology,
software and systems alone accounted for 13% of group’s revenue in CY16.
The company operates in India through its subsidiary, G4S India. Founded in 1989 in
India, it established its presence over a strong network of 128 branches employing
around 160k security guards. Apart from man guarding services, the company also
offers facility management, secure systems, garment manufacturing, recruitment and
training solutions in India.
Securitas (NOT RATED)

Securitas is a Swedish security services company with operations across 53 countries
and CY16 revenue of ~US$11bn. The company currently employs more than 335k
people across the globe. Europe is the core market for the company (45% of revenue,
CY16) while North America is the second-biggest market (41% of revenue). The
company has limited presence in Africa, Middle East and Asia (~2% of overall
revenue). Of late, predictive security (detecting a crime before it happens) has
become the core value proposition of the company.
Leveraging its expertise in risk management and risk analytics, the company aims to
offer predictive security solutions combining historical and real-time digital data from
camera systems, radar systems, intelligent sensors etc. The company provides
specialised services like executive protection, event management, risk management,
transport security and background verification through its subsidiary in India.

Staffing
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 saurabh.mukherjea@ambit.co
Pramod Gubbi, CFA Head of Equities (022) 30433124 pramod.gubbi@ambit.co
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 nitin.bhasin@ambit.co
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadesh.mehta@ambit.co
Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 abhishek.r@ambit.co
Anuj Bansal Consumer (022) 30433122 anuj.bansal@ambit.co
Aditi Singh Economy / Strategy (022) 30433284 aditi.singh@ambit.co
Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 ashvin.shetty@ambit.co
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargav.buddhadev@ambit.co
Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 deepesh.agarwal@ambit.co
Dhiraj Mistry, CFA Consumer (022) 30433264 dhiraj.mistry@ambit.co
Gaurav Khandelwal, CFA Automobiles / Auto Ancillaries (022) 30433132 gaurav.khandelwal@ambit.co
Girisha Saraf Home Building (022) 30433211 girisha.saraf@ambit.co
Karan Khanna, CFA Strategy (022) 30433251 karan.khanna@ambit.co
Mayank Porwal Retail / Consumer Discretionary (022) 30433214 mayank.porwal@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankaj.agarwal@ambit.co
Paresh Dave, CFA Healthcare (022) 30433212 paresh.dave@ambit.co
Parita Ashar, CFA Cement / Metals / Aviation (022) 30433223 parita.ashar@ambit.co
Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 prashant.mittal@ambit.co
Rahil Shah Banking / Financial Services (022) 30433217 rahil.shah@ambit.co
Ravi Singh Banking / Financial Services (022) 30433181 ravi.singh@ambit.co
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 ritesh.gupta@ambit.co
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritika.mankar@ambit.co
Sagar Rastogi Technology (022) 30433291 sagar.rastogi@ambit.co
Sudheer Guntupalli Technology (022) 30433203 sudheer.guntupalli@ambit.co
Sumit Shekhar Economy / Strategy (022) 30433229 sumit.shekhar@ambit.co
Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 utsav.mehta@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7886 2740 sarojini.r@ambit.co
Dharmen Shah India / Asia (022) 30433289 dharmen.shah@ambit.co
Dipti Mehta India (022) 30433053 dipti.mehta@ambit.co
Krishnan V India / Asia (022) 30433295 krishnanv@ambit.co
Nityam Shah, CFA Europe (022) 30433259 nityam.shah@ambit.co
Punitraj Mehra, CFA India / Asia (022) 30433198 punitraj.mehra@ambit.co
Shaleen Silori India (022) 30433256 shaleen.silori@ambit.co
Singapore
Praveena Pattabiraman Singapore +65 6536 0481 praveena.pattabiraman@ambit.co
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Ravilochan Pola – CEO Americas +1(646) 793 6001 ravi.pola@ambitamerica.co
Hitakshi Mehra Americas +1(646) 793 6002 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Production
Sajid Merchant Production (022) 30433247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 30433183 sharoz.hussain@ambit.co
Jestin George Editor (022) 30433272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 30433273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 30433265 nikhil.pillai@ambit.co

Staffing
Quess Corp Ltd (QUESS IN, NOT RATED)
1,000
900
800
700
600
500
400
Apr-17
Mar-17
Dec-16
Dec-16
Jul-17
Jul-17
Jul-16
Jan-17
Aug-16
Aug-16
Sep-16
Jun-17
Oct-16
Oct-16
Nov-16
Feb-17
Feb-17
May-17
May-17
Quess Corp Ltd
Source: Bloomberg, Ambit Capital research
TeamLease Services Ltd (TEAM IN, NOT RATED)
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
Apr-17
Apr-16
Mar-17
Mar-16
Dec-16
Jul-17
Jul-16
Jan-17
Aug-16
Sep-16
Jun-17
Jun-16
May-17
Feb-16
May-16
Oct-16
Nov-16
Feb-17
TeamLease Services Ltd
Adecco Group AG (ADEN VX, NOT RATED)
90
80
70
60
50
40
30
20
10
0
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Aug-14
Aug-15
Aug-16
Jun-15
Jun-16
Jun-17
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
Adecco Group AG

Staffing
Randstad Holding NV (RAND NA, NOT RATED)
70
60
50
40
30
20
10
0
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Aug-14
Aug-15
Aug-16
Jun-15
Jun-16
Jun-17
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
Randstad Holding NV
ManpowerGroup Inc (MAN US, NOT RATED)
140
120
100
80
60
40
20
0
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Aug-14
Aug-15
Aug-16
Jun-15
Jun-16
Jun-17
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
ManpowerGroup Inc
G4S PLC (GFS LN, NOT RATED)
400
350
300
250
200
150
100
50
0
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Aug-14
Aug-15
Aug-16
Jun-15
Jun-16
Jun-17
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
G4S PLC

Staffing
Securitas AB (SECUB SS, NOT RATED)
180
160
140
120
100
80
60
40
20
0
Apr-15
Apr-16
Apr-17
Dec-14
Dec-15
Dec-16
Aug-14
Aug-15
Aug-16
Jun-15
Jun-16
Jun-17
Oct-14
Feb-15
Oct-15
Feb-16
Oct-16
Feb-17
Securitas AB

Staffing
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
* In case the recommendation given by the Research Analyst becomes inconsistent with the rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures (like
change in stance/estimates) to make the recommendation consistent with the rating legend.
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio
Manager, Merchant Banker and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI.
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Staffing
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Ambit - Staffing (POSITIVE) - Errclub - This Is Just The Beginning!

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STAFFING

This is just the beginning!

Under-rated and under-penetrated ……………………………………………….4

The more laws, the less justice …………………………………………………….8

Labour market reforms – boon or bane? ……………………………………….13

Industry is at an inflection point ………………………………………………….17

Disadvantaged, yet disciplined players ………………………………………….28

Security services – Key niche within staffing ……………………………………32

Headline multiples misleading …………………………………………………..37

Company profiles …………………………………………………………………..42

August 08, 2017 Ambit Capital Pvt. Ltd. Page 2

This is just the beginning! Key demand drivers for staffing

Quess Teamlease Adecco Randstad Manpower 10%

Under-rated and under-penetrated

Source: Ambit Capital research

Evolution of flexi staffing industry

August 08, 2017 Ambit Capital Pvt. Ltd. Page 4

Flexi staffing penetration

Increasing penetration in key sectors

August 08, 2017 Ambit Capital Pvt. Ltd. Page 5

Share of flexi staffing CAGR over CY13-15

ITES, 7% Manufacturing 19% 17%

The work force in India is characterised by a significant presence of the informal

August 08, 2017 Ambit Capital Pvt. Ltd. Page 6

12% 11% 11%

August 08, 2017 Ambit Capital Pvt. Ltd. Page 7

The more laws, the less justice

August 08, 2017 Ambit Capital Pvt. Ltd. Page 8

Exhibit 9: Complicated labour dispute resolution process in India

Section VB of Industrial Development Act (IDA)

Section IX A of Industrial Disputes Act (IDA)

August 08, 2017 Ambit Capital Pvt. Ltd. Page 9

Exhibit 11: India fares poorly on co-operation in labour employee relations

12 in months of salary 8 7 in months of salary

August 08, 2017 Ambit Capital Pvt. Ltd. Page 10

Exhibit 14: Multiple legislations governing a single area

Source: World development report 2014, Ambit Capital research

August 08, 2017 Ambit Capital Pvt. Ltd. Page 11

Exhibit 16: Labour market efficiency scores across countries

August 08, 2017 Ambit Capital Pvt. Ltd. Page 12

Labour market reforms – boon or bane?

Flexibility is the key value proposition

Try out potential

staffing agencies for the flexibility.”

-Head of strategy at a top flexi

August 08, 2017 Ambit Capital Pvt. Ltd. Page 13

Managing the bottom of the pyramid is not a priority

“Any HR would like to invest in

Very important Not important

Fixed term employment doesn’t provide job security

Business model is here to stay

August 08, 2017 Ambit Capital Pvt. Ltd. Page 14

Flexi staffing is cheaper than permanent hiring

August 08, 2017 Ambit Capital Pvt. Ltd. Page 15

Exhibit 21: Key assumptions of our cost benefit analysis

In addition, it is empirically observed that permanent employees spend as much as

60% 55% 54%

Increased access to job

Source: Indian Staffing Federation, Ambit Capital research

August 08, 2017 Ambit Capital Pvt. Ltd. Page 16

Industry is at an inflection point

Labour law reforms to drive formalisation

Source: International Monetary Fund, Ambit Capital research