Investments In Digital Platforms And GCC Will Expand Future Opportunities

Key Takeaways

• Focus on GCC-as-a-service and digital transformation is expected to boost future revenue growth and margins.
  
• Demerger and bolt-on acquisitions aim to unlock shareholder value and create long-term growth opportunities.
  
• High inflation, sector slowdowns, and strategic investments have challenged Quess Corp's revenue growth, margins, and earnings recovery in key segments.

Catalysts

Operates as a business services provider in India, South East Asia, the Middle East, and North America.

• The company is investing in the GCC (Global Capability Centers) model, leveraging India's potential as a destination for multinational corporations to establish centers focused on high-value tasks like product development. This focus on GCC-as-a-service is expected to drive future revenue growth. (Revenue)
  
• Verticalization in Workforce Management is being pursued to enhance operational efficiency and cater specifically to sectors such as BFSI, retail, telecom, and manufacturing. This tailored approach aims to boost efficiency and improve revenue outcomes by focusing on niche areas. (Revenue, Net Margins)
  
• The demerger initiative is anticipated to unlock shareholder value by creating independent and strategically focused entities. This restructuring is expected to position each entity for sustainable long-term growth and potentially improve operating margins by removing inefficiencies. (Net Margins, Earnings)
  
• Investments in digital transformation and the expansion of Tech and Digital platforms, including managed payroll and InsurTech services, are expected to drive higher-value service offerings and margins in the long run. (Net Margins, Revenue)
  
• The company is enhancing its product offerings with bolt-on acquisitions, such as recent additions in the food and catering business, which are intended to broaden service offerings and create cross-sell opportunities, thereby contributing to revenue growth. (Revenue)

Quess Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Quess's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 2.5% in 3 years time.
• Analysts expect earnings to reach ₹7.5 billion (and earnings per share of ₹49.99) by about February 2028, up from ₹3.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹8.3 billion in earnings, and the most bearish expecting ₹5.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, down from 24.6x today. This future PE is lower than the current PE for the IN Professional Services industry at 36.2x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.96%, as per the Simply Wall St company report.

Quess Future Earnings Per Share Growth

Risks

• High inflation and elevated interest rates have negatively impacted consumer and business spending, contributing to potential challenges in revenue growth for Quess Corp, especially in sectors they operate in.
  
• The BFSI (Banking, Financial Services, and Insurance) sector remains a key watch area due to slowdown, which may affect revenue from this significant segment for Quess Corp.
  
• EBITDA margins have contracted due to investments in sales, leadership, and festive payouts, which may continue to impact net margins until these investments yield returns.
  
• Demerger-related expenses have already contributed to a decline in PAT (Profit After Tax) and could impact earnings if costs persist or savings from demerger efficiencies take time to materialize.
  
• Seasonally weak hiring, particularly in the IT/ITES sector, and leadership transitions in the foundit platform have led to decreased revenues and increased cash burn, presenting a risk to earnings recovery.

Valuation

• The analysts have a consensus price target of ₹837.56 for Quess based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1000.0, and the most bearish reporting a price target of just ₹670.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹299.9 billion, earnings will come to ₹7.5 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of ₹614.95, the analyst's price target of ₹837.56 is 26.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.