TeamLease renegotiates associate salary contracts, says margin boost unlikely until IT hiring picks up

Human resource company TeamLease Services has begun renegotiating associate salary contracts to pass on the inflation impact to its customers, the company’s chief financial officer Ramani Dathi said on June 10.

“We have been stuck at the average realisation of Rs 700 per associate per month for a long time and this has impacted our overall margin as well in the last year. So, we have started renegotiating the contracts wherein we can pass on the inflation impact in our associate salaries back to the customers, but we are finding it extremely difficult,” she told CNBC-TV18.

When asked if this meant current contracts of employees were being reworked, TeamLease said that they used to charge a Rs 700 markup when average salaries were around Rs 20,000 per month. However, post-COVID-19, there has been an almost 20 percent inflation in associate salaries with the average going to Rs 24,000 per month.

“We are trying to renegotiate the contracts to convert the markup to variable percentage on salaries instead of the fixed amount so that with an increase in salaries we also get inflation in our markup…We are not renegotiating salaries, but only the markup model in contracts, for both existing as well as new contracts,” the staffing firm explained separately on June 12

This comes against the backdrop of the great resignation wave in 2021 following which companies, especially in the IT sector, offered enormous raises to hire or retain talent. However, come 2022, with macro challenges on the global market, many IT companies have either laid off employees or implemented hiring freezes that have continued in 2023 as well.

Teamlease Services’ CFO said in the financial year 2022-23, the firm’s margin-contributing businesses — IT staffing and degree apprenticeship — have had very strong headwinds. With this as the global scenario, IT high hiring was on freeze and some headcount was lost too similarly regulatory changes and uncertainty around the degree apprenticeship programme too posed challenges.

Given these factors, Dathi said the staffing firm’s bottom-most margin level could be 1.6 percent. However, with initiatives on cost optimisation and with the staffing business growing well quarter-on-quarter, the firm is confident of improving margins consistently from the July to September 2023 quarter, especially in the general staffing business, she said. The firm expects to see a net addition of 10,000 employees for its clients on a quarter-on-quarter basis in general staffing business, and growth across segments and across industries.

“That will be the main margin expansion contributor. In case IT staffing gets picked up, that can be a window on our back, we can accelerate our margin expansion further,” she added.

Teamlease’ Dhati, however, said that getting to a 2 percent margin won’t be possible in FY24 until and unless there is a huge turnaround in the IT staffing business, because, in general, staffing business, the firm’s gross margins are 3 percent whereas, in IT, it’s almost 16 percent.

Last week, brokerage firm Motilal Oswal said TeamLease’ stock has seen significant de-rating, down 59 percent from the peak (as of June 6), due to growth moderation and margin pressure following wage increases and a slowdown in technology staffing. It believes Teamlease’s current valuations are focused on near-term challenges.

However, MOSL sees scope for a re-rating in the stock as these challenges ease out. It expects It staffing to see a recovery in the second half of FY24, leading to a strong bounce-back for specialised staffing in FY25. The brokerage sees strong structural tailwinds to drive sustainable long-term growth and upgraded its rating on the stock to ‘buy’ with a target price of Rs 2,890 on June 6.