TeamLease Services Ltd

NSE:TEAMLEASE

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the TeamLease Services Limited Q1 FY '23 Earnings Conference Call hosted by Mr. Aniket Pande, Lead Technology Analyst from ICICI Securities. [Operator Instructions] Please note that this conference is being recorded.

On the call, we are pleased to have Mr. Ashok Reddy, Managing Director and CEO; Ms. Rituparna Chakraborty, Executive Vice President, Staffing; Mr. Sunil, Senior VP, Specialized Staffing; and Ms. Ramani Dathi, CFO. We will start off with the remarks from the management, after which we will open the floor for Q&A session. Thank you once again for joining us today.

I now hand the conference over to Mr. Ashok Reddy. Thank you. And over to you, sir.

[Ashok Nedurumalli, executive]

Thank you. Good evening, and thank you for joining the call.

I think on a broader pace, we continue our growth journey. We've added about 9,000 headcounts in the quarter. We had revenue and PBT growth year-on-year. But obviously, our margin has had a reduction, and this is largely on account of the increased salary hike that we have seen for the associates and training, and increased investment that we did in our own core teams with the salary hikes for the year and some seasonality that comes in from some of the businesses.

While we did see some tightening in some sectors like manufacturing in Q1 and in some other sectors because of the funding fees that has come about, we did see some layoffs and deferred hiring. We do see that the positions -- open positions are increasing as we go forward, and the demand seems to be coming back for hiring in Q2. We've also added over 125 new logos during the quarter. And I think on the back of the new logos and the existing clients, we see the continued trajectory of growth happening as we go forward.

On the staffing front, with the first quarter that we have crossed the 2 lakh associate count. And I think we added over 13,000 associates in the quarter and maintained most of the metrics of PAPM, DSO and productivity to be consistent with the previous quarter. Here also, we've been adding new logos and doing better on hiring, and we continue the focus on productivity.

Obviously, with the increasing wage levels and the consistency in PAPM, there has been a margin pressure and we largely look to address this to the bottom line by scale and productivity. Various technology products and modules that have been getting ready at our end, which go live over the coming quarters will drive faster servicing and self-service into the customer and associate base.

The vertical strategy continues to play out and delivered to the aspect of demand, client logo acquisition and growth. However, the Q1 slowdown in certain sectors did impact a few verticals, some of the sectors being EdTech, FinTech, e-commerce and some new age companies. But we believe this was a correction in the coming and the opening up of new demand and open positions that we see in Q2 should sustain the growth as we go forward for the staffing industry segment in our business.

I will have Ritu cover on the degree apprentices, NETAP side, and Sunil on the specialized staffing before Ramani gives the color on the financial side before we get into questions. Thank you.

[Rituparna Chakraborty, executive]

Thank you, Ashok. Good afternoon, everyone. Hope all is well at your end.

So our vision for degree apprentices that is DA is to move beyond the regulatory terms of NATS, N-A-T-S, NAPS, NEEM and the future of high education with a strong bridge to dignify livelihood for our youth. Given you've seen success in staffing, we've chosen to reorganize the DA business as well, primarily to build intercity with the industry and academia on one hand and create pathways for the public pharmacy to be in line with the emerging needs of industry and our youth. So there are 4 industry-led business units from Q1 under DA; auto and industrial, BFSI and technology, consumer, retail and e-commerce. Going ahead, there is opportunity for 2 or more business units based on anticipated demand and ever-widening skill issue that [ corporate ] India is grappling with.

As evidenced from the numbers in absolute terms, there is de-growth from the previous quarter, largely on account of one of our larger customer choosing to shift a large chunk of our apprentices to employment status. Positive outcome for the apprentices is probably one we are looking at it. Second, we made a choice to focus on higher-margin and degree indicated programs. And hence, most of the additions during previous quarter had a marginally higher realization than the previous quarter.

And third, slowdown in intake of -- particularly in hiring of apprentices in 3 of the business segments between March and May. We do believe it's a temporary phase. I think most of the pent-up demand from employment and expansion needs -- immediate expansion needs were [ privatized ] by some organization. Nonetheless, we've added about 31 new logos during the quarter with an encouraging appetite for degree apprentices.

The focus ahead for DA are five-fold. One, scale up on growth of degree apprentices particularly, to build a compelling product portfolio by curating industry-led work, integrated curriculums and regulatory legitimacy by creating alignment between the UGC, Ministry of Education and MSCE. Third, rapid innovation and digital learning for apprentices. Fourth, enable a strong supply-side network to onboard students nationwide and lastly, strengthen ground advocacy around the future of certification. So that's the way forward.

Thank you. Sunil, over to you.

[C. Sunil, executive]

Thanks, Ritu. Good evening, everyone.

We have been able to maintain a consistent year-on-year growth story for specialized staffing, despite some amount of delay in hiring decisions in early part of the quarter. The revenue grew by 26% year-on-year, while sequentially there was a drop by 1% as most of the headcount additions happened in the later part of the quarter.

The impact of the additional headcount can be seen in the subsequent quarters. The PBT grew by 25% year-on-year, while sequentially, again, we saw a marginal drop of 30 basis points as there was an increase in the wage bill post annual appraisals, which impacted as well as we also made some investments in talent and technology. Overall, the demand for tech talent across IT and non-IT companies continue to be robust due to the super cycle of digitization post-pandemic across the industries.

So what we are witnessing is that despite the macroeconomic situation, we believe we are in a multi-year super cycle of growth rather than a one year spurt. This shall mean there would be tech talent requirement on an ongoing basis. While we have been the partner of choice within IT sector for over the past few years, we have now started focusing on becoming the tech talent supply expert across non-IT companies as well. What this will do is this will put us in a position where we'll be a tech talent supply expert across the sector.

We have been constantly [ revisiting ] the product portfolio in our telecom and infra business by replacing the non-tech mandates with tech mandates. Over the next few quarters, this change of portfolio will get completed and we can surely expect some more improvement in our margins. As mentioned earlier, the pandemic has accelerated digitization and technology spend. This is also evident from the 15 logos we bagged in this quarter.

The logos were a mix of IT and non-IT companies, keeping in line with our strategy. The requirement is for tech talent supply across sectors. Just to give you a flavor of the logos we bagged, we have clients from IT, engineering, healthcare, pharma and logistics, where obviously we have to supply the tech talent. Our ability to supply quality tech talent across industries, strong sales and account management team, ever improving operational efficiency and focused approach to gaining market share make us believe that we will continue to deliver great results in the subsequent quarters.

Thank you.

[Ramani Dathi, executive]

Thank you, Sunil.

We are back to 100% capacity in terms of core employee planned headcount, office infra, travel, printing, et cetera. We are not expecting any material increase in costs for the rest of the year and the current run rate should continue. FTE productivity and PAPM in staffing business have remained flat between Q4 and Q1, and funding exposure DSO has been maintained at Q4 levels.

Sequentially, there is a drop in margins, which is mainly on account of 2, 3 variables. We had a 12% hike in core employee salary, translating to about INR 5 crores, INR 6 crores on a quarterly basis. Historically, this number used to be 7%, 8% of annual hike. And this time in line with the market correction and inflation, we have taken a 12% appraisals. There is also a seasonal impact in our EdTech business to the tune of INR 5 crores in revenue, which is in line with the student admission cycle. Also, there is an Ind AS 116 impact of INR 2 crores.

Regarding the 80JJAA matter, we are waiting for the hearing date on the writ petition filed with the High Court of Karnataka. During this quarter, we have also received low deduction certificate from the income tax department on withholding taxes, including our claim on 80JJAA. PF Trust data migration is currently under progress and is expected to get completed by end of September.

We continue to remain debt free, barring INR 10 crores, INR 15 crores of working capital limits at subsidiary level, and we currently have a free cash of [ INR 250 crores ]. We have an active M&A pipeline, mainly in specialized staffing and HR tech solutions for which, some of the internal cash approvals maybe developed.

That's it from my side. We can take questions now.

[Operator]

[Operator Instructions] We take the first question from the line of Vidit from IIFL Securities.

[Vidit Shah, analyst]

My first question was on the NETAP program and the reorganization offices. You stated that you're now focused on higher-margin apprentices and customers. So could you indicate what sort of margins that we were making earlier on these apprentices and what we can look at now and going forward?

[Ashok Nedurumalli, executive]

So the earlier NETAP program, roughly about INR 550, INR 560 was our realization for a month on a trainee. And majority of the NETAP programs had a training program attached to it, which was around creating employability development. But I think the linkage that we are trying to do in conjunction with the regulatory authorities is a degree apprenticeship program, which is to say that it's just not a certificate program, but can align all the way up to a degree. And this also, we believe, will help the retention of the trainees with the company during that 3-year period where the program is being paid for.

And hence, I think what we are looking at is an over and above fee that we will charge the corporate for the degree linkage and learning for the trainee while they're deployed there for the 3 years earning the degree program. So at this point in time, I think the pricing is still being worked out and will be in conjunction with the authorities, but we believe another INR 200, INR 300, INR 400 is something that we would be able to move the needle as we go aggressively up on the numbers towards the degree apprenticeship program.

[Vidit Shah, analyst]

And this INR 200, INR 300 would be after factoring in the higher cost involved with more interlinkages?

[Ashok Nedurumalli, executive]

Yes. So Ritu, why don't you?

[Rituparna Chakraborty, executive]

Yes. So this is essentially after all the pass-through costs that one can factor in, yes.

[Ashok Nedurumalli, executive]

So I think we will have to have an open architecture with universities to the aspects of providing the degree linkage. So the charge to the corporate would be the comprehensive costs, including what has to be passed through to the university and then there'll be something left at our end.

[Vidit Shah, analyst]

Okay. Understood. Also, just in terms of the average salary per associate, if I calculate, so your general staffing headcount has grown roughly 7% Y-o-Y, but the increase in -- Q-o-Q, sorry, not Y-o-Y, but the increase in the revenue is roughly 4%. However, you mentioned that there's been a rise in associate salaries. So it's not really being reflected in the numbers. So are these -- is this hiring happened in the flag end of the quarter? Is this just a mathematical thing? Or are you hiring at a lower level or lower salary levels?

[Ramani Dathi, executive]

So this is mainly on account of timing of the hiring. So some of these additions happening at the end of the quarter, so that would reflect in the [ 7% ] Q-o-Q growth, whereas revenue is based on the billing for full quarter.

[Vidit Shah, analyst]

Okay. Understood. And just one last clarification I needed in terms of the disclosures in the presentation. So if I deduct the consolidated EBITDA of the quarter on Slide 5 -- Slide 4, sorry and I reduce the segmental EBITDA, I get a massive increase in the unallocated EBITDA quarter-on-quarter. So the unallocated stuff is increasing from INR 6 crores in 4Q to roughly INR 14 crores in 1Q. So could you just explain what this increase is because of -- and like is this the number to work with going forward?

[Ramani Dathi, executive]

Yes. So in this quarter, we have a higher other income almost to the tune of INR 14 crores, out of which close to INR 11 crores is relating to the businesses. So these are some of the provisions which have been created during the last 2 years during COVID times and now with the follow-up, we got collections and those provisions have been biggest. So that's what is contributing to higher other income. And overall, in terms of unallocated expenses, our run rates are more or less in line with Q4, and we are not expecting any material increase in upcoming quarters as well.

[Vidit Shah, analyst]

So I was talking of the other expenses only, which is going up from INR 6 crores to INR 14 crores. So if you look at the presentation on Slide 4, the EBITDA before exceptional, on a consol basis, is INR 25 crores. whereas the segments add up to roughly INR 40 crores.

[Ramani Dathi, executive]

We typically have anywhere between INR 6 crores to INR 7 crores of quarterly unallocated. So this time, it is slightly on a higher side because of Ind AS 116, I just mentioned and a few are the timing differences so wherein the items have been allocated between businesses and unallocated.

[Vidit Shah, analyst]

Okay. Got it. So this is the run rate that we would have? Is it a one-time Ind AS impact?

[Ramani Dathi, executive]

Yes. It's a one-time impact. And going forward, on a quarterly run rate basis, we should be back to INR 6 crores, INR 7 crores per quarter.

[Operator]

[Operator Instructions] We take the next question from the line of Mr. Aniket Pande from ICICI Securities.

[Aniket Pande, analyst]

Like we have seen moderation in hiring in tech companies in this quarter. Just wanted to understand how the open position have moved in this quarter and outlook for the same and also any initial comment on hiring trends for the upcoming festive season?

[Ashok Nedurumalli, executive]

Sunil, you want to take the hiring IT? And then I will cover the festive season.

[C. Sunil, executive]

Sure. Sure. So regarding the hiring, we saw some slowdown in the first half of the quarter. But as you could see that most of our additions have started happening in the later part of the quarter. And currently, we are seeing a good number of open positions and the decision making is very quick. We don't see a slowdown at our end. As of now, we don't see that. Moreover, even if there is any kind of hiring slowdown on the permanent positions, it is a good opening for us because during these times, our contract staffing, which is a preferred mode because that's what organizations do. So going by our discussions with the customers, the talent strategy is clear from all our customers that they are going to continue ramping up the contract staff hiring.

[Ashok Nedurumalli, executive]

So just to add to that Aniket, I think Q1 did see some softening and internal staff taking by corporates on the hiring front. So the exuberance that we had last year on the IT front didn't carry through in Q1. But towards the end of the quarter and going forward into Q2, the open positions have started coming in. And actually, like Sunil was calling out, the customers have been faster in trying to drive the closure of those positions. So I think going forward, the outlook for hiring in the specialized staffing still seems to be healthy.

And as was called out earlier, I think we continue to focus on letting go of some of the lower margin mandates in the specialized staffing side and focus on the higher-margin mandates. So while -- that strategy would also continue to play out. I think the aspect of the festive hiring, we normally get to see towards the end of Q2 and start of Q3. As of now, hopefully, with the good monsoon, the expectation of the FMCG and other companies is that the retail demand, especially from the rural areas will come into play. And they have started planning for their headcount growth for the festive season. We will hopefully start seeing more of that come into play on the table open position for hiring towards the second half of the quarter. But we stay optimistic that given no surprise on anything else that the demand should play in, which should play to the requirements on open positions leading to more hiring as we go forward.

[Aniket Pande, analyst]

Yes. Just one clarification from -- ma'am -- Ramani ma'am, you said on the earlier question that the big difference, which is there in some of segmental EBITDA and reported EBITDA, it is almost like around INR 14 crores this time, okay, which I mean, earlier used to be at around INR 4 crores to INR 5 crores on a quarterly basis. So going forward you said it will remain at around INR 6 crores to INR 7 crores.

[Ramani Dathi, executive]

Yes. So going forward, the quarterly run rate will remain around INR 6 crores to INR 7 crores.

[Operator]

We take the next question from the line of Mr. Manish from Solidarity.

[Manish Gupta, analyst]

I have 3 questions. The first one, sir, I wanted to understand that in the specialized staffing business, what is the value proposition for an employee? Because would an employee not prefer a [ permanent ] job with an IT company rather than be on the role of a company where the contract could expire and then they have look for another job?

[Ashok Nedurumalli, executive]

Yes. So I think in all of campaign, Manish, I think the preferred choice for individuals would be to be on the roles of the company rather than through a staffing company. I think it's not a lifestyle choice yet in India to be a temp. But I think the aspect of hiring and onboarding temps is more a corporate choice at this point in time. And what it does for a candidate is gives them an opportunity to work with some of the big brands, which otherwise they might not have access to. Also, what happens is a lot of the companies use the element of temping as a way to take the employee on a test drive to see how performance is and as a permanent open positions come in from their end, they do convert a large lot of these people onto their roles because they've already worked with them, know how they are performing and are delivering and hence, there's a higher comfort level on that front.

So I think in all, at this point in time, it's more -- the element of staffing is driven more by employer choice than by employee choice. It's not a lifestyle choice to be a temp for most candidates. The fact that we have marquee clients and good open positions effectively drives the candidates to opt-in and kind of expose themselves to the customers, to the big name so that they can get on to their roles in the longer run.

[Manish Gupta, analyst]

And when an employer will convert a temp employee to a permanent position, does TeamLease earn any revenue on that?

[Ashok Nedurumalli, executive]

So we have a sliding scale of an absorption cost depending on the tenure that the temp has been with us and when they get absorbed. If they get absorbed earlier, we get a higher amount. If they get absorbed at a later period, we get a lesser amount.

[Manish Gupta, analyst]

Got it, sir. My next question is on 80JJAA. In our general staffing business, given that this section is only applicable for employees who earn less than INR 25,000 a month, what percentage of our general staffing business would the employees be earning in this bracket, which entitles us to this benefit. And second is that as minimum wages go up, by which year do you think that this tax benefit will actually become marginal and not relevant?

[Ramani Dathi, executive]

So while the average salaries in our general staffing is upwards of INR 22,000 per associate per month, the median is still around INR 18,500, INR 18,600 kind of number. So majority of our associates, almost 70% to 72% of our staffing associates are under INR 20,000 of monthly salary. And in terms of increase in minimum wages and when we can hit that number, at this point in time, we don't have a concrete visibility on that. For a long time under 80JJAA section when it was extended for manufacturing entities, the limit was kept at INR 10,000 per month for almost 10 years to 12 years and later got now increased to INR 25,000 5 years back. So as and when the minimum wages go up, we expect that the -- I mean, this particular limit of INR 25,000 can also be increased by the government.

[Manish Gupta, analyst]

Okay. And my third and last question is that, in HR tech, are we doing anything today which is revenue generating? And are we -- what investments are we specifically making in HR tech, which will -- which can add revenue beyond the core staffing function?

[Ashok Nedurumalli, executive]

So our HR tech business currently is about INR 35 crores in revenue, primarily on the back of what we call compliance and payroll outsourcing. So these are outsourcing services that we provide to corporates, work with about 500 corporates on the compliance outsourcing. We administer their entire compliant -- level of compliances and help them out on that front. And we also do payroll processing for corporates. And we have DWS services that we offer both to our internal employment cluster and operate as a service to outside clients. So a combination of that is about a INR 30 plus crores revenue top line.

We believe that a larger focus on that front to drive sales and client acquisition can -- the upward opportunity in that is quite high, and that's something that we are looking at. Also, I think, while we will focus on organic growth by adding on more sales people and delivery capabilities, there is opportunity for inorganic growth in HR tech, primarily from the aspects of technology platforms that can complement. So today, while we are largely driven on service delivery, I think what we are looking at is also a platform that can move towards self-service and SaaS solutions for the longer tail of the customer base. And I think that is really where we believe inorganic can complement the element of the organic business growth that we have.

[Manish Gupta, analyst]

And is this more of a software business? Or would this be more of a service business supported by software?

[Ashok Nedurumalli, executive]

It will be a combination of the 2. As of now, what we have internally other than DWS is all a service business. The DWS is a product business. I mean, as we go forward, we want to have a combination of product and services.

[Manish Gupta, analyst]

And my last question. Sorry, I'm delivering this point...

[Operator]

I'm sorry to interrupt, Mr. Manish. May we request you to turn back to the question queue, sir. There are participants waiting for their turn.

[Manish Gupta, analyst]

Sure, ma'am.

[Operator]

We take the next question from the line of Mr. Hiten Jain from Invesco.

[Hiten Jain, analyst]

Yes. Sir, I've got questions on margins. So this unallocated part, I have not been able to clearly understand what is this one-time INR 10 crores of impact. It's a large number given a quarterly EBITDA of around INR 25 crores. And at the same time, when you are guiding that on a steady-state basis, it will go from INR 4 crores to INR 5 crores to INR 6 crores to INR 7 crores. But I think -- I mean, I believe there should be some operating leverage and this number should rightly keep going down. So why are you on a steady-state basis? What is leading to that increase?

And at the same time, I would also like to understand the drop in margins in staffing. So while on year-on-year, your revenue growth is 37% in staffing, but on EBITDA basis, it's near 12% growth. So there has been some investments here also this quarter, which look really high. And at the same time, even other HR services there, there was hardly any profits compared to last quarter.

[Ramani Dathi, executive]

Hiten, first let me address your question on staffing margins. So there are 2, 3 variables, which have impacted the margins in staffing business. So one is inflation in associates salaries. It is higher than what we have planned for. While the PAPM has remained flat, it is around INR 700 for the last 2, 3 quarters. So the gross salaries of the associates have been consistently going up quarter-on-quarter. Also between Q4 to Q1, we have our own core employee appraisals. In the past, we used to have about 7%, 8% of annual hikes to our core employees. This time it went to almost to 12%. This is in line with the market corrections that are happening. And also, as we have called out earlier, we made investments in expanding the teams, especially in the hiring and account management. And now all the teams are up to full capacity. We are not expecting any further increase in our current capacity, be it in team size or office infra and other costs.

Coming to the other question on unallocated EBITDA. So this quarter, we have -- there is an Ind AS 116 adjustment. We are moving to a new office nearby. So we have to terminate our current lease contracts and rent the new ones. On account of that, there are some onetime impacts. And also when we create a provision and write back a provision upon collection, depending on the timing, whether we write back in the same financial year or in the subsequent financial year, it can hit the unallocated part of the business. Maybe we can connect separately and walk you through the details on that front. Others, as I have indicated, going forward, the quarterly unallocated EBITDA would be in the range of INR 6 crores to INR 7 crores.

[Hiten Jain, analyst]

And on other HR services?

[Ramani Dathi, executive]

Other HR services, we have mainly 2 businesses, EdTech and HR tech business. EdTech, there is a seasonality in part in line with the student admission cycle. So this is, again, in line with our internal plans. Q2 onwards, there will be a higher revenue. And I mean, we are expecting a much higher year-on-year growth in other HR services compared to the other 2 verticals.

[Hiten Jain, analyst]

Got that. I'll get back to you in offline mode for this unallocated part.

[Ramani Dathi, executive]

Sure. I'll connect with you.

[Operator]

[Operator Instructions] We take the next question from the line of Ashish Chopra.

[Unknown]

Ramani ma'am, before my question, just a clarification. So this provision under Ind AS 116 that you are explaining, this explains the entire INR 7 crores of delta that we saw this quarter in unallocated? Or was there anything else also to it?

[Ramani Dathi, executive]

No, this is about half of that impact. The other half is in terms of increase in other allocations to corporate at this time and the timing difference, as I mentioned, in creating the provisions and write back.

[Unknown]

Okay. Okay. Maybe that's something that we probably understand from you in detail separately. Secondly, out of the total INR 806 crores of employee expenses that you have, would it be possible to just give a ballpark sense on how much of that would be the cost towards your core employees versus the staff associates?

[Ramani Dathi, executive]

For the current quarter, our core employee cost is roughly about INR 48 crores -- INR 48.5 crores and the rest -- the balance is for the associate employees.

[Unknown]

Okay. And this you mentioned would have gone up by INR 5 crores to INR 6 crores this quarter based on the...

[Ramani Dathi, executive]

Yes. Between Q4 to Q1, yes.

[Unknown]

And this number going forward should not move materially, the INR 48.5 crores? This is what should be there and about.

[Ramani Dathi, executive]

Yes. Yes. So we are at almost close to 100% capacity, and this number should continue for the other 3 quarters of the year.

[Unknown]

Understood. And lastly from my side. Could you just explain -- you mentioned, I think, in the opening remarks, the reduction in NETAP due to one particular large customer. Just any details in terms of what transpired there?

[Rituparna Chakraborty, executive]

Actually, the customer used to convert them and take them as employees. That's pretty much what happened. So essentially, in any case, it's a natural progression, Usually, it's not 100%. But in this case, the customer made a chance to kind of move them to regular form of employment or the apprentices.

[Unknown]

Okay. Okay. And would that have been a very large number? I mean, ex of that, would we have grown in this quarter because the overall negative number and the segment was growing quite handsomely in the past few quarters? So outside of -- yes.

[Rituparna Chakraborty, executive]

Even if it's -- even if this conversion would not have happened, I think the quarter would have remained muted for us. And that's the reason I kind of explained a little bit on account of the fact that we are choosing to kind of not pursue low -- I mean, essentially, we're looking at higher margins and looking at degree apprentices mandates specifically. Also, hiring in 3 of the verticals were muted. So -- but then I think it's something which is not likely to be....

[Ashok Nedurumalli, executive]

So I think -- just to add on to that, I think -- I mean, even if that client had decided to stay on, we would have been kind of flattish on numbers on the NETAP front. Some of the muted demand and slowdown in some sectors and the concentration that the apprenticeship program has, did put a demand pressure for growth. But I think the current approach that, that business has taken to verticalize and drive a focused element of sales, industry-wise should get the momentum of open positions back on track. And I think, again, in Q2, we do look at net growth coming about.

[Operator]

We take the next question from the line of Mukul Garg from Motilal Oswal Financial Services.

[Mukul Garg, analyst]

Ramani, I just wanted to follow up on the margin aspect itself. The drop in the margin on a quarterly basis has been quite sharp, even if you adjust for the Ind AS 116 and other corporate level impact. Maybe it would probably makes sense to look at the wage inflation both on core and associate side on a Y-o-Y basis instead of versus what the last figure was. If you can just help us understand what is leading cause for the margin drop here? Is it more to do with your core employees? Or your associate level inflation is also kind of continuing and kind of creating a headwind on your profitability? And, Ashok, how should we see this going forward? Do you think there is scope for taking up our markup, given that the cost of associates is going up and our markup is not increasing by the same quantum?

[Ashok Nedurumalli, executive]

So I think both elements that you called out earlier account for the element of the percentage margin drop. One is that the wage hikes have been higher on the associates front. Hence, our filling goes up, while PAPM doesn't go up in the same proportion. And hence, at a percentage basis, it does end up being lower. And we have also had our own core employee revisions factored into the cost, which leads to a depression in the margin front.

I think the element of our core employee costs getting factored in happens in Q1 will stay for the next 3 quarters. So we'll not have that impact carrying over. And from that perspective, I think going forward, we should see a margin improvement as scale happens. On the PAPM front and realization from customers, as we've always called out, the staffing business has been under pressure. While we do get some hikes from certain customers, we do get discount requests and price reduction requests from others. So there has been a fight to stay at a PAPM realization, while we are looking to cross-sell additional services, upsell to realize more and all of that. It is a fight against the element of falling sword and competitive play on that front.

Having said that, I think in absolute process, we will continue to grow. And the portfolio mix that plays up over the quarter will also adjust for the margin improvement. So I think the other businesses like, say, the EdTech, which has seasonality starts to contribute from Q2 onwards and the specialized staffing business has maintained its margin. And again, with the demand coming in, we'll continue to grow. So I think in absolute profits, staffing can also grow. At a margin level, it will be the portfolio that will contribute to the element of the margin improvement.

[Mukul Garg, analyst]

Sure. And just to a -- I mean a 2-part follow-up here. First, if you look at the 38% increase in the employee benefit expenses Y-o-Y, was the core employee cost a meaningfully large portion of this? Or was this mostly driven by the associate cost because that continues to go up?

And second, how should we think about the margin improvement going forward? You are obviously quite far from the previous quarter number of 2.3%. Do you think you can sharply kind of recover the cost, which has increased this quarter over next 2 to 3 quarters? Or will it take longer than that?

[Ramani Dathi, executive]

Yes. So our core employee cost on a year-on-year basis has increased by close to 33%. So this is in line with what we have indicated over the last few quarters that we are making investments across our teams and improving our hiring capabilities and sales capabilities. And now we are up to 100% capacity. So between Q4 and Q1 also, the core employee headcount has remained flat while there is a salary appraisal impact of 12%. However, on a year-on-year basis, both in terms of core headcount and core employee costs, there is a 33% growth. In terms of margin improvement from Q2 onwards, we have a clear roadmap to improve the margin by a few basis points quarter-on-quarter and we should be able to close the year with what we have done last year.

[Operator]

[Operator Instructions] The next question is from the line of Mr. Sumeet Jain from Goldman Sachs.

[Sumeet Jain, analyst]

Just to [ probe ] on the margin question. Was there any one-off expenses in this quarter, which you can actually recoup in the next quarter?

[Ramani Dathi, executive]

Except for the Ind AS 11 adjustment, Sumeet, we don't have any other one-off costs in this quarter. And as I mentioned earlier, the current run-rate of cost, all costs put together should continue for the remaining quarters in the year.

[Sumeet Jain, analyst]

But regarding the unallocated expenses, you mentioned it will go down back to INR 6 crores, INR 7 crores and based on INR 14 crores unallocated expenses, it boils down to around 80 basis points of margin impact. So should we assume that this 80 basis point of margin impact will come down to 40 basis points in the coming quarter?

[Ramani Dathi, executive]

Over the next 2 quarters, it would happen.

[Sumeet Jain, analyst]

Okay. And lastly, if I heard correctly, you mentioned the FY '23 margin should be similar to FY '22?

[Ramani Dathi, executive]

Yes. We don't give an exact guidance, but yes, we should come closer to that.

[Operator]

We take the next question from the line of Mr. [ Abhay ] from Bajaj Allianz Life Insurance.

[Unknown Analyst]

Sorry to bother you on the margin again, but you called out 3 things. Wage hikes, revenue seasonality in EdTech and the Ind AS impact. So what is this Ind AS impact? Can you explain that? I think that's around INR 2 crores that is impacting, right?

[Ramani Dathi, executive]

So this is the -- today, it will not have an impact on PBT. It's only on the EBITDA. So this quarter, we have terminated our existing lease contracts, and we are moving to a new office. So that alone, this Bangalore office building alone has a INR 2 crores impact and overall Ind AS adjustment is a little upwards of INR 3 crores.

[Unknown Analyst]

Okay. So around INR 5 crores, INR 6 crore impact each of wage hike and the revenue seasonality around INR 2 crores, INR 3 crores here. So that comes to around INR 12 crores to INR 13 crores -- around INR 13 crores, INR 14 crore total impact, right, of these 3 things? Now if I see quarter-on-quarter, your EBITDA actually should have increased by around 3% because that's your associate increase. But instead of INR 42 crores, you have done around INR 25 crores. So that is close to INR 17 crores. So still a INR 4 crores, INR 5 crore gap still. So can you explain why? What's the gap?

[Ramani Dathi, executive]

So the associate headcount growth has happened relatively in the later part of the quarter and the headcount drop in DA business has impacted the net revenue, the gross margin for this quarter. So that's the main reason, while the overall net revenue has remained flat between Q4 and Q1.

[Operator]

That was the last question for today. I would now like to hand the conference over to Mr. Ashok Reddy for closing comments. Over to you, sir.

[Ashok Nedurumalli, executive]

Thank you very much.

I think as we go forward, we'll continue to look for growth in volumes and work back up on the margins front. As I called out earlier, the staffing business does have a pricing limitation. But at a portfolio level, we will rebound back on the margins front. The industry verticals have started to give open positions, and we now have a much higher capability to deliver to them, which should feed our growth as we go forward. And also, hopefully, some of the sectors and companies where we saw layoffs in quarter one are behind us and we should not see any more of that.

We believe the investments that we've been making in the team in capabilities, in technology are also paying off and will prepare us for the future of the opportunity that we have as growth comes back into the market and as more temping comes to play for corporates in the organized sector. So we look to continued growth and working back on the margins front. And thank you all for joining the call. Thank you.

[Operator]

Sir, should we conclude?

[Ashok Nedurumalli, executive]

Yes.

[Operator]

Okay. On behalf of TeamLease Services Ltd, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you very much, everyone.