Info Edge (India) Ltd.

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Info Edge (India) Ltd.

The company was incorporated on May 1, 1995 and became a public limited company on April 27, 2006. Starting with a classified recruitment online business, naukri.com, Info Edge today, has diversified its businesses into online classifieds company in recruitment, matrimony, real estate, education & related services and strategically invests in emerging startups.

Investment Conclusion and Rationale

Buy on attractive investment profile and stable core business; stock fairly valued, Target price Rs. 1,527.

Info Edge has successfully managed to plow cash flows/profits from its core, cash cow business, Naukri.com (recruitment services) and invest & create new businesses to drive sustainable future growth. Naukri still remains the core business which (in FY18) contributes ~70% of total standalone revenue and more than 130% of total standalone PAT (since Info Edge is PAT negative in Jeevansathi, 99acres and Shiksha because of continued investments). While Naukri’s revenue saw a decent growth of c12% in FY18, hiring environment in India is said to become incrementally positive as GDP revives. Post a transitional year of implementation of demonetization, GST and RERA, 99acres’s revenue grew phenomenally at ~21% in FY18. I believe it will benefit from two sources: general growth in real estate and the transformation of spends from print media to online. Jeevansathi’s revenue growth was ~18%. With increased migration and urbanization in India, people disconnected from mother communities, youngsters wanting to exercise their own choice and families needing to go beyond familial ties to widen the sphere of match-making should increase online matrimony market in India. Revenues from Shiksha (Info Edge’s newest business in Info Edge’s standalone portfolio) grew ~16% in FY18. Gradual shift from print media education advertisement to the digital platform and the overall growth of education related advertorials will positively impact Shiksha’s business.

Now talking about investments, Info Edge boasts early stage investments in two of India’s unicorn ($1bn plus valuation) startups ie. Zomato and Policybazaar. Zomato closed Series I funding round of $200 mn with Ant Financial in February 2018 and has recently touched 12mn per month food delivery order run rate (as per Info Edge’s conf. call). If Zomato is able to catch up with Swiggy, which is a market leader in the food delivery space, Zomato’s network with Restaurants and strong brand recall with consumers with innovative products like Piggybank and Zomato Gold will make it even more relevant and able to compete in Restaurant discovery and delivery space. Consequently, this should also notch up its valuation. Policybazaar closed Series F funding round of $200 mn with Softbank in May 2018. Even with Govt. of India’s renewed emphasis on health, crop and general insurance, I think Indian insurance market is under-developed and under-penetrated. Policybazaar should benefit from offline to online migration of insurance business in India.

Industry: Comment on industry structure and competitive scenario in the key business segment

Recruitment services (Naukri)

Industry structure

Sluggishness in the Indian economy and increasing protectionism in USA had an adverse impact on job market in India, especially IT sector. According to Naukri jobspeak index, between March 2017 and March 2018, there was an overall growth of just 3% suggesting uncertain hiring environment. While IT sector witnessed a slowdown, there was some positive momentum from the auto, industrial products and construction segments. Going forward hiring environment in India is said to gain ground as GDP revives and country sees more private expenditure.

Competitive scenario

Naukri.com is an established leader in online recruitment in India. It maintained significant leadership over competition with steady traffic share ranging between 70% and 80% through FY2018. The growth engine is powered by a virtuous circle driven by the fact that it is a clear market leader. This translates into maximum traffic resulting in most responses attracting the most clients leading to the most job postings, which in turn propels another round of increased customer traffic.

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Company: Comment on operating & financial performance and outlook

In FY18, Info Edge cloaked 14% revenue growth in its Standalone business while its operating EBITDA expanded ~31%. EBIDTA margin expanded from 28% in FY17 to 32% in FY18. Cash flow from operations (before tax) grew 37% and profits before exceptional items grew ~40%.

On 5 year basis, company has exhibited an excellent CAGR growth of 48% in Operating EBITDA, 24.5% in PAT along with ~13% Revenue growth on Standalone basis.

Outlook: Positive

While I expect some moderate pressure on hiring activities in the IT sector but expect other sectors to drive revenues for naukri.com. Online Real Estate sector (99acres.com) should display impressive growth given low base last year especially in the initial half of the year. I expect incrementally positive news for Zomato while it tries to close gap with Swiggy in food delivery space.

Valuation: Which valuation methodology is appropriate and why?

Since Info Edge has different businesses (which are unrelated to each other), we need to value each business individually and hence we need to use SOTP method. I arrived at Rs. 1,527 per share value using SOTP model.

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Does the company warrant a premium/discount valuation to peers and why?

Info Edge doesn’t have any direct listed peers in India. Although there are companies which have similar businesses which compete with either one of their segment (eg. Bharat matrimony). In general, its trading at a very rich PE multiple which I think is warranted given its unique positioning in Indian internet companies with huge growth potential. If we look at SOTP based valuation, stock looks fairly valued.

Risks and Concerns

1. Over dependence on Recruitment business – It contributes ~70% revenues and all profits

2. Large part of Info Edge’s valuation comes from unlisted, highly competitive, internet based startups. Entry of any disruptive new player can significantly erode its value.

All 3 components of financial statements, including key financial ratios.

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Info Edge (India) Ltd.

The company was incorporated on May 1, 1995 and became a public limited company on April 27, 2006. Starting with a classified recruitment online business, naukri.com, Info Edge today, has diversified its businesses into online classifieds company in recruitment, matrimony, real estate, education & related services and strategically invests in emerging startups.

Investment Conclusion and Rationale

Buy on attractive investment profile and stable core business; stock fairly valued, Target price Rs. 1,527.

Info Edge has successfully managed to plow cash flows/profits from its core, cash cow business, Naukri.com (recruitment services) and invest & create new businesses to drive sustainable future growth. Naukri still remains the core business which (in FY18) contributes ~70% of total standalone revenue and more than 130% of total standalone PAT (since Info Edge is PAT negative in Jeevansathi, 99acres and Shiksha because of continued investments). While Naukri’s revenue saw a decent growth of c12% in FY18, hiring environment in India is said to become incrementally positive as GDP revives. Post a transitional year of implementation of demonetization, GST and RERA, 99acres’s revenue grew phenomenally at ~21% in FY18. I believe it will benefit from two sources: general growth in real estate and the transformation of spends from print media to online. Jeevansathi’s revenue growth was ~18%. With increased migration and urbanization in India, people disconnected from mother communities, youngsters wanting to exercise their own choice and families needing to go beyond familial ties to widen the sphere of match-making should increase online matrimony market in India. Revenues from Shiksha (Info Edge’s newest business in Info Edge’s standalone portfolio) grew ~16% in FY18. Gradual shift from print media education advertisement to the digital platform and the overall growth of education related advertorials will positively impact Shiksha’s business.

Now talking about investments, Info Edge boasts early stage investments in two of India’s unicorn ($1bn plus valuation) startups ie. Zomato and Policybazaar. Zomato closed Series I funding round of $200 mn with Ant Financial in February 2018 and has recently touched 12mn per month food delivery order run rate (as per Info Edge’s conf. call). If Zomato is able to catch up with Swiggy, which is a market leader in the food delivery space, Zomato’s network with Restaurants and strong brand recall with consumers with innovative products like Piggybank and Zomato Gold will make it even more relevant and able to compete in Restaurant discovery and delivery space. Consequently, this should also notch up its valuation. Policybazaar closed Series F funding round of $200 mn with Softbank in May 2018. Even with Govt. of India’s renewed emphasis on health, crop and general insurance, I think Indian insurance market is under-developed and under-penetrated. Policybazaar should benefit from offline to online migration of insurance business in India.

Industry: Comment on industry structure and competitive scenario in the key business segment

Recruitment services (Naukri)

Industry structure

Sluggishness in the Indian economy and increasing protectionism in USA had an adverse impact on job market in India, especially IT sector. According to Naukri jobspeak index, between March 2017 and March 2018, there was an overall growth of just 3% suggesting uncertain hiring environment. While IT sector witnessed a slowdown, there was some positive momentum from the auto, industrial products and construction segments. Going forward hiring environment in India is said to gain ground as GDP revives and country sees more private expenditure.

Competitive scenario

Naukri.com is an established leader in online recruitment in India. It maintained significant leadership over competition with steady traffic share ranging between 70% and 80% through FY2018. The growth engine is powered by a virtuous circle driven by the fact that it is a clear market leader. This translates into maximum traffic resulting in most responses attracting the most clients leading to the most job postings, which in turn propels another round of increased customer traffic.

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Company: Comment on operating & financial performance and outlook

In FY18, Info Edge cloaked 14% revenue growth in its Standalone business while its operating EBITDA expanded ~31%. EBIDTA margin expanded from 28% in FY17 to 32% in FY18. Cash flow from operations (before tax) grew 37% and profits before exceptional items grew ~40%.

On 5 year basis, company has exhibited an excellent CAGR growth of 48% in Operating EBITDA, 24.5% in PAT along with ~13% Revenue growth on Standalone basis.

Outlook: Positive

While I expect some moderate pressure on hiring activities in the IT sector but expect other sectors to drive revenues for naukri.com. Online Real Estate sector (99acres.com) should display impressive growth given low base last year especially in the initial half of the year. I expect incrementally positive news for Zomato while it tries to close gap with Swiggy in food delivery space.

Valuation: Which valuation methodology is appropriate and why?

Since Info Edge has different businesses (which are unrelated to each other), we need to value each business individually and hence we need to use SOTP method. I arrived at Rs. 1,527 per share value using SOTP model.

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Does the company warrant a premium/discount valuation to peers and why?

Info Edge doesn’t have any direct listed peers in India. Although there are companies which have similar businesses which compete with either one of their segment (eg. Bharat matrimony). In general, its trading at a very rich PE multiple which I think is warranted given its unique positioning in Indian internet companies with huge growth potential. If we look at SOTP based valuation, stock looks fairly valued.

Risks and Concerns

1. Over dependence on Recruitment business – It contributes ~70% revenues and all profits

2. Large part of Info Edge’s valuation comes from unlisted, highly competitive, internet based startups. Entry of any disruptive new player can significantly erode its value.

All 3 components of financial statements, including key financial ratios.

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