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Strong quarter despite pressure on IT; valuations full

Steep margin improvement encouraging; reiterate Neutral

* INFOE delivered a strong revenue growth in 3QFY23, with a standalone revenue growth of 33% YoY (slightly ahead of estimates), led by 40% growth in the Recruitment vertical. EBITDA margin rose 450bp QoQ to 39.1% on account of lower employee costs, advertisement spends, and other expenses (Strong beat). Billings in 3QFY23 remained strong (up 14.5% YoY to INR5.5b), and grew ahead of estimates, despite a slowdown in IT hiring.

* The management sees clear signs of a slowdown in IT hiring, with supply pressure easing and attrition moderating. This remains a key risk, given its significantly high revenue contribution to the Naukri business. On the other hand, Non-IT hiring has picked up well, offsetting the pressure from the slowdown in IT hiring. We expect the Recruitment vertical to see a flattish growth in 4QFY23. Nonetheless, it should maintain its strong revenue growth in FY23, on the back of a strong 4Q exit run-rate and good performance in 9MFY23. We expect the company to deliver a 16% revenue CAGR over FY23-25.

* Rising interest rates have started adversely impacting the company’s realestate business. The industry tailwinds of high multi-year demand for Real Estate would be partly offset by high interest rates. Growth continues to be driven by elevated marketing spends on account of multiple players in the market. These high spends are expected to result in continued losses over the next few years, before 99acres turns profitable.

* INFOE has delivered a sharp margin improvement over the last four quarters (EBITDA margin up 10pp) with lower dependency on advertisement and operating leverage. We expect FY24/FY25 EBITDA margin at 34.9/35.0%, respectively.

* We expect standalone revenue/APAT to clock 16%/14% CAGR, respectively, over FY23-25, driven by strong acceleration in the Naukri business.

* We continue to see a good long-term growth opportunity in its operating entities. With margins improving, we expect scale benefits over the next few years. The current valuations fairly price in its growth outlook.

* We value its operating entities using the DCF valuation. Our SoTP-based valuation indicates a TP of INR 3,800. We reiterate our Neutral rating on the stock.  

Strong all round performance

* Standalone revenue stood at INR5.55b, up 33.4% YoY, (marginally above our estimates of 30% YoY), driven by continued traction in recruitment business (up 40% YoY). Revenue/EBITDA/APAT grew 47%/73%/58%, respectively, in 9MFY23.

* Recruitment solution billing for Q3 at INR4.34b (up 17.7% YoY) was higher than estimated, despite slower IT hiring. Overall billing stood at INR 5.51, up 14.5% YoY

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