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Growth to remain strong, but valuation leaves little upside

* INFOE reported an in-line operating performance in 2QFY22, with standalone revenue growth of 37% YoY (estimate of +35%), the EBITDA margin at 30.2% (estimate of 30.1%), and APAT growth of 98% YoY (estimate of 101% YoY). 2Q billings stood at INR4.02b, +67% YoY and +28% QoQ. Billing growth was led by Recruitment Solutions (73.9%), 99acres (45.9%), and Shiksha (74.7%).

* The Naukri business is expected to grow exceptionally well on account of robust hiring demand across the board, driven by both IT and Non-IT. The Real Estate market is seeing decade-high demand momentum, and the revenue growth rate is expected to be strong.

* The 2Q EBITDA margin fell 100bps QoQ to 30.2%. Margins have expanded for the Recruitment business, led by operating leverage from strong growth. However, margin tailwinds were offset by higher advertisement and promotional expenses in 99acres.

* If the buoyancy in the job market continues, there is further scope for margin expansion in Recruitment. Within Real Estate, the demand rebound has been strong, and the management would continue to invest in marketing to establish leadership within the space.

* With continuous pressure on tech salaries and growth improving in 99acres, we expect the operating spend to increase going forward. However, we see this as being more than compensated by strong revenue growth. We expect standalone revenues / PAT to post a 31%/47% CAGR over FY21–23, driven by strong acceleration in the Naukri business.

* We continue to see a good long-term growth opportunity at INFOE’s operating entities, with margin improvement, as scale benefits come over the next few years. However, we believe the valuation continues to fairly price in the growth outlook.

* We value its operating entities using the DCF valuation, with WACC of 11% and a terminal growth rate of 6%. Our SoTP-based valuation indicates Target Price of INR6,150 per share. Maintain Neutral.

In-line performance; profits boosted by Zomato listing

* Standalone revenues grew 37% YoY (estimate of +35.4%). EBITDA grew 106% YoY v/s estimate of 102% growth. The EBITDA margin stood at 30.2% v/s estimate of 30.1%. APAT growth was 98% YoY v/s estimate of 101% YoY.

* 1HFY22 revenue/EBITDA/APAT grew 25%/32%/51%.

* Billings for the quarter stood at INR4.02b, an increase of 61% YoY. Billing growth was led by Recruitment Solutions (73.9%), 99acres (45.9%), and Shiksha (74.7%). Compared with pre-pandemic levels (2QFY20), billing growth was 33.9%, led by Recruitment Solutions (38.8%) and 99acres (12.5%).

* Standalone revenue was INR3.52b, +10% QoQ and 37.3% YoY, in line with our estimates of +35.4% YoY.

* The EBITDA margin was stable at 30.2% (-100bps QoQ), in line with our estimate of 30.1%.

* The margin was impacted by higher advertisement and promotional expenses (320bp QoQ impact on margin), offset by better operating leverage.

* Adj PAT was INR1.02b (v/s est. of 1.03b), +98% YoY and flat QoQ, driven by strong YoY growth in EBITDA.

* Reported PAT came in at INR83.56b. RPAT was aided by 1) gains on the Zomato stake sale (INR3.6b) and 2) the fair valuation of the Zomato Investment (INR89.4b) – partially offset by higher tax expense and provisions on start-up investment.

Highlights from management commentary

* Recruitment: It saw a sharp growth rebound, which was also seen in a 60% YoY increase in the Jobspeak index. Naukri’s India Enterprise/ Corporate business is up 60% v/s pre-COVID levels and 82% YoY.

* If the strength in the market continues, Info Edge may see margins expand from current levels. However, if the market stabilizes, margins will likely stabilize or inch down. The company does not target margins.

* Real Estate: The industry is seeing strong revival, visible in the growth in the loan books of banks. Low prices and higher personal incomes are driving strong demand, which is at decade highs. Renewal rates have bounced back to preCOVID levels.

* The company expects the growth momentum to continue, driven by the Residential Homes segment. While the market would grow at a high rate, the competitive intensity is also high. The management would continue to invest in marketing expenses within 99acres to establish its leadership.

* The Talent market is hot, and if it continues to be strong, the company may have a structurally higher wage bill.

* The management stated that if Zomato had been a private company, Info Edge would have advised it to focus on the core business rather than adjacent verticals. However, this would have been at Zomato’s discretion.

Valuation and view

* FY22 should see a strong rebound in revenue growth after 14% decline in FY21. Billing is also expected to see a sharp pickup, which should help provide operating leverage support to margins. With the expectation of additional jobs coming in (on pent-up demand) and a rebound in real estate demand, we expect a 31% revenue CAGR over FY21–23E.

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

* We have individually valued INFOE’s group entities using the DCF-based valuation (WACC: 11%; terminal growth rate: 6%). Our SoTP-based Target Price stands at INR6,150/share. Maintain Neutral.

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