Rationale

The reaffirmation of the ratings continues to consider the diversified business profile of Quess Corp Limited (QCL) supported by organic and inorganic growth over the years, its strong market position as the fifth-largest manpower outsourcing company globally, its established client base comprising top companies across industries and the extensive experience of the promoters in the industry. QCL's comfortable capitalisation and coverage indicators aided by a significant reduction in its gross debt (Rs. 521.0 crore as on December 31, 2020 vs. Rs. 1,148.4 crore as on March 31, 2020) in addition to its strong liquidity position further underpin the ratings. QCL is a subsidiary of Fairfax Financial Holdings (Fairfax; rated Baa3 (Stable) by Moody's) The company's operating margins (adjusted for IndAS 116) declined to 4.1% in 9M FY2021 from 5.8% in FY2019 and 4.9% in FY2020 following substantial upfront investments to revamp Monster, the expansion of its after-sales services business (Qdigi) over the last 24 months along with the continued weak performance of its industrial asset management segment. Further pressure on the margins resulted from the decline in margins in the general staffing business due to the company's focus on acquiring new customers at competitive rates and on reducing the headcount (13.3% decline in 9M FY2021 from FY2020 levels) owing to the Covid-19 pandemic-induced lockdown, which impacted operations across businesses. QCL's revenues degew by 2.1% in 9M FY2021 on account of the Covid-19-induced lockdown, which impacted operations across General Staffing, Excelus (training and skill development), IFMS (integrated facility management services) and Qdigi. The ongoing resurgence of the pandemic, resulting in localised lockdowns across several states, is likely to have a further impact on the company's operational and financial profile in the near term. Further, intense competition and steep attrition rates in the general staffing, security services and facility management segments continue to limit the company's pricing power and scope for margin expansion. QCL's cash flows are impacted by high working capital requirements on account of the 30-45-day credit period offered to its customers against upfront payments made to the employees. Even while the company has improved the proportion of the collect & pay model under its general staffing business (73% as on Q3 FY2021), all other segments generally entail a credit period, which results in peak utilisation of ~60-65% (down from ~85%) of its working capital limits on a regular basis. The company is also exposed to government receivables on account of its presence in the training and smart city segments and income tax refunds. While QCL has a cash balance of Rs. 546.7 crore (major part of which would pertain to collections received during the month end from customers), it also has some pending income tax refunds (to the extent of ~Rs. 130 crore), which as and when received, would support its liquidity position. On April 16, 2021, QCL acquired the balance stake of 30% in Conneqt Business Solutions Limited (Conneqt; rated [ICRA]A+ (Stable)/ A1+) for a consideration of Rs. 208 crore (paid using internal accruals and cash balance available at QCL and across subsidiaries). Conneqt has now become a 100% subsidiary of the company. While QCL has been active in the inorganic space targeting growth and diversification through acquisitions in the past, ICRA expects that the company will not pursue any sizeable acquisitions in the near to medium term and will focus on stabilising the operations of the acquired entities and consolidating its various subsidiaries. ICRA has also withdrawn the rating assigned to the Rs. 75.00 crore Non-convertible debenture programme as no amount is outstanding against the rated instrument. The Stable outlook on QCL's [ICRA]AA rating reflects ICRA's opinion that the company will continue to benefit from its diversified business profile, strong market position across businesses, healthy credit metrics and strong promoter profile.