Info Edge: Momentum slackens, growth drivers intact; upgrade to BUY :: Kotak Securities

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Momentum slackens, growth drivers intact; upgrade to BUY. 3QFY15 reflects (1) a
sharp easing of growth in 99acres (soft demand, undercutting by cash-rich competition)
and (2) weakening business metrics in recruitment (moderating activity from job seekers
and companies). This weakness can continue, especially in real estate (where most of
revenue is traffic dependent). Growth drivers are intact for both sectors—for
recruitment these would be cyclical recovery, pricing uptick and new products, and for
real estate they would be concentrated in the top-four cities, mainly from developers.
Our revised SOTP target price of `960 (from `1,070) bakes in stricter assumptions for
99acres and Zomato. We upgrade to BUY from ADD after the recent price correction

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Recruitment—steady growth with some deterioration in business metrics
Revenues grew by a steady 19% yoy to `1.08 bn. While the number of unique paying
customers remained steady, there was some deterioration in job-seekers’ activity (muted resume
additions, modifications), hiring interest (single-digit growth in Naukri’s job index), and margin
(partly related to seasonal factors). Revenue growth is being primarily driven by mainstay sectors
(IT and financial services) and would get a fillip from manufacturing. Naukri’s significant share in
a growing market will support price increases. Further investments in new products should start
paying off for Info Edge over the next couple of years.
99acres—soft demand takes a toll; competition i business and cost metrics
99acres reported further growth moderation in 3QFY15 (up 20% yoy). This was led by a
combination of: (1) lack of new project launches in key markets, (2) fierce competition and
(3) loss of revenues from home owners (as other sites have started offering free listings for
owners). The growth moderation is less reflective of market potential (which remains large) and
more reflective of a large share of traffic-linked income. In a weak demand environment, cashrich
competition is undercutting and increasing the cost of customer acquisitions.
3QFY15—higher spending on new businesses raises revenue growth threshold to sustain margins
Info Edge reported 18% revenue growth with the non-recruitment businesses dragging down
an otherwise steady 19% growth in recruitment. EBITDA margin of 24.6% was impacted by (1)
a sharp increase in staff costs (mainly related to 99acres and (2) higher advertising spends (a
response to stiff competition). Continued investment in new businesses led to a sharp fall in
margins in 9MFY15 despite strong 20% revenue growth and better revenue mix.
Estimates factor stricter assumptions for 99acres and Zomato
We revise our standalone EPS estimates to `13.0/18.2/26.4 from `12.7/18.1/27.6 over FY2015-
17, at lower 35% revenue CAGR and margin (10% EBITDA margin in FY2017E at 10% cost
CAGR) for 99acres. We value investment in Zomato at 30% discount to the recent transaction.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily21012015mo.pdf