Spectrum Talent Management

Spectrum Talent Management- Proxy to Indian Economy Growth ?

. Company Overview

  • Business Model: Spectrum Talent Management Limited (STML) operates in the staffing and recruitment industry, offering services such as general staffing, IT staff augmentation, Recruitment Process Outsourcing (RPO), and apprenticeship solutions​​.
  • Global Presence: With operations across several countries, the company leverages global and Indian talent cost arbitrage, especially in IT and US staffing​​
  • Good Promoters: First Gen promoters, friends from college, doing this same business for 10+ years

2. Financial Performance (FY23)

  • Revenue Growth: STML reported a significant year-on-year revenue increase to ₹7,688 million in FY23, up from ₹4,832.21 million in FY22, demonstrating a robust growth trajectory​​.
  • Profitability: The company achieved a net profit after tax (PAT) of ₹278.13 million in FY23, with a profit margin improvement to 3.6%, compared to 3.2% in FY22​​.
  • Capital Efficiency: Return on Equity (ROE) stood at 49.83%, and Return on Capital Employed (ROCE) was 59.30%, indicating that they almost turn their Asset base (workforce exployed) 12 times a year, which is logical given the nature of the business, so 12 time Asset Turnover * 3% margin is a 36 RoCE business, current RoCE is probably higher due to a better blended RoCE due to the business of trading of electronics good
  • The Fund Flow Analysis provided traces the sources and applications of funds for Spectrum Talent Management Limited over a specified period. Let’s dissect and interpret this data to understand how the company has managed its financial resources over the years
    • Equity + Reserves:
      • There is a noticeable increase in equity and reserves in certain years, particularly a significant inflow of ₹33 crores in Mar-22. – IPO gains were distrubted between OFS and Working Capital needs for future growth
    • Debt:
      • The movements in debt indicate both increases and decreases over the years. For example, an increase of ₹10 crores in Mar-21 followed by a decrease of ₹7 crores in Mar-22 suggests debt repayments or refinancing activities.
    • Trade Payables + Other Liabilities:
      • Increases in trade payables and other liabilities indicate the company deferred some payments or accrued more liabilities, this might be skewed because of the electronics good segment and/or Collect and Pay model which contributes ~50% of the business wherein companies pay spectrum first and then spectrum pays workforce employed

3. Market Position and Growth Strategy

  • Industry Leadership: STML has a strong market position in a growing staffing industry, which is crucial for companies adjusting to dynamic market conditions​​. There are multiple manpower agencies in the market, but size of the business of STML is big enough to put them into an organised / large player category. The biggest in India would be Quess Corp, TeamLease as two listed entities and IT services business like TechMahindra, TCS etc who are also kind of competitor to them as well as customer in IT Staffing vertical
  • Expansion Strategy: The company focuses on volume-driven growth in staffing, high profitability in RPO, and scaling IT staffing and US staffing verticals. The upcoming Industrial Staffing will be a good and a big market to come where manufacturing companies if they want to grow will hire blue collar workforce through agencies like Spectrum which is a medium margin but a bigger business in Pay & Collect model – their working capital needs will go up naturally as the salaries need to paid to workforce first and then collect

4. Challenges and Risks

  • Economic Conditions: Global economic uncertainties and potential industry-specific risks could impact staffing demands. The company needs to navigate these challenges by leveraging its robust service portfolio and global presence​​. In the last con call they already shown the impact of Layoffs in USA and slow hiring in India IT segment. On the flipside, layoffs help manpower agencies after the market turns up as layoffs also require re-hiring which gives them revenue through recruitment fees. This should be cyclical in nature, so when industry upturn is going on then spectrum earns through fees on salary and in downturn/slowdown through recruitment fees
  • Customer Concentration Risks: As with all staffing firms, operational risks such as client concentration and dependency on certain industries or geographies could impact performance. Spectrum’s diversified client base and industry coverage might help mitigate this risk​​
  • Working Capital Risks – things might blow out of proportion if they are not able to recover the dues from comapnies, right now their Bad Debt provision is neglible. So a watch on their Debtor Days and PDD is going to be important

5. Investment Rationale

  • Growth Prospects: Given its aggressive growth strategy, particularly in high-margin areas like RPO and global staffing solutions, STML is well-positioned to capitalize on global staffing demands​​. Promoters have given a CAGR of 30-35% growth prospects overall for the next 3-5 years
  • Competition & MOAT: No point of looking at competition as the market is very huge, and underpenetrated, plus there is a Switching Cost applicable on the Customer(Big clients of companies) where manpower agencies levy 3-5% of the total salary bill as one time expenditure- also a Recruitment Skills of manpower agency of hiring good talent and in less than 15-20 days as KPI act as a good Moat. In the conference call they mention that till date no major customer has left them and have 200+ brands associated with them also they maintain no bench (which says they are able to service the recruitment needs of companies as soon as possible). All in all, higher Switching Cost + Higher Customer Retention + Tech Platform as Intangible should develop into a Moat.
  • Financial Health: The company’s strong financial performance, high profitability margins(compared to Peer, it has +1-2%) , and these margins will remain 2%+ for the time to come as they have a good tech backup (mentioned in the Intangibles section)
  • Strategic Initiatives:
    • Recent initiatives such as the IPO gives them opprtunity to fund working capital which is almost 1:1 ratio resulting into sales.
    • They are also building Tech needed to handle both Supply and Demand side- in the manpower agency business this kind of advance tech has become very important as it is the only competitive edge apart from recruitment skills.
      • Artificial Intelligence (AI) and Machine Learning (ML): These technologies are used for parsing resumes, matching candidates with job descriptions, and predicting staffing needs based on historical data.
      • Blockchain: This can be employed for verifying the credentials of candidates securely and transparently, reducing the risk of fraudulent documents and enhancing trust.
      • Big Data Analytics: Used to analyze trends, predict industry shifts, and optimize staffing solutions based on data-driven insights.
      • Robotic Process Automation (RPA): Automates repetitive tasks such as data entry, candidate screening, and initial communications, which can significantly speed up the recruitment process.
      • Cloud Technologies: Provide scalable infrastructure to support growth and enable the seamless integration of various services across different geographies.
      • Mobile Applications: Facilitate remote access for candidates to apply for jobs, update profiles, and communicate with recruiters; for clients, these apps provide real-time updates on staffing placements and administrative functions.
  • Tax Benefit:- The tax benefit under Section 80JJAA of the Indian Income Tax Act is a significant incentive for companies, including Spectrum Talent Management Limited. Employees must be employed for a minimum of 240 days during the year (150 days for apparel manufacturing employees as per amendments).The employee’s salary must not exceed ₹25,000 per month to qualify for this benefit. Employers can claim 30% deferred tax on the salary cost of these <25K

6. Valuations

Year Total Workforce Deployed Segment Revenue from Manpower Services
(₹ Mn) Segment Profit (₹ Mn) Total Revenue per Workforce
(₹ Lacs) Profit per Workforce
(₹ ‘000)
FY20 10,889 3,794.4 137.4 ₹34.86 ₹12.6
FY21 11,928 3,790.37 135.19 ₹31.78 ₹11.3
FY22 13,031 5,034.1 187.66 ₹38.62 ₹14.4
FY23 16,219 5,034.1 189.8 ₹31.02 ₹11.7
H1 FY24 23,447 2,851.35 (H1) 41.06 (H1) ₹24.32
(H1 rate annualized) not comparable

from the above table there are two takeaways –

  1. workforce deployed has become 2X in last 4 years, which shows the business expansion
  2. they make on an average ~12K profit per workforce annually, this margin range will flucuate between 10-15K as the business grows and industry /customer/ staffing mix changes

At current business they are valued at 10 PE, whereas TeamLease is at 51 PE, which is exactly the same business and has a lower margin % and lesser RoCE, so a potential re-rating candidate with 3-5X possibilities.

Also looking at the future potential and the growth visibility given by the promoters – they should grow 30-35% for next 3-5 year which looks like 2.5 times the current revenue and at the same margin profile and capital efficiency they maintain that makes a proper 2.5-4X opprtunity

so Business Growth plus Earning Re-rating, both put toghether is a 6-20X opportunity from now.

Disc- NISM certified Research Analyst but not a SEBI certified Investment Advisor, this isnt a Investment Advice.

Few opinion:

  1. Your calculation of the Profit Per Workforce is off by a tenth. It cannot be in lakhs per deployed workforce. Please correct it.
  2. OPM is wafer thin, so they hardly are making any money (it is in very low single digit), and if you see recent presentation - they have called out that high margin business has taken a hit. So naturally we can expect things to go south even further.
  3. In general, I am wary of business for which growth driver alone is the future. It signifies two things (a) lack or pricing power - which is indirectly shown by OPM (b) no well defined moat. So any hiccup either in execution or growth can easily lead to downturn in the business.
  4. If you see the financial statement, they have recorded negative tax for past 3 years. I am assuming that is because of the deferred tax. Now, what is the normalized value - we need to see over time.

Disc : Not invested.

1 Like

Thanks for pointing out the profit mistake
The margins in this business are supposed to be wafer thin, you can compare it with Teamlease they are even lesser, 1%
I employ two bug agencies in my professional life and we pay them in the same range as their job is to hire offrole manpower on our behalf and manage the attendance and salary process only

For the tax point it isn’t deferred, they have a benefit from Govt of India which he had mentioned in the con call I will put the exact reason soon

Listened to the con call again

  • for the tax, all companies can claim 30% of tax benefit on the manpower expenses done for <25k per month as per Section 80JJAA
    They will be claiming the ~30% tax benefit every year for the next 3 year which will show in Deferred Tax

have edited the original post, got some new flavour on Moat and Business Model

Have followed private market transactions in same field
Co.s Got less than 1x multiple by investors
2nd there is not moat, I’m sorry but your analysis is off by a huge factor,
The co. Switches hiring agency as it’s not a regular business for them but allied to your regular business, no switching cost TBH
Completely commodotized business,
In a country of 1.5 billion your Manpower can’t be your differentiating factor
There are other billion people ready to work against you at a competitive salary
Also monitor growth
Co. Undergoes IPO just after tremendous growth😃


A few thoughts

  • My gut likes the promoters

    • the company was fully bootstrapped, the promoters started fresh out of college and funded 2L each
    • Profitable since inception
    • just look at the scaleup, within 8yrs of incorporation did 200cr in 2019, and now doing 600cr+, in such a commoditised industry thats a significant achievement i believe
  • Few pieces from the concall

    • ‘‘Chanishji, we are holding an earnings call, facing the music and giving you all the justifications. Regarding the stock price, the drop that you said that sir, our significant wealth is in this organization only for both of us, and we are we are collectively holding over 70%. So, trust me, it bothers me a lot more compared to what it would bother you. But then we are confident on the business. And we are here --we are in it for the long run.’’
      • there were a lot of questions on stock price and biz performance, above replies seem prompt and genuine
    • A question on ipo funds- ‘‘we were very clear that we don’t want to – instead of reporting it, we voluntarily chose a monitoring agency. So that we can put in better corporate governance and build the right amount of trust.’’
  • One needs to understand the fund flow in this industry, without working capital one would need significant debt, look at the other players in the industry

    • Considering this is a new guy with a lot of wc funds acquired through the ipo, it shouldnt face any debt issues in the medium term, causing the ebitda to flow down directly, adding to it the tax benefit
  • Global hr biz has a huge potential as and when the foreign markets turn

    • The US staffing business was started in the year 2020. It has grown over 100% last year in FY23. Such growth in such a short time is commendable however small the actual amount be, and now again they have started seeing mandates coming in proofing their demand.
  • Cannot find the names of customer, and not that it matters as much considering the quantum they have, but back around 2013-16, they have been appreciated from very senior KMPs of companies, primarily MNC pharma names

    • This is especially important because the year of their incorporation was 2012, within such a short period penetrating into such MNC customers, especially serving niche and quality driven requirements of pharma sector, says something atleast
  • Electronics business is soon to be sold out, this would thus not dilute the margins going ahead

Nothing is fully clean/great always

  • There are some doubts on few datapoints, looking closely they have lost of per employee realization, basically they have been needing a higher amt of emps to do the same rev

  • Also the NATS/NAPS scheme is a bucket with a hole, since after their cycles the employees mostly will not join in with spectrum

  • Previously the CFO to EBITDA conversion was high, but since the last 2-3 years it has been dropping, even negative

    • The receivables have spiked up a bit, which can somewhat be expected due to the industry downturn
    • in this industry i have seen debtors cycle inc and then slowly but surely damaging the bs and thus the bottomline, so this needs to be watched very closely.
  • Peers are not seeing any revival in demand in the short term


  • even commodity biz at certain valuations become desirable, everything is based on demand and supply, and mind it in comparison to peers it is vastly undervalued, also now that the low value trading biz is to be cut out, the coal should burn brighter (purposely chose the coal analogy, because it is nowhere near a dimaond)

  • They have been doing a lot of hiring, across mid and senior levels. Previously they werent able to attract talent due to their size, but now post the IPO the company has seen recognition. Also because of the industry downturn the peers are somewhat reducing their force and with the rest they are trying to control the salaries (reduced salaries), during this scenario Spectrum is trying to be the outlier and getting in as much talent as they can, which i find extremely interesting

    • Sales team is up from 11 to 23- new sales head for RPO and a team of 10 under him were just brought in, last yr it was only 3
    • Operating leverage potential is significant, keeping in mind the sheer quantum and the quality of hires
  • There are too many new hires from all MNC competitors, like- Adecco, Quess corp, Terrier security, Teamlease, Randstad, IBM, several other names

    • There are many names, which can be individually looked for on linkedin
  • the recruitment and the professional staffing or the IT staffing businesses are highly dependent on the internal manpower that they have. These are higher margins segments, and like i shared above as soon as the industry turns, there should be significant opt lvg

this industry has never been valued to its potential considering the commoditised structure ensuring there to be no entry barrier. No point in being delusional of there being any moat or structure in this industry. Hence no one in this industry is ever valued highly or even decently, few players are even languishing in the mud.

  • Although I find it hard to understand such undervaluation considering the industry’s simplicity in terms of factors to be tracked, cash flows, such roce, simple cycles where once the cycle turns the earnings explode (mann, this is what happened post covid and hence the ipo post growth)

  • I feel the margins have bottomed more or less, and if not today then tomorrow the demand will come back, and like indicated by the promoter whenever cycle turns it turns for the extreme bull case.

  • It should be a simple play on dirt cheap valuations and earnings growth, dont expect significant rerating

    • I got in here when it valued the lowest among the whole industry (still is, but here the margin of safety reduced a bit for me), almost as if the business wouldnt survive. I wouldnt add much until i start seeing some earnings turnaround
      • Already margins have slightly started increasing, doesnt mean cycle has turned ofcourse
  • Also keep in mind other players with worse economics were trading higher

Have created a small position at lower levels, hence biased


Thank you
Got some more confidence looking at your post :pray: