Higher promotion costs, staff expenses to weigh on Info Edge margins

Recruitment solutions could see faster recovery, real estate segment could be a drag

Info Edge (India) reported muted operational performance in the September quarter (Q2). The disappointment was on the margin front, given that higher advertising costs — especially on its matrimonial segment (Jeevansathi) — weighed on operating profit.

Margins slid by 17 percentage points on a sequential basis to 20.1 per cent, as advertising expenses nearly doubled. Advertising and sales promotion (A&P) costs stood at 20 per cent of sales, compared to 9 per cent in the June quarter. The management expects the current levels of investment in advertising to continue, with the firm looking to increase its market share in the matrimonial segment.

With competitive intensity in this segment rising, analysts at JM Financial expect elevated A&P spends in the second half. They also expect a sequential rise in employee costs, since sales incentive-related payouts and hirings have started, while pending salary hikes and bonuses may also be cleared. This would keep margins under pressure.

On the top line front, there was a 19 per cent decline over the year-ago quarter. This was led by the real estate vertical (99acres), which was down 36 per cent, while recruitment solutions (naukri) fell 19 per cent. Analysts at BOBCAPS Research believe the sequential recovery in traffic is not translating into revenues and expect a delayed recovery in core businesses.

Most brokerages, however, expect the pick-up in hiring in the software segment to aid the naukri vertical in the near term. However, 99acres could take time to see sales traction, as two-thirds of revenues comes from new launches that could take a few quarters to play out.

While the firm continues to gain market share in the matrimonial segment, it is losing money in the business due to a higher spend; consolidation could, however, reduce competitive pressure and help reduce marketing costs.

In addition to the operational performance in key verticals, what the Street is likely to monitor is the bottom line trajectory in investee companies, which includes Zomato.

Loss at investee companies stood at Rs 96 crore, compared to a profit of Rs 3 crore in the June quarter. Losses, however, reduced by half when compared to the year-ago quarter, driven by the lower cash burn at Zomato.

Given the near-term pressure on revenues as well as margins, investors should await a steady recovery before considering the stock.