Early signs of recovery; revenue to see lag effect
* The complete impact of the COVID-19-led lockdown was seen in the 1QFY21 financial performance, with billings decline of 44% YoY.
* The drag in revenues (-10.4% YoY) was curtailed due to the subscriptionbased model of the business. INFOE has shown a high resilience in the margins (+420bp YoY) on account of superior cost optimization.
* For the first time, the company was able to show gains from investee companies, primarily led by positive contribution margins from Zomato.
* Traffic on INFOE’s operating portals has inched up to pre-COVID levels. Billings and revenue should follow a similar trend (in that order).
* Given the company’s market positioning, multi-dimensional growth may be expected across its core businesses in the medium-to-long term. We expect long-term growth trends to play out at its operating entities, whose margins continue to inch up on high operating leverage. Furthermore, led by an inclination for profitability in investee companies, we expect consolidated losses to be curtailed over time.
* We value its operating entities using DCF, with WACC of 11% and the terminal growth rate at 5%. Our SOTP valuation indicates target price of INR3,620. Maintain Neutral.
Billings decline to cause near-term pain
* Standalone revenue was INR2.8b (decline of 13% QoQ and 10.4% YoY), a 22% beat to our estimate of INR2.3b.
* Recruitment revenue declined 9% YoY (est.: 30% decline). Revenue for 99acres declined 25% YoY (est.: 35% decline). Revenue beat was led by a higher lag in billings revenue on account of longer-than-expected contract durations.
* Deferred revenue stood at INR3.7b (decline of 25% YoY).
* The EBIT margin was at 33.4% (+6.8pp QoQ and +4.2pp YoY), +15pp above our estimate of 18%.
* The steep increase in margins was led by 55% sequential decline in other expenses, 47% in advertisement cost, and 7% in employee expenses.
* During the quarter, investee companies declared gains of INR33m v/s loss of INR1.3b in the previous quarter. This was largely led by positive contribution margins from Zomato.
* PAT was INR832m (+5.6% QoQ and +11% YoY) v/s our estimate of INR421m. This was largely attributable to higher operating income.
* INFOE successfully completed its QIP through raising INR18.7b; the total cash balance post-QIP stands at ~INR31b.
Management commentary highlights
* Recruitment: Billings for Naukri declined 44% YoY during the quarter. However, billings have improved with each month post May’20. Traffic is now back at preCOVID levels. Naukri has been working toward technological improvements in its platform. Apart from this, the company has been working on various initiatives, such as: 1) the enterprise version of Resdex, 2) a re-hiring service portal, 3) a separate platform for premium engineering jobs – Hirist, 4) an ultrapremium job market with personalized services – Bigshyft.
* 99acres: Paid listings declined 62% sequentially, thereby resulting in billings decline of 71%. 99acres continues to lead the market in this space. After dropping 80% in April, buyer traffic is now back at 85% of pre-COVID levels. However, supplier-side traffic is yet to return. Initial traction among dealers and developers has been seen in the past couple of months.
* Jeevansathi: INFOE would deploy the majority of its marketing dollars toward aggressively advertising for Jeevansathi. The company has also launched new features, such as video/voice calling and ‘Milan Samaroh’, on the portal.
* QIP: INFOE successfully completed QIP of INR18.75b. It raised the money at a price of INR3090 (2.7% discount to floor price). Funds would largely be utilized for investments in standalone entities and big-ticket M&As to strengthen its market position. The company believes the liquidity crunch in the market due to COVID and the screening of Chinese investments would present opportunities for M&As at reasonable valuations. Funds would not be invested in AIF, for which the company would bring an additional investor on-board.
* Zomato: Zomato’s delivery revenue is back at 60–70% of pre-COVID levels. This is largely attributable to higher delivery fees charged by the platform. Order volumes are yet to recover to similar levels. Zomato’s burn has reduced significantly during the quarter. However, it is expected to return to some extent as Zomato would eventually begin spending on brand-building and reinstate the salaries of its employees.
Valuation and view
* For FY21, we expect 9% revenue decline, largely driven by a 44% drop in billings for 1QFY21. While 1QFY21 resulted in unprecedented billings decline, we expect this to improve as traffic inches up MoM. With the expectation of more jobs coming in (on pent-up demand) and pressure on real estate developers to sell off inventory, we expect 20% revenue growth for FY22E. Our expectation of a 100bp margin expansion over FY20–22E is attributable to lower advertisement expenses and the optimization of other expenses.
* With the company investing prudently (clocked an XIRR >35%), some of its current investments would scale up in the medium-to-long term, further contributing to the group’s valuations.
* We believe INFOE provides a good entry point for the start-up ecosystem, with higher risk being moderated by its relatively stable standalone operating business.
* We have individually valued INFOE’s group entities using DCF-based valuation (WACC: 11%; terminal growth rate: 5%). Our SOTP target price stands at INR3,620/share. Maintain Neutral.
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