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Naukri performance to drag FY24 growth

Limited scope for margin improvement; reiterate Neutral on valuations

* Info Edge (INFOE) delivered a weaker-than-expected revenue growth in 1QFY24, with standalone revenue rising 15% YoY (20.6% expected). EBITDA margin was better than expected at 38.8%, down 30bp QoQ (120bp beat). Overall Billings were muted and remained flat YoY at INR 5.2b, largely on account of lower billings in Recruitment solutions business (down 4.2% YoY).

* The management continues to see a slowdown in IT hiring activity, which remains a key risk, given its significantly high revenue contribution to the Naukri business. Though Non-IT has been doing well for the past couple of quarters, it has started witnessing a slowdown with delayed renewals, which would add to the drag on the billings. The management was surprised by the dip in hiring activity in July’23. While we see recovery in IT hiring in FY25, we expect Naukri billings to decline in FY24 on a high base, which will result in single-digit growth for FY24 and FY25.

* 99acres posted robust revenue growth in 1QFY24. The demand is projected to remain strong due to low inventory levels, a surge in demand for larger homes, higher digital adoption rates, and a shift in spending from offline to online platforms. The decrease in realization can be attributed to the significant influx of new users added in 1QFY24. The marketing spends, though reducing, are likely to result in continued losses for 99acres over the next few years, before it turns profitable.

* INFOE has delivered a sharp margin improvement over the last few quarters with lower dependency on advertisement and operating leverage. With slower growth in FY24 and FY25, we see limited upside on margins. We expect FY24/FY25 EBITDA margin at 37.1/37.4%.

* We forecast standalone revenue and APAT to clock a 10% CAGR each over FY23-25, driven by the Naukri business.

* We continue to see a healthy long-term growth opportunity in its operating entities. With margins improving, we expect scale benefits over the next few years. However, the current valuations fairly price in its growth outlook. We expect share price to remain under pressure in the near term due to weak 1QFY24 performance.

* We value the company’s operating entities using DCF valuation. Our SoTPbased valuation indicates a TP of INR4,200. We reiterate our Neutral stance on the stock.

Miss on revenue; PAT in line on better margins and higher ‘other income’

* Standalone revenue stood at INR5.84b, up 15% YoY, below our estimate of 20.6%.

* Its 1Q billings at ~INR5.2b (flat YoY) were slower due to the impact from IT hiring. Recruitment Solutions billings was down 4.2% YoY (vs. our est. of +7% YoY), 99acres grew 20.1% YoY (vs. +35% est.), and for other segments rose 1.9% YoY.

* EBITDA margin (38.8%) was down 30bp QoQ, vs. our estimate of 37.6% (120bp beat).

* Margin was aided by lower advertisement spend (down 90bp QoQ).

* Naukri’s EBITDA margin was down 300bp QoQ at 59% vs. our estimate of 60%, while 99acres’ EBITDA loss percentage widened 190bp QoQ to 27.2%.

* Adj. PAT was up 25% YoY to INR1.99b (in line) despite lower revenue on margin beat and higher ‘other income’.

Highlights from the management commentary

* Recruitment: The caution in hiring for IT Services continues and the hiring is expected to remain weak, given that IT companies have seen a slowdown in revenues and cut backs in discretionary spending, while they have a larger bench. The company is experiencing delays in renewals by clients. Non-IT demand slowed down in Jul’23. If there is an increase in infrastructure spending, promising opportunities can emerge in sectors such as cement, metals, oil and gas, and industrials. While currently a smaller segment for Naukri, the manufacturing sector has the potential to experience substantial growth in the next 5-7 years if its activity gains momentum.

* Real Estate: The real estate market remains strong with low inventory levels, more demand, bigger developers, RERA enforcement, higher income levels, more demand for bigger homes, and reasonable interest rates. Developers, builders, and brokers are becoming savvy to use online platforms. Ad spends are growing and there is a shift toward online spends. There was a strong growth in the number of enquiries and traffic despite heightened competition. The company also took some price hikes. Strong topline growth along with controlled cost helped to reduce burn in 99 Acers.

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