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Info Edge IPO: Our view - Views on News from Equitymaster
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Info Edge IPO: Our view
Oct 30, 2006

Issue details
Public issue of Info Edge, an online classified business Company, opened today. The issue is 100% book building approach. The net offer is for 4.8 m shares. The price band for the offer is Rs 290 to Rs 320 per share. For the retail bidders the minimum number of share to be applied is 20 and in multiples thereof.

Business of the company
Info Edge (India) limited is a leading provider of online recruitment and matrimonial classifieds and related services in India. The company manages its operations from its four divisions,
  1. Online recruitment classified division (www.naukri.com, launched in March 1997),

  2. Online matrimonial classified division (www.jeevansathi.com, acquired in September 2004),

  3. Online real estate classified division (www.99acres.com, launched in September 2005).

  4. Offline executive search division (operating through the Quadrangle division, acquired in November 2000).

Amongst the various divisions, the online classified division has contributed significantly to revenues (92.7% of total income in FY06). The topline of the company has registered a CAGR of 118.2% during the period FY02 to FY06.

Info Edge has 45 offices in 30 cities across India and an office in Dubai. It has registered 24 trademarks for its brand Naukri, Info Edge, Jeevansathi and Quadrangle. It currently has two subsidiaries, Naukri Internet Services Private Limited and Jeevansathi Internet Services Private Limited.

Reasons to Apply
  • Diversification moves: The company currently generates a significant portion of its revenues from the online recruitment business (93% in FY06). However, in an effort to diversify and thereby, avoid the systemic or industry risks, the company is scaling up its operations in other verticals too (plans to enter automobile, education and industrial products). The objectives of issue enumerated above reveals the same.

  • High operating leverage: The sector is highly scalable and therefore, operating leverage prospects are tremendous. Also the fact that the required expenditure for newer business stream like real estate online classified and online marriage classified has already been incurred, profitability is likely to improve. Despite investing heavily in the recent past, EBDITA margins in 1QFY07 stood at 27%. As these new investments start yielding desired returns, the growth in operating profit is likely to be much faster than the topline.

  • Virtuous circle of prosperity: The company is the market leader as well as market creator. As of September 2006, Naukri.com was rated as India’s eighth most visited website as per Alexa. Naukri.com is currently India’s number one website for online recruitment services in terms of the number of unique visitors to the website, based on the data provided by Comscore. Also, Jeevansathi.com is currently India’s number three website for online matrimonial classified services in terms of the number of unique visitors to the website, based on the data provided by Comscore. Thus, higher number of visitors attracts higher number of employers to the site, which in turn brings more number of visitors to the site, thus leading to higher revenues.

  • Favourable macro-economic dynamics: We expect the current computer penetration, Internet penetration and mobile subscriber base to grow exponentially in the times to come. PC population in India has grown from 1.5 m in FY97 to 13.5 m in FY05, registering a CAGR of 31% over the period. The trend is expected to continue. Also, the Internet users have grown from 6.7 m in FY01 to 52.8 m in FY05, registering a CAGR of 68%. Such broader industry will have a meaningful impact on the company going forward.

Reasons not to apply
  • Increasing competition in the segment: The online classified industry in India is highly competitive and competition in the industry is expected to increase further. Barriers to entry for internet-related business are relatively low. The key competitors for naukri.com and Quadrangle are monsterindia.com, Jobsahead.com and Timesjob.com. Competitors also include traditional media such as magazines, newspapers and printed yellow pages.

  • Risk associated with a sunrise industry: While the potential for growth are significant; the visibility is missing to an extent. The lack of visibility could be attributed to unstable industry where more and more entrants will come in and affect the realisations and profitability.

  • Increased cost of brand building: Advertisement cost (cost of brand building) constituted 20.6% of the total income of the firm in FY06. The cost of maintaining and enhancing brand awareness is expected to rise. New business initiatives in the form of online-classified matrimonial and real estate classified in the nascent stages, thus requiring significant brand building exercise. Importance of the brand building exercise will also increase due to significant increase in competition (particularly from monsterindia.com and lower barriers to entry in the segment. Thus, if the company is unable to maintain or enhance the brand awareness in a cost effective manner, operating profits and financial position could be severely affected.

Comparative valuation and comments
While valuing companies like Info Edge, it has to be remembered that the sector is still at its nascent stage and the business model of the company is also evolving i.e., from purely an online recruitment company to a diversified bouquet of online channels. Unlike the online recruitment operations that started in FY97, the new ventures will take time to contribute to the consolidated bottomline. To that extent, the financial performance of Info Edge is contingent upon the online recruitment operations. The proposed venture into international markets on this front is a step in the right direction and we believe that margins can be high in such initiatives.

The basic characteristics of online operations are:

  1. High asset turnover (in the case of Indo Edge, it stood at 5.4 in FY06 and is likely to be higher in FY07). This reflects that the sector is not capital intensive. Return on equity was 53 % in FY06.

  2. Since customers pay for services like online recruitment in advance, working capital is negative in nature (this may not be the case with online matrimonial operations).

  3. As mentioned earlier, operating leverage is significantly higher, which is reflected in EBDITA margins. We have a positive view on the company’s margins over the long-term, albeit short-term gyrations might be there in light of the new initiatives.

Based on the annualised 1QFY07 earnings and on post-issue equity capital, the issue is priced at a P/E multiple of 41.8 times on the higher end of the price band and 37.8 times on the lower end of the price band.

Comparative snapshot…
Particulars Info Edge Monster* Jobstreet*
Price/ Earnings 41.8 45.5 21.3
Price/Cash flow 35.3 33.6 20.5
Price/Sales 7.8 4.9 6.3
Net margin 18.7% 10.9% 29.8%
Return on Equity** 53.4% 11.7% 38.6%
Note: Calculations for Info Edge is on the higher side of the price band.
*December ending 2005.
** RoE for Info Edge is for FY06, as the annualised 1QFY07 earnings distorted to an extent due to IPO.

For the purpose of comparison, we have considered Monster Worldwide Inc. (a listed entity in the US with a worldwide operation) and Jobstreet (a listed company in Malaysia focused on South East Asian regions). Despite superior margin profile and return ratios, Jobstreet is trading at much lower valuation on a trailing basis. At the same time, it needs to be remembered that the markets of South East Asia are relatively small as compared to India. Monster Worldwide meanwhile, is trading at 35.1 times its CY05 earnings. Info Edge is being offered at 41.8 times annualised 1QFY07 earnings (at the higher end of the price band), which highlights that the offer is not cheap.

Having said that, the growth prospects its terms of topline, operating profits and bottomline look exciting. The high operating leverage benefit coupled with scaleable nature of the business makes it an attractive proportion. However, short-term volatility in the operating performance due to evolving business model could lead to abnormality in the valuations. We recommend ‘SUBSCRIBE’ to the offer from a long-term horizon for high-risk investors. We will put up the detailed report on the same tomorrow morning.

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