Info Edge: Near-term upside limited

But given the prospects of Naukri.com and 99acres.com and the high cash generation supporting start-ups, expect good gains in long run

Info Edge, an online classifieds company owning Naukri.com, 99 acres.com, jeevansathi.com and Zomato.com, has significantly outperformed the S&P BSE 500 and Sensex in one and three months both. This can be attributed to two-three key factors. One, its core business of recruitment (Naukri.com) has done reasonably well despite a slowing domestic economy. Second, 99acres.com (15-17 per cent of revenues) and Zomato are seeing good traction. Third, the recent investment by private equity (PE) firm Sequoia Capital in Zomato assigns a higher valuation to Info Edge's stake in Zomato, boosting its overall valuation.

Given India’s online/e-commerce sector will continue growing fast for many years led by an increasing penetration of the internet and smart phones, Info Edge’s prospects remain strong. Naukri.com and 99acres.com enjoy dominant market positions and the company has strategic investments across diverse internet properties. The challenge, though, will be to sustain its edge and profitable growth in these.

While most analysts are bullish on the scrip from a business perspective, current valuations could cap significant upsides. At Rs 449, the stock is trading at 30.9 times FY15 estimated earnings, closer to its historical average one-year forward PE of 32-33. The average target price of analysts (polled by Bloomberg since November) at Rs 479 indicates near-term upsides are limited. So, Investors can buy the stock at dips.

Naukri.com ( 70 per cent of revenues and all profits) has reinforced its leadership position with market share gains. Since FY09, the market share has improved from 45 per cent to 64 per cent. The business derives most of its revenues from companies who pay for job classifieds and banner advertisements. While most jobseekers post resumes for free, they also have the option to subscribe to premium services (resume writing, improved visibility). Revival in hiring by the information technology (IT) sector (27 per cent of recruitment revenues) is a key positive. While LinkedIn is a rival, Info Edge continues to invest in the recruitment business (to roll out Android app in 6-12 months).

“Given Info Edge’s market leadership in the online recruitment business, it is likely to be a disproportionate beneficiary of a recovery. At the same time, the high-cash generation gives enough headroom to create lines of businesses,” says Ankur Rudra, IT analyst at Ambit Capital. The debt-free company has Rs 500 crore of cash, a little over 10 per cent of its market capitalisation.

While there is an upside potential, there is a flip side, as well. The company has invested Rs 285 crore in nine internet start-ups, some are ‘high risk-high reward’. The company has written off its investment in three: StudyPlaces, 99Labels and Noble. However, it says these are long-term strategic investments. A sustainable break-even of its businesses like 99 acres.com, jeevansathi.com and Zomato.com is crucial, as it could act as a catalyst in the medium term.

Hitesh Oberoi, managing director and chief executive, Info Edge, says, "I think for 12 months or so we should not expect a serious profit from 99acres. We will be investing a lot for the future. If we continue to grow at 50 per cent for 12 to 18 months, we may make some profit. But, if the growth slows a bit, we could go into loss."

99acres.com derives its revenues from classifieds and display ads posted by real estate developers and brokers. For Jeevansathi.com, the basic services are free, but premium require payment. The focus is to improve the number of unique paid customers, and also average realisations.

The restaurant classifieds subsidiary, Zomato, recently raised Rs 227 crore from Sequoia Capital and Info Edge. Analysts remain bullish on Zomato and expect it to break even this financial year. The deal values Info Edge's 50.1 per cent stake in Zomato at Rs 494 crore, as against its investment of Rs 143 crore in the company. Zomato will deploy these funds to double its global presence to 22 countries in two years.

The combined operating loss of non-recruitment businesses, though volatile, fell to just Rs 2.2 crore in the September quarter.