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Neutral Info Edge India Ltd For Target Rs.5,230

Tech demand to lead to a growth acceleration in Naukri

* INFOE reported a strong operating performance in 1QFY22, with standalone revenue/EBITDA margin/PAT growth of 14%/31.2%/21% YoY (est. +6.3%/+20%/-21%). Billings stood at INR 3.14b 1QFY22, up 67% YoY, although it was down 24% QoQ due to seasonality. Revenue in 1QFY22 was driven by good growth across Recruitment (+11.2% YoY), 99acres (+15.8%), and others (+28%).

* While non-recruitment billings were impacted in 1Q due to the lockdown, the management indicated that all segments saw a pickup in Jul’21 and should further strengthen over FY22. The Naukri business is expected to grow exceptionally well on account of robust demand from the IT/ITES ITeS industry, which was ~60% of enquiries inquiries on the platform in Q1.

* EBITDA margin jumped to 31.2%, up 13pp sequentially, but is still down 6pp v/s the highpoint seen during 1QFY21. The same for Naukri stood at 52.9% (+290bp), while 99acres was flat v/s -33% in 4QFY21. Better operating leverage, coupled with lower advertisement and promotion expenses in 99acres drove the margin performance.

* With a continuous pressure on tech salaries and growth improving in 99acres, we expect operating spends to increase going forward. However, the same will be more than compensated by the strong revenue growth. We expect standalone revenue/PAT to grow by 28%/42% CAGR over FY21-23E, driven by strong acceleration in the Naukri business.

* We continue to see good long-term growth opportunities at INFOE’s operating entities, with a margin improvement, as scale benefits accrue over the next few years. We believe valuations continue to fairly price in the growth outlook.

* We value its operating entities using the DCF valuation, with a WACC/terminal growth rate of 11%/5%. Our SoTP-based TP stands at INR5,230 per share. We maintain our Neutral rating.

Beat in revenue/margin led by Naukri/lower ad spends

* Billings rose 67% YoY to INR3.14b in 1QFY22, although it fell 24% QoQ due to seasonality. Deferred sales revenue stood at INR5.1b, up 36% YoY.

* Standalone revenue rose 10.2% QoQ and 14.1% YoY to INR3.2b, above our estimate of 6.3% YoY on account of strong growth in the Recruitment segment (up 11.2% YoY and 12% QoQ).

* 99acres returned to the growth track, with 15.8% YoY growth. Other businesses (Jeevansathi and Siksha) grew 28% YoY.

* EBITDA margin jumped to 31.2%, up 13pp sequentially, but is still down 6pp v/s the highpoint seen during 1QFY21. The same for Naukri/99acres stood at 52.9%/-6% (+290bp/+38pp QoQ).

* Better operating leverage, coupled with lower advertisement and promotion expenses (14.3% of revenue, down ~INR100m QoQ) in 99acres drove the margin performance. Operating loss in 99acres fell ~INR200m v/s 4QFY21.

* Adjusted PAT stood at INR1m, up 21% YoY and 51% QoQ, driven by strong growth in 1Q, coupled with a good margin performance.

* Net loss from investee companies stood at INR959.6m in 1QFY22, as against a profit of INR33m in 1QFY21 and a loss of INR245.8m in 4QFY21. Adjusted PAT stood at INR699m, down 11% YoY, but flat QoQ. Lower operating income was offset by lower ETR (15% v/s 24% in 4QFY20) and higher other income (INR406m v/s INR195m in 4QFY20).

Highlights from the management commentary

* Recruitment saw a sharp rebound in growth. The management expects the business to enter a high growth phase in FY22. IT/ITeS have been the most significant contributor, with 57-58% of all searches and hiring is for IT talent. INFOE has added new customers and is seeing increased billing and a good renewal.

* A lot of companies delayed renewal last year, and hence the renewal period has shifted and is not comparable with 1QFY20. 2Q/3QFY22 will see higher growth due to the shift in base. The management is hoping to see higher growth in 2Q/3QFY22 v/s the corresponding periods in FY19/FY20. The renewal cycle has changed, and hence it will see a more balanced fiscal.

* The management said it hadn’t seen this environment in the last 15 years.

* 99acres started recovering on a MoM basis after the impact of the lockdown in 1QFY22, with Apr-May’21 being mainly affected. The Real Estate environment has turned benign after that. Traffic is back and all metrics are at their peak. The same trend continued in Jul’21. The management expects the Real Estate market to be in a better position v/s the last five years.

* Clients have started upping ad spends as seen by the massive activity on its platform. However, INFOE is still in a wait and watch mode.

* Cost pressure: It is becoming almost impossible to hire in this market. It has 700-800 people in tech and is seeing cost pressure, as salary rises every three months. But the other workforce does not have the same cost pressures.

* Acquisitions: Valuations have gone up for some companies, but not for others. The management said it would be willing to pay more if an acquisition allows it to do things it can’t do today.

Valuation and view

* FY22E should see a strong rebound in revenue growth after a 14% decline in FY21. Billings are expected to see a sharp pickup, which should help provide operating leverage support to margin. With the expectation of additional jobs coming in (on pent-up demand) and pressure on Real Estate developers to sell off inventory, we expect 28% revenue CAGR over FY21-23E.

* With the management investing prudently, some of INFOE’s current investments should scale up in the medium-to-long term, further contributing to the group’s valuation.

* We have individually valued INFOE’s group entities using DCF-based valuation (WACC: 11%; terminal growth rate: 5%). Our SoTP-based TP stands at INR5,230/share. We maintain our Neutral rating.

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