Rationale

 The ratings reaffirmation continues to factor in Teamlease Services Limited's (TSL/the company) established brand equity, and strong market share in the temporary staffing segment, the extensive experience of its promoters in the general staffing industry and a reputed client base of large companies across industries. The ratings also consider the diversified domestic footprint and customer base with ~43% of its total revenues derived from its top 20 customers in FY2022. TSL's financial profile remains healthy, characterised by low debt, comfortable capitalisation and coverage indicators, coupled with a strong liquidity position. TSL witnessed strong, YoY revenue growth of 33% in FY2022, backed by ~25% growth in headcount (with ~57,000 associate addition) aided by healthy demand across industries. The operating profit margins expanded by 10 bps to 2.2% in FY2022 led by traction in margin-accretive specialised staffing and human resources (HR) services segments supported by efficiencies driven by digitalisation. While TSL witnessed YoY revenue growth of 36% in Q1 FY2023, the operating margins contracted to 1.3% due to high salary hikes to core employees (~12%), inflation in associates' salaries against flat per-associate-per-month (PAPM), seasonality in the HR services segment (Edtech) and one-off increase in corporate/unallocated overheads. Going forward, the company is expected to improve its profitability margins gradually supported by headcount additions, improvement in segment mix and continued efficiencies from back-end process automation. The ratings remain constrained by the inherently low profit margins and high attrition in the general staffing segment, which generated 90.1% of the company's total revenues in FY2022. ICRA continues to monitor the performance of TSL's acquired entities and considers the risks from the acquisitions made by the company (integration-related challenges) and the funding support required for TSL's not-for-profit subsidiary, TeamLease Skills University (TLSU), held through TeamLease Education Foundation. The ratings remain tempered by the intense competition in the fragmented manpower outsourcing industry as a major portion is provided by the unorganised sector, leading to weaker pricing flexibility. ICRA notes that the company has migrated its provident fund accounts to the Employee Provident Fund Organisation (EPFO) in March 2022 and has created adequate provisions (Rs. 57.2 crore) for the shortfall in returns in FY2022. No incremental cash outflow is expected relating to the same. Further, ICRA notes that the income tax (IT) department has disallowed TSL's additional employee cost deduction for FY2019 under section 80JJAA of the IT Act, 1961, and has issued a reassessment notice for FY2018. The developments of the writ petition filed by TSL in this regard for claiming the deductions will be a key rating monitorable. Any large potential obligation arising from it will need to be assessed when more information is available. The Stable outlook reflects ICRA's opinion that TSL will continue to benefit from its long track record of operations, established client base and healthy financial risk profile. While ICRA expects TSL's operating margins to improve from Q1 FY2023 levels, the same remains one of the key rating monitorable. TSL has a track record of growing and diversifying through strategic acquisitions. Any significant debt-funded acquisition impacting its credit metrics remains an event risk and would be evaluated on a case-by-case basis.