November 19, 2022

Exit note on Team Lease

by Solidarity Investment Managers in Equity, Select Company Perspectives

Our context

  • Allocators of capital in the best 20 opportunities we see over the next 5 -10 years
  • Practice “good churn”: when we are wrong, when valuations are euphoric, when we can reallocate for better returns elsewhere

Team Lease – entered portfolio as Clear Leader

  • Contract staffing – a mega trend
  • Great business as results in “win win” outcomes for customers, Govt and companies as it encourages formalization
  • Industry consolidation should happen as is happening in other industries in India and will lead to margin expansion
  • Team Lease, the best run company in the sector with excellent governance/promoters
  • Low margin business, but capital light due to low Working Capital, so can be 25% ROE
  • Possible to get 15%+ top line growth plus some margin expansion over time. Margin expansion over low base will be a meaningful driver of bottom-line growth.
  • 15-18%+ decadal compounding possible

Key assumptions that have changed

  • Industry consolidation not playing out. The industry is stuck at pre Covid Gross Margin/person. Companies are willing to drop margins to gain business.
  • IT Staffing, a higher margin business facing head winds.
  • Our margin expansion assumption is wrong which means bottom line growth will mirror top line growth or could be a bit lower due to drag from IT Staffing.
  • Without margin expansion, the thesis breaks as Team Lease is a very low margin business which will be unwieldy with scale.
  • In hindsight, we have over-paid as we were far more optimistic on pace of consolidation and Earnings growth prospects than warranted.

Choices before us

  • We can stay invested as TL is a well-run company and growth will cover valuation errors over time.
  • We can re-allocate capital elsewhere. It is not amongst the best 20 opportunities we have at present.

Our learnings

  • Ride winners. Average down on companies executing well where stock price may not be recognizing Operational improvements
  • Exit if the original thesis is no longer valid before the market comes to the same conclusion. Companies can end up stagnating for long periods of time.
  • Taking a loss is painful, but the right thing to do if capital can be re-allocated. We need to act basis facts today, and not basis what was our cost price on a position.

Hence, we have exited and the money is being re-allocated to other opportunities where we have more conviction.

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