>INFO EDGE: Why do we like the company

Upgrade to Buy – It’s Got the Edge


■ Why do we like the company? – 1) Info Edge (INED) is the dominant player in Indian online recruitment space through its Naukri.com portal, which gives it the benefit of high operating leverage; 2) we like the mgmt’s execution capability – investing (rather than hiding) in the last down cycle helped it increase its market share; 3) the company benefits from structural opportunity in the online space with rising internet penetration (through computers & mobile) and 4) scarcity premium - there are few investible companies in the Indian space, unlike in China.


■ Why are we upgrading? – 1) The job market is adjusting to a slow environment and is using such platforms more, unlike in 08 when everything froze; 2) a flexible cost structure with 20% of employee cost (40% of rev) variable helps in margin mgmt; and 3) there are some revenues in the bag, which can support the top line for some time in case the economy slows further (unlikely). Longer term, we think it will stay ahead of the game, despite competition from a large player, LinkedIn. Besides, it is difficult to dislodge a segment leader - Makemytrip in travel, Flipkart in e-retailing. Its real estate portal, 99 acres, is the largest in its segment and should start adding some value.


■ How do we value it? – Valuation is based on earnings and EV/Sales. We apply 31x FY13E PER to standalone EPS; in line with its trading history (30x Sep-12E on consol EPS earlier) and reasonable given 1) healthy ROE (ex-cash) of ~50% & 2) strong cash generation. We take standalone and not consol EPS, which is distorted by early stage investments and is unpredictable and offers low earnings visibility (4-14% consol EPS cut in FY12-14E is primarily due to higher-than-expected losses in new segments/investee cos). 99 acres is valued at 4x Mar-14E EV/Sales; in line with peers. 99 acres is 10% of standalone rev but has no EBITDA. The other 2 segments could potentially add value in future. New TP (Rs754+55) imputes consol FY13E PE at 39.9x.


■ Key risks – 1) Prolonged slowdown would start to hurt top line with depleted deferred rev unable to support growth; 2) an aggressive foray by a large well-funded competitor like LinkedIn could eat into its market share (it has already hurt Monster’s N America r ev), 3) sustained losses in new ventures – both primary segments or funded cos


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RISH TRADER