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Info Edge India
Overweight
INED.BO, INFOE IN
It's not just naukri.com; 99acres.com could well be the
next big thing; this is available today for free
• Info Edge has become so synonymous with naukri.com that it is easy to
overlook the potential significance and value of its other internet properties.
Within its portfolio of other internet properties could be a hidden gem if the
market dynamics prove favorable over time. Enter 99acres.com – Info Edge’s
real-estate online classifieds venture. 99acres.com has around 50% traffic
share in the real estate portal market, and we believe it has established
itself as the uncontested leader. The Indian real estate portal market is still at a
nascent stage. However, a host of factors such as increasing internet penetration
(which is a very low 7% currently), rising urbanization, huge population, and a
secular shift towards organized real estate development provide ideal
background conditions for the growth of this business, in our view.
• Similar businesses in other countries (SouFun.com, Rightmove, Seloger, Rea
Group) have experienced very strong growth. Looking at market framework
and competitive positioning, we see SouFun.com (China) as the closest
comparable to 99acres, although China is 5-6 years ahead of India in terms of
internet penetration. Interestingly, over the past five years, SouFun has had a
revenue CAGR of 66%, despite the financial downturn. We believe 99acres
will also achieve a robust revenue CAGR of 45-50% over the next 4-5
years, in line with its comparable companies.
• We acknowledge that the real estate portal business is highly sensitive to
interest rates and inflation, but over a period of time growth rates tend to
normalize e.g. SouFun grew only 22% in CY09 due to macro weakness, but
made up for that by growing at 77% in CY10, or 47% CAGR for the two years.
• 99acres is yet to break even, but operating leverage is the name of the game in
the internet portal business; as the company achieves critical mass and matures,
profitability should follow. Relatively mature but similar businesses in other
geographies operate at an EBITDA margin of 45-50%, and we believe
99acres will also get there in 4-5 years once it establishes a critical mass.
• Our analysis suggests that 99acres will be worth about Rs125/share in Mar-
12, which should swell to over Rs300/share over the next 4-5 years.
• Reiterate OW on Info Edge with a new Mar-12 PT of Rs845: This revised
PT includes Rs125/share for 99acres.com, which we believe is not reflected at
all in current expectations. Essentially, today, investors get this for free.
Investment Thesis
99acres’ potential underappreciated
Recruitment services business contribute about 85% of total Info Edge revenues and
more than 100% of EBITDA, while other businesses are in the relatively early stages
of growth. 99acres is currently 6% of total revenues and is yet to break even, but the
growth prospects of the business appear very attractive to us. Notably, profitability in
the portal business is driven by operating leverage and, as 99acres achieves scale,
profitability should follow.
99acres.com reported more than 70% revenue growth over the first three quarters of
FY11 (over the same period last year), and we expect that growth of 50-70% will
continue for the foreseeable future. We analyze the evolution of listed companies in
other geographies to assess the future prospects of 99acres. We conclude that the
company is well positioned to benefit from the growing online real-estate advertising
spend in the country. We estimate that the current stock price reflect zero value for
this business, implying that investors are getting this business for free.
All levers in place to drive 99acres’ growth, including market leadership
Growth in the real estate portal business is driven by several factors, including
internet penetration growth, urbanization, secular shift to organized property
development, prevailing interest rates and competitive positioning. Low (around 7%)
but rapidly growing internet penetration, significant movement from rural to urban
areas, and increasing proportion of organized real estate development provide the
ideal growth background conditions for the development of the real estate portal
business in India, in our view. Interest rates are admittedly a key variable, but the
impact tends to be normalized over a period of time.
In terms of the competitive landscape, despite low revenue generation, 99acres has
around 50% real estate portal traffic share, which places the company in a dominant
position in the fledgling but rapidly growing market. We expect revenues in this
division to grow at a CAGR of about 50% over the next few years, which is
conservative compared to the growth exhibited by comparable companies such as
SouFun (in China) which have grown by about 66% over the last five years in a
similar market (five years ago).
Operating leverage should drive margins as the company grows to achieve
critical mass
In the portal business, costs are relatively fixed in nature and are less sensitive to
revenue growth, providing significant operating leverage. 99acres is yet to break
even, but as the portal gains scale, EBITDA margins should rise significantly.
Similar but relatively mature businesses operate at an EBITDA margin of 45-50% in
other markets both developed and developing. We expect 99acres to achieve similar
margins over the next 3-5 years and expect margins to stabilize at these levels.
99acres should be itself worth about Rs125/share by Mar-12
We value 99acres at Rs125/share for Mar-12 based on 12x EV/sales, which might
seem high at first glance but comparable businesses have traded at even higher
multiple in the initial years of growth. We believe EV/sales is a better metric to value
the business over the next few years as margins are still rising quickly and are yet to
stabilize. We have estimated the value of the business over a period of time and
computations based on EV/EBITDA and EV/sales tend to converge when margins
are relatively stable at around 45%. Our analysis suggests that 99acres should be
worth more than Rs300/share in 3-5 years’ time with value largely tracking growth.
Info edge’s core namely the recruitment services is well poised to grow driven
by the improving hiring environment
Naukri.com, which is the most important business for the company, has about 60%
total job search traffic share, according to Comscore and the company has built a
solid brand over the last decade maintaining leadership position since its inception in
1997. EBITDA margins for naurkri.com (recruitments services.) currently stand at
50%, and could further improve with operating leverage. The company has built
strong relationships with clients over these years, reflected by the fact that they
stayed even during the downturn. The portal reported 35,500 paid customers for
FY10.
Fortunately, hiring activity has picked up steam in the IT/ITes/BPO sector, which
generates about 26-27% revenues for the portal. The infrastructure sector (22%
revenue share) should also witness a significant increase in employment as the
government continues to emphasize its development. Overall, growing internet
penetration, a large number of employable population and rapidly growing economy
and industry provide an ideal environment for the growth of Info Edge’s recruitment
services business.
99acres.com - Financials and valuation
Financials – expect 50% revenue CAGR over the next 3-4 years
The portal is in the early stages of development in a nascent stage market of online
advertising in India. However, it has about 50% share of total property portals'
traffic, putting the website in a leadership position. Management reported 76%
revenue growth for the first nine months of FY11 for 99acres, which is in line with
growth rates exhibited by comparable companies during initial years. We believe the
company will maintain a revenue CAGR of around 50-60% for the next 3-4 years,
which we believe is a realistic assumption given the dominant position of the website
and similarity of growth exhibited by peers in other geographies.
Agreed, the revenue growth is dependent on macro factors such as interest rates and
inflation, but we believe over a period of time, these should normalize over a time
period as witnessed in the growth of SouFun. SouFun’s revenues increased at 66%
CAGR over the last five years, although FY09’s growth rate was only 22%.
EBITDA margins are still negative for 99acres.com, although significantly better
than in FY09 (-68%). The company expects the portal to break even this quarter. We
believe margins will improve steeply, driven by operating leverage, which is the key
margin driver for this business. EBITDA margins should stabilize around 45-50%
from FY15 onwards, in line with peers from other countries. .
Valuation
We have used EV/forward sales to value 99acres though FY13, as margins are
increasing steeply and we see EBITDA as a weak metric to estimate the earnings
power of the portal. We believe that starting in FY15, when we expect margins to
reach around 45% and should be relatively stable going forward, EV/EBITDA is a
better valuation metric to employ.
We have valued the portal at different points of time between Mar-11 and Mar-14.
According to our base case, the portal should be worth Rs125/share by the end
of Mar-12 based on 12x EV/FY13E sales, and the value should reach
Rs200/share in Mar-14 based on 10x EV/FY15E sales as well as 22x EV/FY15E
EBITDA. We believe the relatively high multiples are justified given the dominant
position of the portal and similar multiples exhibited by comparables.
Risks to our rating and price target
Key risks to our PT and rating include:
1. Traffic share contraction due to competitive threat, for example from
Monster’s semantic search (Trovix) technology.
2. Increasing interest rates and inflation may hurt real estate market, impacting
99acres.com business for a relatively long period of time.
3. 99acres does not follow the trend exhibited by companies in other
geographies or lose market leadership position.
4. Advertising expenses pick up in response to competitors’ actions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Info Edge India
Overweight
INED.BO, INFOE IN
It's not just naukri.com; 99acres.com could well be the
next big thing; this is available today for free
• Info Edge has become so synonymous with naukri.com that it is easy to
overlook the potential significance and value of its other internet properties.
Within its portfolio of other internet properties could be a hidden gem if the
market dynamics prove favorable over time. Enter 99acres.com – Info Edge’s
real-estate online classifieds venture. 99acres.com has around 50% traffic
share in the real estate portal market, and we believe it has established
itself as the uncontested leader. The Indian real estate portal market is still at a
nascent stage. However, a host of factors such as increasing internet penetration
(which is a very low 7% currently), rising urbanization, huge population, and a
secular shift towards organized real estate development provide ideal
background conditions for the growth of this business, in our view.
• Similar businesses in other countries (SouFun.com, Rightmove, Seloger, Rea
Group) have experienced very strong growth. Looking at market framework
and competitive positioning, we see SouFun.com (China) as the closest
comparable to 99acres, although China is 5-6 years ahead of India in terms of
internet penetration. Interestingly, over the past five years, SouFun has had a
revenue CAGR of 66%, despite the financial downturn. We believe 99acres
will also achieve a robust revenue CAGR of 45-50% over the next 4-5
years, in line with its comparable companies.
• We acknowledge that the real estate portal business is highly sensitive to
interest rates and inflation, but over a period of time growth rates tend to
normalize e.g. SouFun grew only 22% in CY09 due to macro weakness, but
made up for that by growing at 77% in CY10, or 47% CAGR for the two years.
• 99acres is yet to break even, but operating leverage is the name of the game in
the internet portal business; as the company achieves critical mass and matures,
profitability should follow. Relatively mature but similar businesses in other
geographies operate at an EBITDA margin of 45-50%, and we believe
99acres will also get there in 4-5 years once it establishes a critical mass.
• Our analysis suggests that 99acres will be worth about Rs125/share in Mar-
12, which should swell to over Rs300/share over the next 4-5 years.
• Reiterate OW on Info Edge with a new Mar-12 PT of Rs845: This revised
PT includes Rs125/share for 99acres.com, which we believe is not reflected at
all in current expectations. Essentially, today, investors get this for free.
Investment Thesis
99acres’ potential underappreciated
Recruitment services business contribute about 85% of total Info Edge revenues and
more than 100% of EBITDA, while other businesses are in the relatively early stages
of growth. 99acres is currently 6% of total revenues and is yet to break even, but the
growth prospects of the business appear very attractive to us. Notably, profitability in
the portal business is driven by operating leverage and, as 99acres achieves scale,
profitability should follow.
99acres.com reported more than 70% revenue growth over the first three quarters of
FY11 (over the same period last year), and we expect that growth of 50-70% will
continue for the foreseeable future. We analyze the evolution of listed companies in
other geographies to assess the future prospects of 99acres. We conclude that the
company is well positioned to benefit from the growing online real-estate advertising
spend in the country. We estimate that the current stock price reflect zero value for
this business, implying that investors are getting this business for free.
All levers in place to drive 99acres’ growth, including market leadership
Growth in the real estate portal business is driven by several factors, including
internet penetration growth, urbanization, secular shift to organized property
development, prevailing interest rates and competitive positioning. Low (around 7%)
but rapidly growing internet penetration, significant movement from rural to urban
areas, and increasing proportion of organized real estate development provide the
ideal growth background conditions for the development of the real estate portal
business in India, in our view. Interest rates are admittedly a key variable, but the
impact tends to be normalized over a period of time.
In terms of the competitive landscape, despite low revenue generation, 99acres has
around 50% real estate portal traffic share, which places the company in a dominant
position in the fledgling but rapidly growing market. We expect revenues in this
division to grow at a CAGR of about 50% over the next few years, which is
conservative compared to the growth exhibited by comparable companies such as
SouFun (in China) which have grown by about 66% over the last five years in a
similar market (five years ago).
Operating leverage should drive margins as the company grows to achieve
critical mass
In the portal business, costs are relatively fixed in nature and are less sensitive to
revenue growth, providing significant operating leverage. 99acres is yet to break
even, but as the portal gains scale, EBITDA margins should rise significantly.
Similar but relatively mature businesses operate at an EBITDA margin of 45-50% in
other markets both developed and developing. We expect 99acres to achieve similar
margins over the next 3-5 years and expect margins to stabilize at these levels.
99acres should be itself worth about Rs125/share by Mar-12
We value 99acres at Rs125/share for Mar-12 based on 12x EV/sales, which might
seem high at first glance but comparable businesses have traded at even higher
multiple in the initial years of growth. We believe EV/sales is a better metric to value
the business over the next few years as margins are still rising quickly and are yet to
stabilize. We have estimated the value of the business over a period of time and
computations based on EV/EBITDA and EV/sales tend to converge when margins
are relatively stable at around 45%. Our analysis suggests that 99acres should be
worth more than Rs300/share in 3-5 years’ time with value largely tracking growth.
Info edge’s core namely the recruitment services is well poised to grow driven
by the improving hiring environment
Naukri.com, which is the most important business for the company, has about 60%
total job search traffic share, according to Comscore and the company has built a
solid brand over the last decade maintaining leadership position since its inception in
1997. EBITDA margins for naurkri.com (recruitments services.) currently stand at
50%, and could further improve with operating leverage. The company has built
strong relationships with clients over these years, reflected by the fact that they
stayed even during the downturn. The portal reported 35,500 paid customers for
FY10.
Fortunately, hiring activity has picked up steam in the IT/ITes/BPO sector, which
generates about 26-27% revenues for the portal. The infrastructure sector (22%
revenue share) should also witness a significant increase in employment as the
government continues to emphasize its development. Overall, growing internet
penetration, a large number of employable population and rapidly growing economy
and industry provide an ideal environment for the growth of Info Edge’s recruitment
services business.
99acres.com - Financials and valuation
Financials – expect 50% revenue CAGR over the next 3-4 years
The portal is in the early stages of development in a nascent stage market of online
advertising in India. However, it has about 50% share of total property portals'
traffic, putting the website in a leadership position. Management reported 76%
revenue growth for the first nine months of FY11 for 99acres, which is in line with
growth rates exhibited by comparable companies during initial years. We believe the
company will maintain a revenue CAGR of around 50-60% for the next 3-4 years,
which we believe is a realistic assumption given the dominant position of the website
and similarity of growth exhibited by peers in other geographies.
Agreed, the revenue growth is dependent on macro factors such as interest rates and
inflation, but we believe over a period of time, these should normalize over a time
period as witnessed in the growth of SouFun. SouFun’s revenues increased at 66%
CAGR over the last five years, although FY09’s growth rate was only 22%.
EBITDA margins are still negative for 99acres.com, although significantly better
than in FY09 (-68%). The company expects the portal to break even this quarter. We
believe margins will improve steeply, driven by operating leverage, which is the key
margin driver for this business. EBITDA margins should stabilize around 45-50%
from FY15 onwards, in line with peers from other countries. .
Valuation
We have used EV/forward sales to value 99acres though FY13, as margins are
increasing steeply and we see EBITDA as a weak metric to estimate the earnings
power of the portal. We believe that starting in FY15, when we expect margins to
reach around 45% and should be relatively stable going forward, EV/EBITDA is a
better valuation metric to employ.
We have valued the portal at different points of time between Mar-11 and Mar-14.
According to our base case, the portal should be worth Rs125/share by the end
of Mar-12 based on 12x EV/FY13E sales, and the value should reach
Rs200/share in Mar-14 based on 10x EV/FY15E sales as well as 22x EV/FY15E
EBITDA. We believe the relatively high multiples are justified given the dominant
position of the portal and similar multiples exhibited by comparables.
Risks to our rating and price target
Key risks to our PT and rating include:
1. Traffic share contraction due to competitive threat, for example from
Monster’s semantic search (Trovix) technology.
2. Increasing interest rates and inflation may hurt real estate market, impacting
99acres.com business for a relatively long period of time.
3. 99acres does not follow the trend exhibited by companies in other
geographies or lose market leadership position.
4. Advertising expenses pick up in response to competitors’ actions.
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