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Info Edge India Overweight
INED.BO, INFOE IN
Core recruitment business exhibits healthy growth
trend with impressive operating leverage; reiterate OW
Info Edge reported another strong quarter with 6.4% Q/Q revenue growth
and impressive operating/EBIT margin expansion of 210bps. Recruitment
services, the most important segment of the company which contributes almost
all of Info Edge’s value, reported revenue growth of ~28% Y/Y. The highlight
of the quarter was impressive EBITDA margin expansion of about 500 bps for
recruitment business to 49% despite wage hikes of 18-20%.
Recruitment services business is on track to achieve 25%+ revenue growth
in FY12E as market leadership is intact and the business environment
remains healthy. The IT sector at 25% revenue contribution is likely to sustain
traction, while other larger sectors such as Infrastructure and BFSI also continue
to grow at a good clip. Healthy revenue growth should help Info Edge to exceed
FY11 margins as operating leverage should kick in to offset the increase in
people and advertising costs which management intends to incur. Notably, the
company is likely to invest some part of the operating leverage for future
growth (employee and advertising cost), and hence we do not expect all the
operating leverage to flow down to the bottom line, which we believe
demonstrates long-term focus of the company. Management pointed out that
20% Y/Y growth should be sufficient to sustain operating margins and offset
cost headwinds. Revenue growth above that should help increase margins.
99acres (the online real estate classified of Info Edge) sequential revenue
growth remained muted in 1QFY12. We believe 99acres’ FY12 revenue growth
is likely to get impacted due to high interest rates and the High Court ruling
regarding land acquisition (primarily in Noida). However, we remain
confident about the long-term growth trajectory of the business. For
example, SouFun.com, a Chinese online real estate classified company (similar
to 99acres.com), registered 66% revenue CAGR over the last five years, though
FY09’s growth rate was only 22% due to a weak macro environment.
Revenue visibility for FY12 is strong, an indicator of which is deferred sales
revenues of Rs950 mn (up 55% Y/Y and 6% Q/Q). Almost all of these
revenues are likely to be recognized over the next 3-4 quarters.
We maintain our OW with a price target of Rs845. Recruitment services
business makes up most of the value, while 99acres contributes the remaining.
We do not bake in any value for other businesses.
Price target and valuation analysis
Our Mar-12 price target of Rs845 is based on 31x one-year forward
EPS. The stock has historically traded at 41x forward P/E multiple.
Recruitment services business makes up most of the value, while
99acres contributes the remaining. Our target multiple of 31x, is in line
with earnings CAGR of 32%, implying a PEG of about 1.0x, which we
believe is justified, given the leadership position of Naukri.com and
high incremental ROIC. There is also the option value of currently lossmaking
but development phase non-recruitment businesses (outside of
99acres.com).
Revenue chart
Risk-free rate: 6.50%
Market risk premium: 8.00%
Beta: 0.75
Debt/equity: 0.00%
Cost of debt: 10.08%
Terminal “g”: 4%
The key risks are: a drop in market share due to increased competition
across sites, higher advertising expenses in response to competitor
activity (e.g., Monster.com) which puts the assumption of operating
leverage at naukri.com at risk, weakness in property business due to an
increase in interest rates and inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Info Edge India Overweight
INED.BO, INFOE IN
Core recruitment business exhibits healthy growth
trend with impressive operating leverage; reiterate OW
Info Edge reported another strong quarter with 6.4% Q/Q revenue growth
and impressive operating/EBIT margin expansion of 210bps. Recruitment
services, the most important segment of the company which contributes almost
all of Info Edge’s value, reported revenue growth of ~28% Y/Y. The highlight
of the quarter was impressive EBITDA margin expansion of about 500 bps for
recruitment business to 49% despite wage hikes of 18-20%.
Recruitment services business is on track to achieve 25%+ revenue growth
in FY12E as market leadership is intact and the business environment
remains healthy. The IT sector at 25% revenue contribution is likely to sustain
traction, while other larger sectors such as Infrastructure and BFSI also continue
to grow at a good clip. Healthy revenue growth should help Info Edge to exceed
FY11 margins as operating leverage should kick in to offset the increase in
people and advertising costs which management intends to incur. Notably, the
company is likely to invest some part of the operating leverage for future
growth (employee and advertising cost), and hence we do not expect all the
operating leverage to flow down to the bottom line, which we believe
demonstrates long-term focus of the company. Management pointed out that
20% Y/Y growth should be sufficient to sustain operating margins and offset
cost headwinds. Revenue growth above that should help increase margins.
99acres (the online real estate classified of Info Edge) sequential revenue
growth remained muted in 1QFY12. We believe 99acres’ FY12 revenue growth
is likely to get impacted due to high interest rates and the High Court ruling
regarding land acquisition (primarily in Noida). However, we remain
confident about the long-term growth trajectory of the business. For
example, SouFun.com, a Chinese online real estate classified company (similar
to 99acres.com), registered 66% revenue CAGR over the last five years, though
FY09’s growth rate was only 22% due to a weak macro environment.
Revenue visibility for FY12 is strong, an indicator of which is deferred sales
revenues of Rs950 mn (up 55% Y/Y and 6% Q/Q). Almost all of these
revenues are likely to be recognized over the next 3-4 quarters.
We maintain our OW with a price target of Rs845. Recruitment services
business makes up most of the value, while 99acres contributes the remaining.
We do not bake in any value for other businesses.
Price target and valuation analysis
Our Mar-12 price target of Rs845 is based on 31x one-year forward
EPS. The stock has historically traded at 41x forward P/E multiple.
Recruitment services business makes up most of the value, while
99acres contributes the remaining. Our target multiple of 31x, is in line
with earnings CAGR of 32%, implying a PEG of about 1.0x, which we
believe is justified, given the leadership position of Naukri.com and
high incremental ROIC. There is also the option value of currently lossmaking
but development phase non-recruitment businesses (outside of
99acres.com).
Revenue chart
Risk-free rate: 6.50%
Market risk premium: 8.00%
Beta: 0.75
Debt/equity: 0.00%
Cost of debt: 10.08%
Terminal “g”: 4%
The key risks are: a drop in market share due to increased competition
across sites, higher advertising expenses in response to competitor
activity (e.g., Monster.com) which puts the assumption of operating
leverage at naukri.com at risk, weakness in property business due to an
increase in interest rates and inflation.
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