Info Edge - Stock Analysis

24 Apr 2019 Read 119 Views

Info Edge is a pure play internet company, it is India’s premier online classifieds company in recruitment, matrimony, real estate, education and related services.

The company was incorporated on May 1,1995 as Info Edge (India) Private Limited and became a public limited company on April 27,2006. Starting with a classified recruitment online business, naukri.com, Info Edge has grown and diversified rapidly, setting benchmarks as a pioneer for others to follow.

Its business portfolio comprises of:

Recruitment: Online recruitment classifieds ,a job site focused at the Middle East market ,offline executive search and a fresher hiring site. Additionally,Info Edge provides jobseekers value added services (Naukri Fast Forward) such as resume writing.

Matrimony: Online matrimony classifieds, which also has an offline Jeevansathi Match Points and franchisees.

Real Estate: Online real estate classifieds, covering almost all the major cities and a large number of agents and developers.

Education: Online education classifieds,

The company has made investments in some early stage companies/start-up ventures to tap into the growing and vibrant Indian internet market. Currently, the company has investments in:

  • Zomato Media Private Limited 
  • Applect Learning Systems Private Limited 
  • Etechaces Marketing and Consulting Private Limited
  • Kinobeo Software Private Limited
  • Canvera Digital Technologies Private Limited 
  • Happily Unmarried Marketing Private Limited
  • Goa-based Mint Bird Technologies Private Limited 
  • Mumbai based Green Leaves Consumer Services Private Limited, invested 8 Cr via compulsorily convertible debentures
  • Rare Media Company Private Limited
  • It has also made forays abroad into the Gulf market and currently has offices Dubai, Bahrain, Riyadh and Abu Dhabi.

What is the moat?

Yes, most of its businesses are leaders in terms of attracting traffic in their respective segments. Network effect on its platforms perpetuate users and increase the value of its services. For the companies operating in this industry, the real assets are its users. The users are the content creators and also the consumers. Hence having a large consumer base on its platform is what attracts more users creating a virtuous cycle high traffic that results in more responses, which attracts more clients, which propels the next round of increased customer traffic. Naukri.com alone has 57million resumes in its databases, with 17000 of these being added daily as of FY2018, as claimed by the company. According to Alexa (an Amazon.com company), Naukri.com is also the 41st most visited site in the country coming over the likes of Netflix.com! Similarly, 99acres is leading traffic volume against its top competitors, in terms of time spent, it now has a traffic share of 51%.

The company is also trying to apply a similar strategy for its investments. It’s are a big factor in making the company market beater in the future. Zomato and policy bazaar are attractive ventures which have huge future potential and Info edge is trying to increase their consumer base and attract more vendors and thereby create a network effect in their future investments too.

Business

1) Does the company have sustainable Moat?  (3)
Yes, the moat is sustainable as all its platforms have high number of users which is difficult to achieve for any platform and takes years to achieve.

2) Does the company have strong Pricing Power? (2)
To some extent it does enjoy some power but being a service provider, which needs high number of participants to operate, it cannot dictate the price as it would run the risk of losing customers which can severely affect the quality of the service it provides.For platforms like Zomato, the company needs to adapt a low-cost strategy to make the platform attractive to the consumers.

3) Is the business simple to understand? (3)
Yes, the companies operated by info edge offer basic services for free but to have more reach, larger pool of options and personalized service they charge and offer tranches for various prizes.

4) Does the business operate in a fast-changing industry? (1)
Yes, the company operated in fast-changing industry where innovative ways to service customers and quality service is rewarded.

5) Is the company’s product able to withstand being easily substituted or outdated?  (2)
No, the company cannot withstand being substituted because if the substitute can provide a better alternative than currently used then the customers will switch, primarily because their services offer ease to the consumer which if replaced with better offering will diminishes the older service altogether.

6) Is the company’s business immune from easy replication by new players? (2)
Yes, but the new players need to have a substantial user base to be able to replicate the network effect created by the likes of Naukri.com, 99acres.com, Jeevansathi.com.
For Zomato, which is operating in new domain, it will take time till the segment is established and it will also attract a lot of players till the industry matures and a leader emerges.

7) Does the industry have long term visibility? (4)
Yes, this model has a good outlook and is responsible for replacing the traditional brick and mortar models. With increasing internet penetration in India, the industry has a lot of room to grow and the company’s businesses have the potential to become household names of the country.

8) To what degree is the business cyclical, countercyclical, or recession-resistant? Is the earnings growth constant or cyclical? (3)
Recruitment business: Highly dependent on economic growth and recessionary cycles, as recruitment policies of the companies are related to economic outlook of the industry. For example, in the FY2018 was not as well as expected because the IT sector, which is one of the highest recruiters from the online portals, did not fare well and therefore cut back on their recruitment hence the revenues on Naukri were also affected. It is a growing sector and business.
Matrimonial business: Not cyclical or recessional business. Growing sector.
Real Estate business: Non-cyclical but dependent on the economic development and the Real Estate industry and norms. The recent RERA regulations hit the industry and the business hard which reflected on the earning for the period. Growing sector.
 

Management

1) Is management’s salary too high? On what basis warrants and esops are issued to the management?  (4)
The remuneration of the management team was close to 4.37% of net profit which is reasonable.The Company has no warrants issued.
ESOPs are issued to employees who are willing to purchase.

2) Is the company free of promoter pledging of shares? (4)
Yes, the company does not have pledged shares.

3) Is the management trustworthy? Do they have a history of compliance and legal troubles? (4)
Yes, the management is trustworthy, there is no information which proves otherwise.

4) Has there been any substantial equity Dilution in the last 2 years? (4)
No, the company has not seen substantial equity dilution.

5) What has management done with the free cash in the past years? (3)
The Company has invested heavily in start-ups and new ventures. It could be said that Info edge has acted more like a venture capitalist firm investing mostly on firms who provide an online service model even though the service areas are different.
Info edge invests into via its subsidiary ‘Start-up     Investments (Holding) Ltd (SIHL) and not only provides funding to these companies but managerial guidance and expertise. The company has an investment exposure of wort     h ₹ 9,648 million in start-ups and ₹ 1860 million or 19% of all such investments ever made have been written-off but this is part of the growth strategy and the investee companies seem promising.

6) Is the management guilty of diworsification? (2)
Some of the companies that Info Edge invests in have little in common with the core competence of Info Edge and a lot of the venture fail, but every investor in start-ups have a failure projects hence it can be considered normal. Nevertheless, it is highly risky and return of capital is not guaranteed.

7) Are there too many related party transactions? (1)
Yes, the companies invest a substantial amount into its subsidiaries.

8) Is the tax payout less than 25%? (4)
No, the current tax payout is 35.23%.

9) Is the industry in which the company operates highly regulated? Can regulatory or geopolitical changes affect the working of the company? (4)
The industry is not highly regulated. Geopolitical changes will also have minimal effect on the industry. Recent regulations on data security and privacy policy has forced the industry players to take measure to prevent data leaks but this has not severely affected the workings of the company and has minimal effect on day to day workings.

Financials

1) Does the business have a consistent sales and profit growth history and is there room for future growth? (3)
The both standalone and consolidated sales have shown consistent growth.
The net profit for standalone statement, i.e. the profit from only the core businesses, has shown consistent growth but the consolidated, i.e. the profit/loss including that from the subsidiaries, has been fluctuating. Hence an inference can be drawn that the core businesses are stable but the unstable cash flow from the subsidiaries are causing intermittence in the consolidated report. The industry does have a good future prospect with increasing internet penetration the businesses will likely grow.

2) Does the company enjoy significant degree of operating leverage? (4)
Yes, the company has a significant degree of operating leverage as it is an online service provider and any increase in the number of customers would only require an increase in the capacity of the servers and data handling capacity, and infrastructural increase will not be required.
As compared to traditional firms, the fixed cost of Info Edge is covered and with every new customer added the profits will increase disproportionately.

3) Are the profits of the company actually turning into cash flow? (3)
Yes, profits from the operations have turned into cash flows.

4) Has it generated healthy return ratios? (2)
The ROE and ROCE are low as the its investments have not completely mature and contributing to the profit. But the company’s standalone figures have high ROE and ROCE.

5) Does the business generate strong free cash flow?  (2)
The company does not generate strong free cash flows as it chooses to invest in its subsidiaries.

6) Is the company conservatively financed? Is the debt to equity ratio of the company <= 1 (4)
Yes, the company is virtually debt free.

7) Can the company run its business without relying on external funding in the upcoming years? (1)
Yes, the company has healthy cash balance and financial assets which can be used without relying on external funding.

Behavioural

1) What is the general sentiment around the stock? (3)
The company has strong core business. Naukri .com is a market leader and retain dominance for the foreseeable future. The company is growth oriented and invests heavily to into new businesses and has a diverse investment portfolio.
Zomato and Policy Bazaar are two of its standout investments which have huge potential. Zomato posted a three-fold jump in revenues in 2018-19. The growth in sales can be attributed to the acquisition of new customers. The company’s total costs increased by more than six-fold in 2018-19 as compared in the previous financial year.
Info Edge with its investment portfolio is akin a venture capitalist firm investing in promising ventures that can be highly profitable in the future. The investors investing in Info Edge can therefore indirectly own parts of Zomato and Policy Bazaar two companies and also other promising startups.

Valuation

 

Segment

Methodology

Sales

Sales expected next FY

PBT

PBT  expected

expected valuation

share price contribution

Naukri & other recruitment

30 x recruitment PBT

6687.52

7950.85662

3660.28

4304.977

129149.3

1059.024

99acres

8x forward sales

1354.33

1610.17592

-360.18

-202.557

12881.41

103.0513

Other

3x forward sales

1113.06

1280.019

-485.77

 

4224.063

32.94769

Subsidiaries:

 

           

Zomato

Valuation ascribed in the latest round of funding

       

23100

346.5

Meritnation

Valuation ascribed in the latest round of funding

       

3900

19.5

Policybazaar

Valuation ascribed in the latest round of funding

       

1400

14

other subsidiaries

 

       

0

5

cash on books

 

       

18000

144

 

 

         

1724.023

Final price

15% safety margin

 

 

 

 

 

1465.4

 

The correct valuation for Info Edge should be close Rs 1724.023. Giving a 15% safety margin to the above price, the value quoted is 1465.4. This is done to counter balance any crude approximation errors taken to reach the above price.

The valuation has been based on ‘some-of-the-parts’(SOTP) methodology. SOTP methodology is used because Info Edge is a company which draws its incomes from different business and subsidiaries, hence for a comprehensive valuation every business needed to be valuated and their contribution to the share price determined.

Since the company earns its revenues by providing services online, to value its individual companies Profit before Tax (PBT) is considered for profit making businesses and sales for businesses that are have not yet started making profit but have potential in the future.

For the subsidiaries, valuation is based on the latest round of funding provided them by parent company or sale of shares to other outside parties, like in the case of Zomato where Info Edge sold close to 6% to Alipay.

Key Highlights

FINANCIALS

  • CAGR revenue growth (5 years) – 15.91%
  • ROE (Mar 2018) – 6.94%
  • EPS (June 2018) – 42.11
  • P/E ratio – 91.97
  • Debt equity ratio – 0
  • NPM – 51.81%
  • Profit growth (YOY - 3 year)- 94.42%
  • Profit growth (YOY – 5 year)- 16.03%

What is good?

  • Zero debt
  • Strong operational cash flow from core businesses
  • Good profit growth

What is bad?

  • Low ROE
  • High dependence on recruitment division for profits
  • High income from other income and secondary sources ₹ 480.28

Finology Review

Review video on Info Edge https://www.youtube.com/watch?v=odI7IN23J4Q&t=349s

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