Info Edge: Margin pressure to continue

Firm continues to invest in growth potential businesses and this will go on for a while; analysts take optimistic long-term view

Subdued performance of its real estate business (99acres.com, about 15 per cent of revenue) pulled down the June quarter results of Info Edge, the online classifieds company.

Standalone revenues grew 18.6 per cent over a year before to Rs 172 crore, a bit lower than the Bloomberg consensus estimate of Rs 178 crore. However, thanks to a sharp spike in advertising and promotion expenses (up 1,522 basis points to 26.8 per cent of sales). incurred primarily towards 99acres.com, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin contracted a massive 1,965 basis points to 13.9 per cent. As a result, net profit fell 27.8 per cent to Rs 29 crore and was 41 per cent below the earlier estimate of Rs 49 crore. The fall could have been higher save for the 65 per cent year-on-year growth in other income to Rs 21 crore.

The real estate business' revenue grew only 12 per cent to Rs 25 crore versus analysts' expectation of 23 per cent growth to Rs 28 crore. The bigger concern is that the business continued to post an Ebit loss at Rs 36 crore, up 3.3 per cent over a year. While revenue growth was the lowest over the past six quarters, Ebit loss was the highest over the period.
And, the trend might not change soon. Intensifying competition from a host of real estate classified portals, such as housing.com, is hurting. Info Edge management's focus is to increase 99acres.com's market dominance amid increasing competition. It will thus continue to invest in 99acres and Jeevansathi.com, and believes the margins will be a function of these investments.

Chintan Thakkar, finance head, says: “We have invested in technology and marketing in 99acres.com and expect advertising and promotional spends to be similar in the September quarter as well. Though we are in a leadership position in this segment, we are trying to become a dominant player, similar to Naukri.com's position in the recruitment business.”

The big positive, though, is that its core recruitment business, namely, Naukri.com, 73 per cent of revenue, continues to see traction, fuelled by strong hiring in the information technology (IT) sector. In the quarter, recruitment revenues grew 19.8 per cent to Rs 125 crore and segment Ebit margins were 51.3 per cent, down only 34 bps. Both these are in line with the trend in recent quarters.

The management remains confident of maintaining a healthy growth in this business. This is important as the strong cash flows generated by the business are partly invested in others — real estate and matrimonial (Jeevansa-athi.com), among others.

After the dismal set of numbers, analysts could trim their full-year estimates. Most of its non-recruitment businesses will remain in investment mode in the foreseeable future and, hence, the margin pressure is likely to continue for the next few quarters.

“Slowing revenue growth in 99acres.com is a cause of concern. The company needs to protect its traffic share and leadership. We believe there will eventually be consolidation in the real estate online classified segment, after which only two or three will be left. Unless that happens, these portals are unlikely to make profits,” said an analyst with Motilal Oswal Securities (MOSL).

For long-term investors, any correction in the stock would be an opportunity to accumulate, as Info Edge is a good play on the high growth potential e-commerce segment. It's, thus, not surprising that the stock, after falling sharply since the results, had closed with a net loss of only 0.6 per cent to Rs 887, even as the broader markets were down two per cent.

The MOSL analyst remains bullish on Info Edge. In a Bloomberg poll of analysts since June, the majority are positive on the stock, with an average target price of Rs 984.