Info Edge India - Concerns around Zomato's gig work unwarranted - ICICI Securities

(1) Legislative / judiciary actions on gig work in US & UK (e.g. UK Supreme Court's recent ruling), (2) Deliveroo's IPO debacle (-31% on listing) due to legal / ESG concerns and (3) 2nd wave impact on Naukri's billings led to ~15% correction in Info Edge from its peak. As outlined in our food-tech thematic (link), the Indian Social Security Code 2020 is more conducive for gig work. Unlike in the West, we reckon an average rider earns higher than minimum wage / PF threshold (~Rs20-23k / month) and is more satisfied with aggregators like Zomato/Swiggy. In the worst case, we expect some mandatory contribution for the social security fund being envisaged for gig workers. Concerns around 3rd wave may keep hiring decisions off the corporate table for a couple of months. While NIFTY 50 / BSE 200 aggregate revenue grew 52% / 47% over 2016-20, permanent headcount increase was anaemic at 16%/15%. Our analysis hints at a strong impending catch up on white collar hiring by India Inc., even accounting for technology led productivity gains. Given its track record of identifying scalable internet businesses early, we expect continued high IRR on investible cash (~Rs 44bn, incl Zomato OFS proceeds). We upgrade the stock to BUY (from SELL earlier) with SoTP-based TP of Rs6,000.

- Partner structure of Zomato / Swiggy riders and the legal nuances around it. All riders of Zomato / Swiggy are structured as partners who get paid on per delivery basis. This is due to two reasons which are critical to the survival of the business model - (1) to bring in flexibility in fixed costs and more importantly (2) to incentivise the riders do more deliveries. World over, most new age business models (e.g. Uber, Deliveroo, DoorDash, Zomato etc.) follow the same model. However, in both US and UK, this partner model witnessed backlash both from legislative and judiciary bodies.

In Sep-19, California state government brought about a legislation - California Assembly Bill 5 (AB5) / gig worker bill. This requires companies like Uber that onboard independent partners to reclassify them as employees, with some exceptions. Recently (in Feb-21), the UK Supreme Court upheld a prior employment tribunal ruling that Uber drivers should be classified as workers rather than independent partners. This judgment also played a spoiler in Deliveroo's IPO especially as investors focused on sustainable investing shunned the issue.

- However, in India the gig employment - wage dynamic is different. The legal activism in US & UK led to concerns around similar legal risks in India. Nevertheless, it should be noted that employment / wage / poverty dynamic in India is very different from those in the developed economies. Fundamentally, gig work in the West (largely formalised economies) is competing with and benchmarked against formal work.

In India, with ~88% of the workforce being informal, gig work is still an upgrade for workers who would otherwise be left with informal or no work. Unlike AB5, Social Security Code 2020 passed by the Indian Parliament shows no intent to establish employer - employee relationship between gig workers and platform operators.

Secondly, unlike in the West with lower order volumes, we estimate Zomato / Swiggy riders to be earning (ex-tip / service charge) higher than minimum wages in the respective micro-markets. For instance, media articles (link) hint at multiple instances of protests by Deliveroo riders over making less than the national legal minimum wage (currently GBP 8.9 / hour).

In India, assuming an average of ~16-17 fulfilments per day and 26-day work month, riders are likely to take home an average of ~Rs20-23k, which is more than the highest minimum wage in the country (Rs16-18k / month, in Mumbai & Delhi). Our channel checks with the riders of these platforms suggest they are satisfied in terms of income / quality of life style working for aggregators like Zomato / Swiggy.

- Expect a worst case mandatory contribution to social security scheme. It should be noted that Provident Fund (PF) / ESIC contribution is mandatory only for those employees whose monthly salary < Rs15k / Rs21k, respectively. Given the income levels, minimum wage / PF compliance are not very relevant for Zomato / Swiggy riders. In the worst case scenario, we expect some mandatory contribution (e.g. ~1%-2% of net revenue, in form of additional tax or cess) for the social security fund being envisaged for gig workers by the government.

So far, the labour ministry has not notified the source of funding for this scheme. However, labour law experts expect this scheme to be funded either solely or jointly by central government, state governments, CSR spend pools of companies or collected in the form of additional tax / cess from gig platforms like Zomato.

- Strong impending catch-up on white collar hiring by India Inc. By Dec-20, Naukri's billing run-rate was muted and ~20% lower than pre-covid peak (Mar-20). March, being an important month for field sales and collections, would have gotten impacted due to the panic around 2nd wave (especially in key metros like Mumbai, Pune, Delhi etc). Even as 2nd wave wanes, uncertainty around 3rd wave may keep hiring decisions off the corporate table for at least another couple of months.

However, it should be noted that the weakness in white collar hiring in India started way before the onset of covid pandemic. We analysed the revenue and permanent headcount trends at NIFTY 50 & BSE 200 companies (proxy for India Inc.) over 2016-21. More often than not, permanent employees tend to be white collared in nature while temporary employees tend to be grey / blue collared. While headcount data for 2021 is still unavailable for most companies, it is likely to be lower than in 2020.

Our analysis suggests that for NIFTY 50 companies, while sales grew 52% over 2016-20, headcount growth over the same period was anaemic at 16%. Similarly, for BSE 200 companies, while revenue growth over 2016-20 was robust at 47%, permanent employee count increased by a meagre ~15%. These trends hint at a strong impending catch up on white collar hiring by India Inc. even accounting for the technology led productivity gains. Given its near monopoly position in the recruitment category, we expect Naukri to be a key beneficiary of this trend.

- Upgrade the stock to BUY with SoTP-based TP of Rs6,000. Regulatory concerns around Zomato's gig workers are unwarranted, in our view. As highlighted in our thematic (link), we see very strong investment case for the company. Besides, the likelihood of a sharp recovery in Naukri's demand going ahead is high. We are unperturbed by the optically expensive valuations which fail to capture the underlying optionality in many investee companies (e.g. Zomato, Policybazaar etc.). Given its track record of identifying scalable internet businesses early, we expect continued high IRR on investible cash (~Rs 44bn, incl proceeds from Zomato IPO). We upgrade the stock to BUY (from SELL earlier) with SoTP-based target price of Rs6,000.

Shares of INFO EDGE (INDIA) LTD. was last trading in BSE at Rs.4900.75 as compared to the previous close of Rs. 4682.45. The total number of shares traded during the day was 45442 in over 7922 trades.

The stock hit an intraday high of Rs. 4923.8 and intraday low of 4702.2. The net turnover during the day was Rs. 220872857.

Source : Equity Bulls

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