Info Edge (India) Ltd Rating: BUY Jobs and...

Sector: Internet

Sector view: Positive

Sensex: 19,577

52 Week h/l (Rs): 405/278

Market cap (Rscr) : 3,289

3m Avg vol (‘000Nos): 55

Bloomberg code: INFOE IB

BSE code: 532777

NSE code: NAUKRI

FV (Rs): 10Price as on Jul 01, 2013

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Rating: BUY Target (9-12 months): Rs345CMP: Rs301Upside: 14.6%

Company Report July 02, 2013

Research Analyst: Aniruddha Mehta

[email protected]

Info Edge (India) Ltd

Initiating Coverage

Jobs and more!

Info Edge, largely known by its recruitment portal Naukri.com, is the first listed internet based player on Indian bourses and until recently the only one. Info Edge owns a diversified portfolio of portals like Naukri.com, 99acres.com, Jeevansathi.com and Shiksha.com which have come a long way in establishing strong market and mind share. This is evident in Naukri’s market leadership among job portals with 60%+ market share and 99.acres’s market leadership (30%+) among real estate classifieds portal. Its matrimony portal – Jeevansathi (JS) too is one of the top players in the online matrimony space. Its investment companies like Zomato, PolicyBazaar and Meritnation have also shown early success with leading market share and brand recall.

Info Edge’s strong growth since inception in these key portals is on the back of key structural tailwinds. These include increasing internet penetration, faster and cheaper internet access. The internet penetration in India , despite the strong growth, is still one of the lowest (11%) and is poised to grow threefold by 2015 . The average annual growth in mobile subscriber base of 33% over FY07-13 also further validates the improving penetration through mobile internet. Over a longer period of time, this under-penetration and India’s young demographics is expected to bode well for internet-based businesses in general and Info Edge in particular.

In last five years though, Info Edge’s growth has been impacted due to the effects of global financial crisis (over FY09-10) and more recently in FY13 which was on the back of general slowdown of both global and domestic economy. Due to strong linkage of recruitment (75%+ of the consolidated revenues) to business cycles and increased competitive intensity from non-traditional players (Linkedin), we expect the slower growth to continue in the medium term. On the flipside, high under-penetration, small base, dominant positioning should lead to robust growth for portals like 99acres, JS, Zomato, Meritnation and PolicyBazaar. Overall, we expect the company to register 21%/12% CAGR over FY13-15E and assign a conservative P/E multiple (28x 1 yr forward v/s 37x historically) considering slower growth. Initiate with BUY and 9-month TP of Rs345.

Financial summary Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E Revenues 3,919 4,723 5,693 7,030 yoy growth (%) 21.8 20.5 20.5 23.5 Operating profit 1,183 1,210 1,561 1,763 OPM (%) 30.2 25.6 27.4 25.1 Reported PAT 919 916 1,349 1,438 yoy growth (%) 45.5 (0.3) 47.3 6.6 EPS (Rs) 8.5 10.6 12.4 13.2 P/E (x) 35.3 28.4 24.3 22.8 Price/Book (x) 6.2 5.4 4.5 3.8 EV/EBITDA (x) 25.8 25.2 18.7 15.9 RoE (%) 19.3 20.3 20.1 18.0

Source: Company, India Infoline Research

Info Edge

2

Rapid growth in India’s internet subscriber base… .. but penetration still minimal

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Source: TRAI, India Infoline Research Source: Company, Internet World Stats

A quasi play on Indian Internet space Info Edge’s majority business is providing online classified services in variety of domains like recruitment, matrimony, real estate, education and restaurants catalogues. The high under-penetration of internet in India provides a strong growth opportunity for the established online portals of Info Edge; as the user base expands, this consequently increases the attractiveness of these platforms. Strong headroom for growth of internet user base in India The use of internet in India is set to grow rapidly with the current user base of ~137mn expected to grow threefold by 2015. This population has already grown five-fold since 2005 validating the strong growth potential. India’s rising levels of urbanization, rapid growth in consumer base, and one of the most youthful demographic profiles worldwide are the key factors driving this growth. India’s young and growing population provides an opportunity to build an internet-oriented economy considering the fact that despite having the third largest internet user base in the world, the penetration levels are just 11-12%

The key factors that are driving increased internet usage are: Faster and cheaper internet access- Availability of faster broad-band

/mobile connectivity and cheaper internet access devices like mobile phones, tablets has resulted in strong usage growth.

Improved last mile connectivity- Due to increased use of mobile technologies and broad band (cable), the last mile connectivity issues have been less troublesome and has effectively resulted in higher internet usage

Increased mobile penetration- India's tele density has doubled in the last three years reaching 74% at the end of CY12. The mobile subscriber base has increased from 165mn in 2007 to 892mn now registering at CAGR ig nearly 33%.

Majority of Info Edge’s business is web‐based service thus being a quasi play on the Indian internet growth story

Indian internet user base poised to grow three‐fold by 2015..

Faster and cheaper internet access, improved last mile connectivity, higher mobile penetration..

Info Edge

3

Robust growth in India’s wireless subscriber base Tier2/3 town internet penetration has improved

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Higher internet penetration in tier2/tier 3 towns- Growth of internet usage in non-top 8 metros has been much faster than the metros indicating increased penetration.

Favourable demographics – India has ~65% of its population below 35 years of age. This populace is generally early adaptor of new technologies and is highly connected through mobile and internet. This sets a perfect stage for multifold increase in the internet usage.

Higher penetration of internet implies higher online classifieds spends Online advertising currently forms less than 5% of the total advertising spends in India much below 40%+ contribution from Television and print (each). However, due to the increasing internet penetration and cost effective nature of online advertisement there has been robust growth in the same. This is evident in the ~30% growth in online advertisement market to Rs22.6bn in FY13 which is further expected to grow at the same pace in FY14. The high degree of flexibility to target variety of audience as well as ease of monitoring the impact (measuring ROI) are the other important factors that make online advertisement more attractive. Across Info Edge's portfolio, online advertising is a key revenue component. For instance, in the case of Naukri/99acres, banners of recruiters/developers on the home page as well as their classifieds are a important part of their revenues. Additionally, due to the lower cost of online advertisement, it suffers lesser budget cuts (lower beta) in a slowdown.

…improving penetration in Tier2/3 towns and favorable demographics are driving higher internet usage

Online advertising has been growing at a robust 20%+ annual rate over past years Flexibility, ease of measuring returns (ROI), low cost as more importantly shift of users base are the key factors responsible for driving online advt.

Info Edge

4

Naukri’s resume base highest amongst peers Traffic share of naukri compared to peers

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Source: Company, India Infoline Research Source: Comscore, Company, India Infoline Research

Online advertising in India set to grow

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Source: IAMAI, India Infoline Research

Naukri.com – Leading player in online recruitment space Info Edge first ventured into online space with its online recruitment classified Naukri.com in FY97. A path-breaker in the Indian internet space, Naukri.com has grown impressively since inception and has maintained its leadership position despite increasing competition. The resume database has expanded more than 3x since inception and its traffic share (among online recruitment sites in India) has remained strong at 60%+. Resultantly, despite diversification into multiple portals, recruitment solutions (including both online and offline recruitment services) still account for 75%+ of the standalone revenues.

The robust growth witnessed is on the back of Naukri's strong value proposition as well as overall strong growth in the Indian economy. The underlying growth drivers for overall recruitment industry have been the GDP growth, business confidence and investment spending by businesses. This is evident in the strong correlation of the revenue growth at Naukri and the GDP growth for India. Apart from the underlying driving factor of overall economy's health, the biggest factor for Info Edge is the strong brand (Naukri,com) that it enjoys. In addition to the brand, the inherent virtuous

Naukri.com – the foremost online jobs portal has grown impressively since its inception The resume database has grown 3x and it commands a leading market share of 60%+

Strong growth in the Indian economy and was a key growth driver with others being business confidence, business spending More resumes attracting more recruiters which attract more resumes has led to a virtuous cycle resulting in strong growth

Info Edge

5

Naukri’s client base has shown stable growth Client revenue productivity has been improving over FY10-13

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cycle of more resumes attracting more recruiters which further attract more resumes has helped the company to maintain its leadership position. The lead in terms of size of the resume database is evident considering the 33mn plus resumes for Naukri versus 25mn for Monster.com and 20m for timesjob.com. Recruitment revenues are intrinsically linked to economic growth

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Source: Bloomberg, Company, India Infoline Research

The key revenue streams for Info Edge's recruitment business include database access, classifieds/job postings by recruiters, job-seeker services and offline recruitment service. Of these resume database access forms a majority part of the revenues followed by advertising/job listing. Established leadership, brand recall and services/tools around response management, data mining and mobile solutions have resulted in improved client engagement and revenue productivity.

Resume database access, job postings and corporate classifieds are the key sources of revenues

Info Edge

6

Linkedin - New source of threat for Naukri? Ability to mine the potential candidate database, short-list relevant candidate profiles, manage their response and the ease/efficiency of doing the same are the most critical factors on which the efficacy of the recruitment service depends. While Naukri.com has been able to sustain its market share through effectively implementing these, alternate sources of recruitment like social recruitment (Linkedin) and advanced search technologies (like semantic search) have emerged. Linkedin originally a professional networking portal is now increasingly becoming a medium for networking, job listing and passive recruiting. A totally new mode of searching candidates or jobs, Linkedin provides a unique 'social' recruiting platform. Corporates are increasingly using Linkedin for posting jobs, passive recruitment (candidates who are not actively looking to change job), building talent pipeline and recruiting for higher level posts. Also, Linkedin is a medium for improving external brand of the company through features like participation in various industry specific forums, talent brand index among others. Various paid features like 'Recruiter' 'Work for us' add material value to the recruitment process for the employers. From the employee perspective, Linkedin membership not only helps being professionally connected but also doubles up as an alternative resume for recruiting employers. Additionally, job posts provide avenues for active job search for these members. Features like recommendation, endorsements also add credibility to the member profiles further helping corporates to zero in the right candidates. We note that this acts a quasi referral for the potential target and that referrals have always been the largest mode for recruitment among corporate. Linkedin global profile base has shown robust growth

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New modes of recruiting like through networks (Linkedin) and new technologies like semantic research (monster’s trovix) are emerging threats to Naukri’s turf Linkedin adds value to the process of recruitment through various services/features to recruiters as well as candidates Profile doubles up as online resumes, recommendations/endorsements act as referral tools. Other tools like Recruiter, work for us, talent brand index, job listings etc also add value

Info Edge

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Advanced search technologies like semantic research could be another source of competition. This is because these make the candidate search process very scientific, effective and quick – a key requirement for any recruiter. The acquisition of Trovix -a leading player in semantic search technologies by monster.com in 2008 provided with such capabilities. Semantic search technology help in filtering resumes by breaking them, structuring the data according to certain key attributes (skills, job designation, work history education) and reduce the resume database to a list of matching resumes without much of human intervention. Availability of such technologies are a big plus for the recruiters who will then buy only the relevant resumes from the recruitment portal hence reducing both the cost and time of short-listing. To counter these threats and to fill in specific product/services gap, Info Edge, in H2 FY13, acquired TooStep.com and Makesense Technologies. While MakeSense Technologies is involved in proprietary semantic search technologies, TooStep.com uses SAAS based platform enabling social network and search engine based jobs propagation. Nonetheless, we believe that the competitive intensity has been increasing in the recruitment space due to both new technologies and newer players and hence are credible threats to Naukri’s turf.

Semantic search makes search process scientific, effective and quick with an ability to break /structure along various lines viz. skill, job designation, work history, education etc. Recent acquisitions of makesense and toostep by Info Edge are specific steps taken to counter the new threats

Info Edge

8

Fast growing presence in newer segments- real estate, matrimony and education In addition to the online recruitments classifieds (Naukri), Info Edge has diversified into three other online portals Jeevansathi (2004), 99 acres (2005) and Shiksha (2008). Each of these online portals caters to different market segment but works on similar model by providing an efficient online platform connecting key stakeholders (buyer/seller in case of 99acres, prospective bride/bridegroom in case of JS). These businesses have grown impressively since inception with their contribution to the total revenues increasing from 10% in FY08 to 20% at present. Increasing revenue contribution from non-recruitment business

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99 acres – Rapid growth, Established market share 99acres is key non-recruitment business segment of Info Edge’s standalone business, which provides an online real estate classifieds platform for real estate properties in India. Established in 2005, 99 acres has grown from strength to strength witnessing 41% Revenue CAGR over past five years. This is also seen in its contribution to Info Edge's standalone revenues which has increased from 6% to 12% over the same period. Easy access to vital information (comparison, prices) on real estate market is a key attraction for a sector, which is inherently affected by informational asymmetry. Increased internet usage and need for exhaustive information research also has augmented the attractiveness of online property portals like 99acres.com. Additionally, real estate players being one of the highest advertising spenders, online classifieds spending has continued to increase. This is evidenced by strong paid listings growth at 99acres.com (122% CAGR over FY08-13)

Other key portals of 99 acres, Jeevansathi and Shiksha have shown promise Over past fuve years 99 acres has witnessed a41% revenue CAGR .. with its proportion of total revenues improving from 6% to 12% currently

Info Edge

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99acres sales witnessed a 38% CAGR over FY09-13 Traffic share stats – 99acres and peers

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Since its inception in 2005, 99acres has maintained its dominant market share with magibricks.com being a close competitor. The key factors that have resulted in sustained market leadership are the continued investment in on-field sales force, product innovation and brand building. This is evident in terms of the page views/traffic rank/’time on site’ parameters of 99acres compared to its peers. The growth headroom continues to be strong considering low penetration in a market of nearly 200,000 dealers and about 10,000 builders. This provides a sizeable opportunity fueling both the new property listing as well as secondary market listing (rental and re-sales) revenue sources.

Pageview statistics of 99acres with peers

Source: Alexa.com

Cyclical nature of the revenues correcting Among the two major sources of revenues i.e. the new property listing and secondary listing, the new property listing is closely linked to the macro-economy (the interest rates and inflation) as the real estate/construction activity is highly linked to these factors. As a result, these new listings are cyclical in nature. On the other hand, resales/rental listings are less correlated to the macro factors. Over a period of time, the company has been able to successfully reduce the concentration of new listings and resultantly improving the resales/rental proportion to ~50% currently.

99acres is a dominant player with 30%+ market share with magic bricks being close competitor There are ~200000 dealers and 10000 builders to be penetrated

New project listings which are linked to the macro‐economy (interest rates, inflation) have reduced significantly with more stable re‐sales/rentals forming a larger revenue proportion

Info Edge

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Strong growth opportunities ahead Our conversation with management suggests a high under-penetration in online real estate classifieds market. As more and more dealers/builders/brokers get acquainted to the online medium of advertising/listing, it should lead to increasing listings, which should further penetration. Growing presence in Tier 2/3 cities (Top 10 cities' presence already established), expanding field force and most importantly the increasing share of online advertisement should continue to lead to strong revenue growth for 99acres.com. As a result, we estimate 99acres to register a Revenue CAGR of 35% over FY13-15E. Jeevansathi and Shiksha.com- moderate successes Jeevansathi.com (JS), Info Edge's matrimony portal, is one of the leading players in the Indian online matrimony market. In India, due to higher focus on arranged marriages involving consent of parents, the demand for match making services has long been in existence. The matrimony market has been largely fragmented with these services accessed through print, community specific matrimony houses, online matrimony portals or through relatives' contact. Internet savvy millennial generation, higher internet penetration and continued increased in the profile base (and hence probable matches) has resulted in matrimony portals becoming a credible alternate resource. JS was acquired by Info Edge in 2004 and has witnessed a decent revenue CAGR of 20% with the number of listed profiles witnessing a CAGR of 28% over the FY08-13. Unlike other portals of Info Edge (naukri, 99acres), JS growth traction has not be as strong considering no first-mover advantage, highly fragmented nature of the market and strong competition in the online space. Nonetheless, JS continues to be one of the leaders (Ranked 3rd) in the online matrimony market. This is on the back of increasing profile base, competitive prices and continued investment in product innovation. Despite the de-focusing on pan India presence (more specific focus on North India Hindi speaking belt, parts of Maharashtra and big cities), the site has steadily grown its user base. This is evident in the growth of 6 % in paid user base with average realisation per user witnessing a 16% CAGR .

High under‐penetration, expanding filed force and increasing contribution of online advertisement should lead to continued growth Millennial generation, higher internet penetration and continued increase in profile base have made matrimonial websites a strong alternative Profile base/Revenues have witnessed a 28%/20% CAGR over FY08‐13 Despite de‐focus on pan India presence, JS has shown decent growth both in profiles as well as average revenue productivity

Info Edge

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JS user base has nearly doubled over FY09-13 Average revenue productivity of JS has seen steady improvement

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Info Edge

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Early investments in various internet/mobile startups in the growing internet space Info Edge's strategy to monetize the nascent and fast growing Indian internet space has not only led to strong home-grown brands like Naukri.com, 99acres, etc but also led to investment in rapidly growing web/mobile based start ups. Strong profitability and robust cash flows from the core business as well as extensive domain knowledge in the internet space also were the key reasons for these investments. Info Edge has invested ~Rs2.8bn in these ventures till date. These investments are detailed below: Out of these investments, Zomato, Meritnation and PolicyBazaar have shown strong promise considering the dominant positioning in their area of operations. First mover advantage, capturing of mind share through strong positive brand recall in an increasingly mobile/connected consumer base are the key factors for their success. This is validated by the robust revenue growth CAGR witnessed in the past three years. Strong growth potential of these businesses, considering the under-penetration, faster and cheaper internet connectivity and cheaper access devices, have attracted substantial investor interest. A look at the growing institutional investments done in India’s internet-based companies also corroborates the strong potential these start-ups. Expanding business of the Info Edge’s investee companies especially Zomato and Meritnation has resulted in increased investment in them over FY13. For instance, out of the cumulative invested capital of Rs2.8bn, nearly Rs1.5bn was invested in FY13 of which majority was in Zomato and Meritnation. This recent additional investment now values both the companies at Rs6bn+ each - a multifold premium to the total capital investment of Rs1.47bn.

Strong cash flows from core business and established domain expertise are key factors leading to new investments Domain expertise, surplus cash and growing market resulted in number of investments of ~Rs2.8bn by Info Edge Zomato, Meritnation and Policy Bazaar have shown early promise Recent investments in Zomato and Meritnation value each of them atRs6bn+.

Investment portfolio of Info Edge

Entity Name Year

Total investment

(Rs mn) %

holding Business area Revenue stream Competition

Zomato 2010 860 57% Restaurant listings and advertisements. advertisement revenues

burpp.com, timescity.com

Merit Nation 2008 615 54%

Educational content provider through subscription K12 students (Std V to Std XII) ; advertisement and lead generation

Pay per use of educational content

Toplearning.com, learnnext.com etc

Policy Bazaar 2008 325 32%

Customised comparison for insurance and other financial products

Lead generation fees which is recently capped by IRDA

Zibika.com, insuringindia.com, apnainsurance.com etc

My dala 2011 270 47% Bulk discount offers and deals, Platform for new vendors to market the products

Merchant commisions

Snapdeal.com, groupon.co.in, dealsandyou.com

Canvera 2012 354 23%

Mass customised photo printing and e-commerce soln for professional photographers

Priniting revenues; solutioning revenues snapfish.com

Happily Unmarried 2012 50 25%

Collaborates with product designers, craftsmen to produce lifestyle products Selling products zazzle.com

Floost 2011 26 31% Helps individuals build social network around their interest eg. photgraphy Ad space

pinterest.com, jabbermark.com

99labels* 2011 285 Written

off e-commerce in the area of fashion merchandise and accessories Sale of the products

jabong.com, yehbhi.com, fashionandyou.com


Info Edge

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On the other hand, we note that lower entry barriers and resulting intense competition also may not lead to similar success for all the investee companies. This is already evident in the recent Rs290mn write off of the investment in fashion e-commerce portal 99lables.com by the company. Competition for mydala.com has also been high with entry of international player groupon.com and presence of another strong competitor snapdeal.com. Nonetheless, the strong foundation for the top 3-4 investee companies should help to company to ride the increased consumption over the internet and possibly derive rich dividends from the same.

Not all the ventures have been successful due to heightened competition/commoditised business. Recent write off of e‐commerce venture 99lables is a key example

Investment galore in internet based start-ups

Company Description Investor Investment

(US$ m) Last invested

in year

Snapdeal.com e-commerce/groupbuying Bessemer, Nexus and IndoUS 102 2013

Indiaproperty.com e-commerce/Real Estate Cannan, Mayfield 7 2013

Flipkart e-commerce/Diversified Accel India, Tiger Global,Naspers Limited, ICONIQ and MIH 355 2012

Bookmyshow Online Movie ticket booking Accel 18 2012

Inmobi Mobile ad networking

Mumbai Angels 0.5

2012 Kleiner perkins Caufield & Byers and Sherpalo 15

Softbank 200

Exclusively.in e-commerce/apparel Accel, Tiger Global 19 2011

Bigbasket e-commerce/grocery store Acent capital 10 2012

Zovi.com e-commerce/fashion shopping portal

Saif partners 25 2013

Redbus.in Online bus ticketing Helion, Inventus, Seedfund 10 2011

Naaptol.com e-commerce/diversified NEA, Canaan Partners and Silicon Valley Bank 32.5 2011

Consim Classifieds Canaan Partners and Mayfield 17 2013

Healthkart.com online health store Omidyar, Sequoia and Kae Capital 22.5 2013

Tutorvista online tutoring Pearson 139.5 2013

Homeshop18 e-commerce/shopping Saif partners, Network 18 and GS shopping 53.5 2011

Caratlane.com online jewellery Tiger Global 27 2013

Source: Company, various online news services, India Infoline Research

Info Edge

14

Recruitment revenues grew at 12 % CAGR over FY09-13

Non-Recruitment had a robust 31 % revenue CAGR over FY09-13

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Financial Analysis Info Edge, driven by its strong online brands, first mover advantage, improving consumption over the internet and a largely stable macro-economy, has witnessed a decent revenue CAGR of ~25% over FY07-13. Due to recent sluggishness in economy and the subsequent tepid corporate hiring/attrition there has been a slower growth in the recruitment business (~18% CAGR). On the other hand, the non-recruitment business i.e. home grown portals 99acres (including allcheckdeals), Jeevansathi and Shiskha grew at a robust 43% CAGR over the same period.

A majority of the Info Edge’s revenues continue to be driven by its recruitment business, which contributes 77% of the standalone business and 71% of the consolidated entity. As new job creation and attrition (the two key factors driving recruitment) are impacted by the economic business cycles, the recruitment revenues are highly correlated with the cyclicality of the Indian economy. For instance, due to the impact of the financial crisis in FY09, the recruitment business slowed down in FY09 and de-grew in FY10. The recent sluggishness in the economy and tepid corporate hiring has also resulted in a deceleration of revenue growth in FY13 after a pick-up in FY11-12. Within the recruitment business, nearly 40% is contributed by the IT/ITES sector (directly and through consultants) and ~25% is from recruitment consultants. Indirect linkage of recruitment business to the global economy due to export oriented IT/ITES exposure was also a key reason that resulted in the tepid performance. Our conversation with the management suggests that during tepid growth environment, corporate also cut down on the consultants’ channel. On the other hand, in an expanding economy, the recruitment solutions witness strong growth with high attrition, new job creation, increasing use of consultants and consumption of premium recruitment products.

Info Edge standalone business has shown an impressive CAGR of 25%+ over FY07‐13.

Recruitment business contributes 75%+ to the total revenues and hence is a key growth indicator Growth of the recruitment business is inextricably linked to the vagaries of the domestic as well global business cycles IT/ITES sector contributes nearly 40% of total recruitment revenues.

Info Edge

15

Attrition and gross additions at TCS on a decline Decreasing utilization at Infosys

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Expect Recruitment to grow at 13% CAGR over FY13-15E

Non-Recruitment business to grow at a robust CAGR of 37% over FY13-15E

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We expect the slow recovery in global IT spending indicated by the IT cos’ management commentary, industry analysts, low average utilization, reducing attrition to lead to tepid growth in the near term. Additionally, the slow recovery in the domestic economy should also continue to have dampening effect on the hiring. Rising non–traditional competition (Linkedin) could also be a headwind considering its increased aggression. We conservatively estimate the recruitment business revenues to grow 13% CAGR over FY13-15E.

The other key growth engines for Info Edge -99 acres and Jeevansathi should continue to grow strongly in our view. Significant headroom for penetration 99acres (both in terms of dealers/builders as well as geographic presence) and increasing contribution of online advertisements for real estate players are the key levers for growth. Product innovation, market share gain through competitive pricing and expanding consumer base considering the increasing internet usage should bode well for the company. We expect the non-recruitment business to grow at a 35% CAGR over Fy13-15E.

Current slowdown in IT space, slow recovery in economy and increased competition should continue to lead to weak revenue traction for recruitment business

Strong headroom for growth and established brand for 99acres, JS and front line investee cos like Zomato, Meritnation, policy should lead to strong revenue traction

Info Edge

16

Trend in OPM of recruitment business

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Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13

(%)


Slower revenue traction to result in range bound operating margin The operating margin performance for Info Edge has historically been strong as the relatively fixed cost base lends significant operating leverage. Among the top three businesses, recruitment business contributes almost entirely to the profitability with the rest – real estate, matrimony and education being at breakeven/loss. Since inception, recruitment business growth was robust due to growing Indian economy, market expansion due to increased online adoption and market share gains from peers. As recruitment revenues grew, operating leverage advantage played out with OPM expanding from 16% in FY03 to 49% currently. For the rest of the organic business, due to consistent investment in field force (especially for real estate business), lack of pricing power, advertisement for brand awareness and continued need for product innovation has resulted in zero/negative profitability. In the past five years, Info Edge’s operating margin performance has been volatile due to the combined effect of choppy revenue traction and continued investment in personnel as well as products. For instance, in period of weak/negative growth after the global financial crisis and more recently in FY13, the OPM corrected. This is largely due to fixed costs, continued investment in people and product development and higher advertisement for market share protection/gain. On the other hand, as there is a recovery in growth rates, the profitability has also picked up materially as seen in the period FY10-12.

High operating leverage and good growth of recruitment business since inception has resulted in strong operating profitability (49% OPM for FY13) Sustained investments in field force, product innovation and advertisement as well as lack of pricing power key reasons for near zero profitability for rest of the business Consolidated OPM performance has been choppy over last five years

Info Edge

17

Going forward, over FY13-15E, considering the macro uncertainty (global and domestic), weak outlook for the IT/ITES space (largest client base) and increased competitive intensity, we expect the growth in the recruitment business to be slow. Also the need for continued investments in the real estate, matrimony and education business for maintaining market share and expansion in newer markets may not lead to material improvement in their profitability. From the investee companies’ perspective, despite the established brand awareness and market share for Zomato, Merit Nation and Policy Bazaar, there would be need for continued investment for market expansion, product development and increasing brand visibility. As a result we do not expect a material contribution from these to the consolidated entity profitability. Overall, we estimate the consolidated operating margin to remain stable over FY13-15E (25.1% versus 25.6% in FY13) OPM expected to be range bound over FY13-15E

20

23

26

29

32

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

(%)


Weak revenue traction for recruitment business as well as continued investments for newer business should lead to range bound OPM over FY13‐15E

Info Edge

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One yr forward rolling P/E band P/E valuations below long term average

0

100

200

300

400

500

600

700

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

20.6x

27.7x

34.7x

41.7x

48.7x

(Rs)

0

10

20

30

40

50

60

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

(x)


Valuation and Recommendation Info Edge is a leading player with strong presence in the Indian online space. Dominant positioning/leadership of key brands like Naukri.com, 99acres, Jeevansathi, Zomato, Meritnation in a growing internet space provides an opportunity to participate in the long term growth of the internet space in India. Due to this as well as being one of the foremost listed players in the Indian internet space, Info Edge has traditionally enjoyed premium valuation (average P/E 37x one yr forward earnings). More recently though, the revenue traction for Info Edge has been tepid due to weak macro economy and its resultant effect on recruitment. Increased competition from non-traditional players like Linkedin for its recruitment business (75%+ of total revenues) is also a longer term headwind. Consequently, we estimate 21%/12% CAGR revenue/earning over FY13-15E (medium term) for Info Edge (consolidated). Weaker near-medium term growth also leads us to assign lower earnings multiple (28x one year forward) and arrive at a 9-month TP of Rs345. We nonetheless are positive on the long term growth opportunity for the company and initiate coverage with BUY.

Info Edge

19

Financials

Income statement Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E

Revenue 3,919 4,723 5,693 7,030

Operating profit 1,183 1,210 1,561 1,763

Dep & Amort (83) (118) (160) (175)

Interest expense (22) (28) (29) (29)

Other income 395 475 522 573

Profit before tax 1,472 1,540 1,894 2,132

Taxes (529) (529) (625) (704)

Minority & Others (16) 142 80 10

Adj. profit 927 1,153 1,349 1,438

Excep. items (8) (237) - -

Net profit 919 916 1,349 1,438

Balance sheet

Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E

Equity capital 546 1,092 1,092 1,092

Reserves 4,726 4,993 6,215 7,526

Net worth 5,272 6,085 7,306 8,618

Minority interest (25) 105 (25) (85)

Debt 3 5 5 5

Total liabilities 5,250 6,194 7,286 8,538

Fixed assets 642 1,064 1,038 1,188

Intangibles 0 557 557 557

Investments 3,152 2,614 2,614 2,614

DTA 42 45 45 45

Net working cap 1,414 1,915 3,051 4,170

Sundry debtors 81 95 115 142

Cash 2,216 2,286 3,480 4,686

Other curr assets 970 1,594 1,922 2,373

Sundry creditors (382) (557) (671) (829)

Other curr lia (1,471) (1,504) (1,813) (2,238)

Total assets 5,250 6,194 7,286 8,538

Cash flow statement


PBT 1,448 1,444 1,974 2,142

Dep & Amort 83 118 160 175

Tax paid (529) (529) (625) (704)

Working capital ∆ (341) (431) 76 105

Operating CF 661 603 1,585 1,719

Capital exp. 29 (1,096) (135) (325)

Free CF 690 (493) 1,450 1,393

Equity raised 129 23 - -

Investments (524) 538 - -

Debt fin/disp (4) 2 - -

Dividends paid (127) (127) (127) (127)

Other items (24) 127 (130) (60)

Net ∆ in cash 141 70 1,193 1,207

Key ratios

Y/e 31 Mar FY12 FY13 FY14E FY15E

Growth matrix (%)

Revenue growth 21.8 20.5 20.5 23.5

Op profit growth 42.9 2.3 29.0 12.9

EBIT growth 45.5 4.9 22.6 12.4

Net profit growth 59.9 24.3 17.0 6.6

Profitability ratios (%)

OPM 30.2 25.6 27.4 25.1

EBIT margin 38.1 33.2 33.8 30.7

Net profit margin 23.7 24.4 23.7 20.5

RoCE 31.1 27.4 28.5 27.2

RoE 19.3 20.3 20.1 18.0

RoA 14.4 15.1 15.0 13.5

Per share ratios

EPS 8.5 10.6 12.4 13.2

Dividend per share 1.2 1.2 1.2 1.2

Cash EPS 9.3 11.6 13.8 14.8

Book value per share 48.3 55.7 67.1 79.3

Valuation ratios

P/E 35.3 28.4 24.3 22.8

P/BV 6.2 5.4 4.5 3.8

EV/EBIDTA 25.8 25.2 18.7 15.9

Payout (%)

Dividend payout 13.7 11.0 9.4 8.8

Tax payout 35.9 34.3 33.0 33.0

Liquidity ratios

Debtor days 8 7 7 7

Creditor days 36 43 43 43

Du-Pont Analysis


Tax burden (x) 0.63 0.75 0.71 0.67

Interest burden (x) 0.99 0.98 0.99 0.99

EBIT margin (x) 0.38 0.33 0.34 0.31

Asset turnover (x) 0.61 0.62 0.63 0.66

Financial leverage (x) 1.34 1.34 1.34 1.34

RoE (%) 19.3 20.3 20.1 18.0

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between -10% to +10%

Sell – Absolute return below -10%

Published in 2013. © India Infoline Ltd 2013 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013. For Research related queries, write to: Amar Ambani, Head of Research at [email protected] or [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91-22 4007 1000

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