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Info Edge (India) Ltd.
Upgrade to Overweight on
Recent Underperformance
Our price target remains at Rs675: Info Edge stock
has corrected 14.2% since the end of October 2010
while the Sensex has declined 4.9%. Following this
underperformance, valuations have moderated. The
stock now trades at 31x FY12e EPS, closer to its one- to
two-year historical average. We believe the stock should
have limited downside from current levels and could
revert to outperforming the broader market.
InfoEdge reported a mixed set of Dec-10 standalone
results: Revenues at Rs751m (+5.5% qoq, 27.5% yoy)
were marginally below our expectations. However, EBIT
margin and net income performance were significantly
ahead of expectations. EBIT margins at 33.9% improved
+600bps qoq, leading to a net profit of Rs219m (up 23%
qoq, 40% yoy).
Losses in other verticals could remain flat yoy in
FY11e: So far in 9mFY11, Info Edge has incurred
EBITDA losses of Rs111m (vs. Rs116m in 9mFY10).
Assuming 4Q losses stay flat qoq, Info Edge would incur
overall losses of Rs137m (flat yoy) in FY11e.
Management believes losses in other verticals could be
in the range of Rs100-150m in FY12e. We believe lower
losses could help margins by 100-200bps in FY12e.
Valuations: We note that InfoEdge has carried a
premium to the market ranging from 50% to 140% with
an average of 100% over the last two years. It currently
trades in line with its historical average, and we believe
the stock could continue trading at a premium to the
market.
Financials: We expect a revenue CAGR of 26% from
FY11-13e for InfoEdge. We forecast consolidated
margins to stay at ~31-32% in FY12e-13e due to losses
in its subsidiaries that remain in investment mode.
Overall, we believe InfoEdge should be able to deliver a
strong 28% EPS CAGR over FY11-13e. Our estimates
remain largely unchanged.
Investment Case: Upgrade to Overweight
Valuations Have Moderated After Correction
Our price target of Rs675 is unchanged
We believe Info Edge should continue to benefit from recovery
in the jobs market, its leadership position in the online job
search business and growing Internet penetration in India. We
forecast strong revenue and earnings CAGRs of 26% and 28%
over FY11e-13e for Info Edge. Following the recent correction
in the stock price, valuations have moderated to 31x FY12e
EPS and 25x FY13e EPS. The stock is currently trading at
~110% premium to the market, toward the lower end of its
longer-term historical range of 70%-250% (see Exhibit 9). As
Info Edge delivers on its expectations, we believe it should
continue to trade at a premium to the market.
Dec-10 Results: Revenues Lower than Expectations
Info Edge reported a mixed set of results for 3Q11. Revenues
were at Rs751m (+5.5% qoq, +27.5% yoy). Over the last nine
months in FY11, Info Edge has already achieved revenues of
Rs2.1bn (+27% yoy) on a standalone basis. We forecast total
consolidated FY11e revenues of Rs2.9bn (+26% yoy).
Secular decline in ad expenses is a bullish sign, in our
view: From ~20% of revenues a few years back, Info Edge has
now lowered its ad expenses to just 11% of revenues. This
demonstrates that Indian Internet companies are now able to
generate revenue growth without having to spend large
amounts in offline advertising (television, print, etc). Info Edge
achieved strong EBIT margin performance in 3Q11 of 33.9%
(+590bps qoq, +600bps yoy) – the highest ever achieved by
the company historically.
This was led by reduction in ad expenses to Rs83m (-25% qoq,
-4% yoy) – or 11.1% of revenues, the company’s lowest level
ever as a percentage of revenues. So far, in 9mFY11, Info
Edge has achieved margins of 30.4% (+630bps yoy) on a
standalone basis. We now forecast FY11e consolidated EBIT
margins of 29.4% (+660bps yoy) as subsidiaries may continue
to incur losses in FY11e.
Key results positives:
1) Strong margin performance (as discussed above)
2) Losses in other verticals (99 acres, Jeevansathi, Shiksha
etc) decreased to Rs27m (-54% qoq)
3) EBITDA margins in recruitment business remain strong,
improving further to 48.7% (+250bps qoq) in 3Q11
Key results negatives:
1) 3Q revenue growth of 5.5% qoq lagged our expectations,
2) Depreciation expense increased significantly for Info Edge
by 41% qoq, impairing margins by 60bps qoq,
3) Free cash flow for 3Q11 was negative at -23m due to
significantly higher capex of Rs247m during the quarter.
So far in 9mFY11, free cash flow (on a standalone basis) is
Rs264m (12% of revenues) compared with Rs440m (19%
of revenues) in FY10.
Conference Call Takeaways
1) Info Edge expects to devote Rs70-80cr to capex related to
purchase of office buildings over next 30 months.
2) Losses in other verticals came down, as Info Edge did not
spend on television for Jeevansathi in 3Q11.
3) Management believes losses in other verticals could
continue to come down in coming quarters. Management
expects EBITDA losses in FY12 could be in the range of
Rs10-15cr, which would be -27% to +10% yoy, in our view.
4) Naukri continues to hold ~55% market share of traffic.
5) InfoEdge cut down on its TV advertising during the quarter
for Naukri business, because hiring is usually low during
the holiday season.
Valuation
We value Info Edge using a DCF model. Our price target is the
probability-weighted average of our bull-, base-, and bear case
scenario values. We assume probability weightings of 20% for
our bull case, 60% for our base case and 20% for our bear case.
(Our price target of Rs675 = 0.20*1000 + 0.6*690 + 0.2*305).
Our price target implies an F2012 P/E multiple of 39x, on our
estimate. The current P/E multiples of ~31x F2012E and ~25x
F2013E are ~113% above those of the broader market.
Bull Case – we maintain our scenario value of Rs1,000: In
our bull case, we assume the hiring outlook continues to
improve, with a revenue growth trajectory of 8-10% QoQ over
the coming quarters. Via strong revenue growth, Info Edge
improves its recruitment business margins in 2H and lowers the
losses in other verticals. Overall, our assumptions translate to
revenue growth of 31% YoY and EBIT margin of 29.5% in
F2011e. For F2012-13, we forecast revenue growth of over
30% with stable margins in the recruitment business and
further lower losses in other verticals. Over the longer term
(F2011-21), we forecast revenue and EBIT CAGRs of 30.5%
and 31%, respectively, with margins of 31% by F2021e (from
~33% in F2012e). Our bull case value implies a P/E of ~42x
F2013e bull-case EPS.
Base Case scenario value remains Rs690: We assume Info
Edge maintains its current pace of revenue growth in the
coming quarters. Historically, Info Edge has improved margins
in 2H. We now forecast EBIT margin of 29.4% in FY11e. For
F2012, we assume margin improves further to 32% (+260bp
YoY). Our assumptions lead to earnings CAGR of 28% over
F2011-13e. Over the longer term (F2011-21), we forecast
revenue and EBIT CAGRs of 24.3% and 24%, respectively,
with EBIT margin declining to 26.5% by F2021e. Our new
base-case value of Rs690 implies a P/E of ~30x F2013e EPS.
Bear Case scenario value is still Rs305: In our bear-case
scenario, we assume that job market revives only gradually,
leading to a slower revenue growth trajectory for Info Edge over
the coming years. Higher spending on advertisement leads to
lower operating margin in 2H from current levels. For F2012e
and F2013e, as revenue growth slows down, margins in
recruitment business may slide from its peak in F2011e.
Overall, our assumptions imply revenue growth of ~26% in
F2011, and ~22% in F2012 and F2013 with EBIT margin of
~27% in F2011, and declining by ~100bp YoY over the coming
years. Over the longer term (F2011-21), we forecast revenue
and EBIT CAGRs of 17.9% and 13.8%, respectively, with EBIT
margin declining to ~19% by F2021. Our bear-case value now
implies a P/E of ~16x F2013e bear case EPS.
Key downside risks to our rating and price target include:
1) Weaker-than-expected growth in online hiring budgets
2) Losses in non-job initiatives could be a drag on earnings
3) Increasing competitive intensity in the industry
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Info Edge (India) Ltd.
Upgrade to Overweight on
Recent Underperformance
Our price target remains at Rs675: Info Edge stock
has corrected 14.2% since the end of October 2010
while the Sensex has declined 4.9%. Following this
underperformance, valuations have moderated. The
stock now trades at 31x FY12e EPS, closer to its one- to
two-year historical average. We believe the stock should
have limited downside from current levels and could
revert to outperforming the broader market.
InfoEdge reported a mixed set of Dec-10 standalone
results: Revenues at Rs751m (+5.5% qoq, 27.5% yoy)
were marginally below our expectations. However, EBIT
margin and net income performance were significantly
ahead of expectations. EBIT margins at 33.9% improved
+600bps qoq, leading to a net profit of Rs219m (up 23%
qoq, 40% yoy).
Losses in other verticals could remain flat yoy in
FY11e: So far in 9mFY11, Info Edge has incurred
EBITDA losses of Rs111m (vs. Rs116m in 9mFY10).
Assuming 4Q losses stay flat qoq, Info Edge would incur
overall losses of Rs137m (flat yoy) in FY11e.
Management believes losses in other verticals could be
in the range of Rs100-150m in FY12e. We believe lower
losses could help margins by 100-200bps in FY12e.
Valuations: We note that InfoEdge has carried a
premium to the market ranging from 50% to 140% with
an average of 100% over the last two years. It currently
trades in line with its historical average, and we believe
the stock could continue trading at a premium to the
market.
Financials: We expect a revenue CAGR of 26% from
FY11-13e for InfoEdge. We forecast consolidated
margins to stay at ~31-32% in FY12e-13e due to losses
in its subsidiaries that remain in investment mode.
Overall, we believe InfoEdge should be able to deliver a
strong 28% EPS CAGR over FY11-13e. Our estimates
remain largely unchanged.
Investment Case: Upgrade to Overweight
Valuations Have Moderated After Correction
Our price target of Rs675 is unchanged
We believe Info Edge should continue to benefit from recovery
in the jobs market, its leadership position in the online job
search business and growing Internet penetration in India. We
forecast strong revenue and earnings CAGRs of 26% and 28%
over FY11e-13e for Info Edge. Following the recent correction
in the stock price, valuations have moderated to 31x FY12e
EPS and 25x FY13e EPS. The stock is currently trading at
~110% premium to the market, toward the lower end of its
longer-term historical range of 70%-250% (see Exhibit 9). As
Info Edge delivers on its expectations, we believe it should
continue to trade at a premium to the market.
Dec-10 Results: Revenues Lower than Expectations
Info Edge reported a mixed set of results for 3Q11. Revenues
were at Rs751m (+5.5% qoq, +27.5% yoy). Over the last nine
months in FY11, Info Edge has already achieved revenues of
Rs2.1bn (+27% yoy) on a standalone basis. We forecast total
consolidated FY11e revenues of Rs2.9bn (+26% yoy).
Secular decline in ad expenses is a bullish sign, in our
view: From ~20% of revenues a few years back, Info Edge has
now lowered its ad expenses to just 11% of revenues. This
demonstrates that Indian Internet companies are now able to
generate revenue growth without having to spend large
amounts in offline advertising (television, print, etc). Info Edge
achieved strong EBIT margin performance in 3Q11 of 33.9%
(+590bps qoq, +600bps yoy) – the highest ever achieved by
the company historically.
This was led by reduction in ad expenses to Rs83m (-25% qoq,
-4% yoy) – or 11.1% of revenues, the company’s lowest level
ever as a percentage of revenues. So far, in 9mFY11, Info
Edge has achieved margins of 30.4% (+630bps yoy) on a
standalone basis. We now forecast FY11e consolidated EBIT
margins of 29.4% (+660bps yoy) as subsidiaries may continue
to incur losses in FY11e.
Key results positives:
1) Strong margin performance (as discussed above)
2) Losses in other verticals (99 acres, Jeevansathi, Shiksha
etc) decreased to Rs27m (-54% qoq)
3) EBITDA margins in recruitment business remain strong,
improving further to 48.7% (+250bps qoq) in 3Q11
Key results negatives:
1) 3Q revenue growth of 5.5% qoq lagged our expectations,
2) Depreciation expense increased significantly for Info Edge
by 41% qoq, impairing margins by 60bps qoq,
3) Free cash flow for 3Q11 was negative at -23m due to
significantly higher capex of Rs247m during the quarter.
So far in 9mFY11, free cash flow (on a standalone basis) is
Rs264m (12% of revenues) compared with Rs440m (19%
of revenues) in FY10.
Conference Call Takeaways
1) Info Edge expects to devote Rs70-80cr to capex related to
purchase of office buildings over next 30 months.
2) Losses in other verticals came down, as Info Edge did not
spend on television for Jeevansathi in 3Q11.
3) Management believes losses in other verticals could
continue to come down in coming quarters. Management
expects EBITDA losses in FY12 could be in the range of
Rs10-15cr, which would be -27% to +10% yoy, in our view.
4) Naukri continues to hold ~55% market share of traffic.
5) InfoEdge cut down on its TV advertising during the quarter
for Naukri business, because hiring is usually low during
the holiday season.
Valuation
We value Info Edge using a DCF model. Our price target is the
probability-weighted average of our bull-, base-, and bear case
scenario values. We assume probability weightings of 20% for
our bull case, 60% for our base case and 20% for our bear case.
(Our price target of Rs675 = 0.20*1000 + 0.6*690 + 0.2*305).
Our price target implies an F2012 P/E multiple of 39x, on our
estimate. The current P/E multiples of ~31x F2012E and ~25x
F2013E are ~113% above those of the broader market.
Bull Case – we maintain our scenario value of Rs1,000: In
our bull case, we assume the hiring outlook continues to
improve, with a revenue growth trajectory of 8-10% QoQ over
the coming quarters. Via strong revenue growth, Info Edge
improves its recruitment business margins in 2H and lowers the
losses in other verticals. Overall, our assumptions translate to
revenue growth of 31% YoY and EBIT margin of 29.5% in
F2011e. For F2012-13, we forecast revenue growth of over
30% with stable margins in the recruitment business and
further lower losses in other verticals. Over the longer term
(F2011-21), we forecast revenue and EBIT CAGRs of 30.5%
and 31%, respectively, with margins of 31% by F2021e (from
~33% in F2012e). Our bull case value implies a P/E of ~42x
F2013e bull-case EPS.
Base Case scenario value remains Rs690: We assume Info
Edge maintains its current pace of revenue growth in the
coming quarters. Historically, Info Edge has improved margins
in 2H. We now forecast EBIT margin of 29.4% in FY11e. For
F2012, we assume margin improves further to 32% (+260bp
YoY). Our assumptions lead to earnings CAGR of 28% over
F2011-13e. Over the longer term (F2011-21), we forecast
revenue and EBIT CAGRs of 24.3% and 24%, respectively,
with EBIT margin declining to 26.5% by F2021e. Our new
base-case value of Rs690 implies a P/E of ~30x F2013e EPS.
Bear Case scenario value is still Rs305: In our bear-case
scenario, we assume that job market revives only gradually,
leading to a slower revenue growth trajectory for Info Edge over
the coming years. Higher spending on advertisement leads to
lower operating margin in 2H from current levels. For F2012e
and F2013e, as revenue growth slows down, margins in
recruitment business may slide from its peak in F2011e.
Overall, our assumptions imply revenue growth of ~26% in
F2011, and ~22% in F2012 and F2013 with EBIT margin of
~27% in F2011, and declining by ~100bp YoY over the coming
years. Over the longer term (F2011-21), we forecast revenue
and EBIT CAGRs of 17.9% and 13.8%, respectively, with EBIT
margin declining to ~19% by F2021. Our bear-case value now
implies a P/E of ~16x F2013e bear case EPS.
Key downside risks to our rating and price target include:
1) Weaker-than-expected growth in online hiring budgets
2) Losses in non-job initiatives could be a drag on earnings
3) Increasing competitive intensity in the industry
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