Info Edge riding on Nomura's $1.4-bn valuation of Zomato

Higher valuation of the restaurant classifieds business has led to an increase in target prices

The Info Edge stock was up 7.5 per cent on Friday (closing at Rs 1,186.60 on the BSE) adding to the 19 per cent gains since the end of August on brokerage upgrades. The bullish view on the stock, which hit its 52-week high on Friday, stems from the growth potential of Zomato, its 46 per cent-owned online restaurant classifieds business, as well as expected returns from the jobs vertical once recovery takes hold.

Analysts at Nomura have upgraded the target price of Info Edge to Rs 1,280 from Rs 1,100 on higher valuations for the company’s stake in Zomato. They believe the Street’s valuation of $1billion for Zomato is too low and the company should, in fact, be valued at around $1.4 billion. They say that given the restaurant classifieds business is a globally scaleable one, which utilises the network effects of its restaurant discovery platform, enabling monetisation in food ordering at low customer acquisition costs. 

Zomato’s revenues, according to them, could grow by 6.5 times to more than $300 million over the next five years, driven by a 4.5 times uptick in the advertising business, which had revenues of $38 million in FY17 and a larger 15 times improvement in the food ordering business, which ended FY17 with revenues of $9 million. Overall, Zomato recorded Rs 330 crore in revenue, a year-on-year growth of 80 per cent in FY17.

The higher valuations are expected to be led by expansion in the nine countries where it has traffic leadership and on-ground presence. The scalability and growth potential stems from the company’s plan to target the entire food cycle, from restaurant discovery, online ordering, table booking and back-end systems for restaurants. Analysts at Edelweiss, too, believe Zomato’s cash burn rate has declined significantly and growth momentum continues to be strong.

The near-term, however, could see some headwinds for its job classifieds (Naukri) and real estate portals (99 acres). The management attributed the muted show in the June quarter for Naukri to lower collections given uncertainties around the goods and services tax (GST) and lower hirings due to a slowing economy. Implementation of the GST has had a negative impact on the non-IT business. Despite tough competition, the company has maintained traffic and market share. The company has a 75 per cent share in the online job classifieds business.

The company’s realty portal, 99acres, has been impacted by the real estate regulation Act, which led to uncertainty on projects and the weakness in demand in the NCR, which is the largest market for the company. The management, however, believes that competitive intensity has come down substantially and expects higher advertising revenues from digital platforms on the back of broadband penetration and firming up of the realty market.

The stock is trading at 37 times its FY19 earnings estimates and most brokerages are bullish on the company’s long-term prospects.