Info Edge - Rating Revision - Valuations still attractive - Centrum

Rating: Buy; Target Price: Rs770; CMP: Rs601; Upside: 28%

Valuations still attractive

We upgrade Info Edge to Buy from Hold as we believe the worst is behind for the recruitment business and hence expect strong double digit growth going in to FY15. Stability in the IT sector, market share gains coupled with new product launches will help in hiking prices leading to revenue growth. With strong growth potential in the real estate vertical, we remain confident on long term value creation despite near term losses. Success in other investee companies (we are bullish on canvera.com & meritnation.com) could offer significant upside similar to that of Zomato.com in the long run. With large opportunity across verticals and strong free cash flow we believe the company should trade at premium valuations.

- Worst is behind for recruitment business: We believe the worst is behind for the recruitment business and expect double digit growth in FY15E despite GDP being below 5%. With IT sector stabilising, we expect the company to take price hikes (offer less discounts) and coupled with market share gains it should improve its growth trajectory. We believe the new product pipeline in Naukri continues to be strong and will not only help the company garner revenues by getting a higher share of the wallet from customers but also strengthen the overall ecosystem and increasing stickiness of the brand. Hence we have modelled 14% growth in the recruitment business for FY15E compared to 9% in FY14E.

- To continue to invest in 99acres for long term growth: We believe that as globally real estate classifieds business is a bigger opportunity than recruitment, Indian online real estate classifieds market is highly under penetrated with strong growth potential on the back of a shift from print advertisement to online. Despite high competition, 99acres has been able to expand its market share to ~40% and widen its gap with the number 2 player. We believe the company will continue to invest in product development, improve data quality, explore new markets, strengthen the sales team and invest more in brand building. Hence we have modelled revenues of Rs1562mn, 45% CAGR over FY13-16 in revenues with marginal profit in FY16E.

- Success in investee companies to have significant upside: Info Edge continues to make strategic investments across verticals in early stage ventures and has invested Rs3.7bn till date. However, the company had a setback and wrote off/exited its investment worth Rs356mn across three portals. We believe the company will invest further in some of these portals depending on the scale-up. Recently, Info Edge, along with Sequoia Capital, invested $37mn in the company and valued it at Rs9.6bn where Info Edge's stake was 50.1%. We believe similar success in any of the other companies would offer significant upside to shareholders in the long run.

- Valuation & Risks: We value the core recruitment business at 30x FY16 (10x EV/Sales) and arrive at Rs438/share while global classifieds business have an average PE of 46x and EV/Sales of 8.2x. 99acres is valued at 8x EV/Sales at Rs114/share in-line with global real estate classifieds businesses. Other non-recruitment businesses predominantly jeevansaathi is valued at Rs47/share (6x EV/Sales) lower than global average. For investee companies, we value Zomato on the current deal value of Rs44/share while other investments are valued at Rs53/share (3x BV) and cash at Rs76/share. Downside risk could be increasing competition in the recruitment & 99acres businesses and higher write-offs in investee companies.

Source : Equity Bulls

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