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Non-IT demand to partially compensate for the slowdown in tech

Maintain Neutral on Valuations

* INFOE delivered a strong revenue growth in 2QFY23, with a standalone revenue growth of 51% YoY (inline), led by 41% growth in the Recruitment vertical. EBITDA margin rose 250bp QoQ to 34.6% on account of lower employee and advertisement spends. Billings in 2QFY23 remained strong, but grew at a relatively slower pace (up 30% YoY to INR5.4b).

* 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 60% revenue contribution to the Naukri business. We expect the Recruitment vertical to see flat to negative growth in 2HFY23. Nonetheless, it should maintain its strong revenue growth in FY23 on the back of a strong 4Q exit run-rate and good performance in 1HFY23. It should deliver 28% revenue CAGR over FY22-24.

* INFOE should see good growth traction in 99acres, given the high multi-year demand for Real Estate in India. Growth continues to be driven by elevated marketing spends on account of multiple players in the market. This will result in continued losses over the next few years, before 99acres reaches critical scale to be profitable.

* We expect standalone revenue/APAT to clock 26%/29% CAGR over FY22-24, driven by strong acceleration in the Naukri business.

* We continue to see a good long-term growth opportunity in its operating entities, with a margin improvement, as scale benefits are seen 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 INR4,020. We maintain our Neutral rating.

Strong margin performance, but slowing growth in billing a concern

* Billings grew 30% YoY to INR5.43b in 2QFY23, led by a 41%/11.2% growth (est. 45%/30%) in Recruitment Solutions/99acres while Siksha grew 31% YoY. Billings for Naukri grew 2.6% QoQ, despite a seasonally low base in 1QFY23.

* Revenue/EBITDA/APAT grew 55%/69%/56% in 1HFY23.

* Standalone revenue grew 51% YoY to INR5.32b (in line), led by continued traction in the Recruitment business (up 63%).

* EBITDA margin grew 250bp QoQ to 34.6% (est. 30.4%, a 420bp beat).

* The EBITDA margin for Naukri was slightly better at 60.8% (up 115bp, est. 59.9%), while the percentage of operating loss in 99acres improved sharply (up 10pp QoQ).

* PAT grew 66% YoY to INR1.68b (est. INR1.52b).

* The company announced a dividend of INR10/share.

Highlights from the management commentary

* Recruitment: There is a strong bounce back in non-IT demand. Many industries saw headcount shrink during the COVID-led lockdowns, which is now normalizing. INFOE is seeing good demand in Retail, Telecom, BFSI, and Travel sectors. It expects a continued increase in non-IT realizations. The demand for IT was driven by higher attrition rates and an exceptional hiring in the last seven quarters, which is now moderating. The pace of moderation remains unclear.

* Real Estate: While the market will grow at a high rate, the competitive intensity is also high. The management continues to spend on marketing in 99acres to establish leadership. It expects advertisement costs to be at elevated levels.

Valuations and view

* Though near-term growth in Recruitment is expected to be impacted by lower IT demand, good medium term growth in Recruitment and a rebound in demand in Real Estate should help it deliver 26% revenue CAGR over FY22-24.

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

* We individually value INFOE’s group entities using a DCF-based valuation. Our SoTP-based TP stands at INR4,020. We maintain our Neutral rating.

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