Initial Coverage: INFO EDGE LIMMITED

Summary

Info Edge (India) incorporated in 1995 is primarily in the business of operating multiple internet-based services through its various web portals and mobile applications and long-term value investing. It currently operates in four service verticals - recruitment solutions, real estate services, matrimonial services, and in education services.

CONSUMER DIGITAL SECTOR

• India’s consumer digital economy is expected to be USD800 billion by 2030, clocking in growth of 10x from 2020. As per Google, the classifieds segment is expected to report a CAGR of 18%, with jobs, real estate, and matrimony constituting 2/3rd of the market.
• The Government of India's (GOI) focus on the ‘Digital India’ initiative along with cheaper smartphones, declining data tariffs, and increasing digital literacy is helping the sector boost its growth.
• There has been a 124% growth in the number of internet users in the past 5 years driving the digital sector majorly. Low internet penetration in India at ~43% presents an opportunity for the company, where the internet penetration is above 80% in developed nations while ~60% penetration is in South American and South-East Asian nations.
• The single most important driver of rapid internet penetration across India is the widespread adoption of mobile internet in India. India recorded the highest-ever smartphone shipments in the year 2021.
• With this kind of penetration of the internet in India, the digital space is transforming the way consumers and marketers interact with each other. Increase in the internet usage by rural India has also grown at the record with almost two-thirds of active internet users now accessing the internet daily to meet their needs.
• Thus, the growing digital economy coupled with rising per capita income and favorable demographics presents a huge market potential for internet-based technology-led disruptions.

INFO EDGE

Info Edge (India) incorporated in 1995 is primarily in the business of operating multiple internet-based services through its various web portals and mobile applications and long-term value investing. It currently operates in four service verticals - recruitment solutions, real estate services, matrimonial services, and in education services.

BUSINESS MODEL

Info Edge is India’s premier online classified company with a portfolio of brands. It owns various brands in different fields like naukri.com (online recruitment), 99acres.com (online real estate), jeevansathi.com (online matrimonial) as well as shiksha.com (online education information services). It also acts as an investor and has invested in many start-ups in the online space and is actively growing its investment portfolio.

• Recruitment: Online recruitment classifieds, www.naukri.com, a clear market leader in the Indian e-recruitment space, www.naukrigulf.com, a job site focused in the Middle East market, offline executive search (www.quadranglesearch.com) and a fresher hiring site (www.firstnaukri.com). Additionally, Info Edge provides jobseekers value-added services (Naukri Fast Forward) such as resume writing.
• Matrimony: Online matrimony classifieds (www.jeevansathi.com) are in the top three of India’s online matrimonial space and have offline Jeevansathi Match Points and franchisees.
• Real Estate: Online real estate classifieds (www.99acres.com) is India’s largest property marketplace covering almost all the major cities and many agents and developers.
• Education: Online education classifieds (www.shiksha.com) are the smartest gateway for students to achieve their higher education goals.

When Info Edge began investing in 2007, the Indian start-up ecosystem was still in its infancy and there were only a few early-stage institutional investors operating there. Info Edge has so far invested a total of about $2,380 cr. in 41 start-ups. Around $855 million had been collected as exit profits from these assets as of FY22. Info Edge has invested in online businesses with the aim of receiving returns from long-term value development due to the strong cash flow in the main company as well as cautious financial reserves. There have been two phases to the direct investments.

Amongst the investments in the first phase of investments, while some had to be written off, two investments – Zomato and Policybazaar–evolved as strong growth-oriented entities. Both companies had successful Initial Public Offerings (IPOs) in FY22 providing significant investment income for Info Edge. There is another group of companies in the direct investment portfolio where Info Edge has done early-stage investments and they are being developed for future value creation. To further streamline this high-value creating business investment portfolio, the company in the last couple of years has worked on creating a structured investment vehicle through specific investment funds. In FY20, Info Edge set up an ‘Alternative Investment Fund (AIF)’ named Info Edge Venture Fund (IEVF) to invest in technology and technology-enabled entities.

MANAGEMENT

The management of the company has a strong vision to pursue outperformance in order to generate value for the business and the stakeholders. The management's mission is to continuously delight customers in current and new businesses by delivering superior value through enhanced offerings on the Internet and other platforms. It believes that with a proper product pipeline, efficient execution, and cash inflows, the company will be able to deliver superior growth in the future.

SHAREHOLDING PATTERN:

RISK:

• Data Security: Technical failure and breakdowns in servers could lead to interruptions of our websites and result in the corruption of all data and/or security breaches. The Company has established a secondary site in India as a precautionary measure for disaster recovery.
• Obsolescence: Being a technology-driven enterprise, it always faces the risk of an innovation or product development that can make one or more of Info Edge’s propositions redundant. If we fail to implement new technologies, develop and provide innovative features and services, respond to evolving user preferences, enhance the user-friendliness of our online recruitment platform, or optimize our technology systems, we may not be able to improve user experience, which may have a material and adverse effect on our user growth and retention, business, financial condition and results of operations. The Company remains alert to technological developments to overcome this risk. A case in point is the investments being made in mobile-based applications, which is a breakthrough technology in this business.
• Network Effect: The network effect refers to the concept that the value of a product or service increases when the number of people who use that product or service increases. Most of the businesses in Info Edge’s portfolio base their growth on the network effect. Any factors that can breach the sanctity of networks on which the businesses are built are a risk to the business. The Company continues to take steps to preserve these networks
• Competition Risk: All portals face competition directly in the online space as well as offline. Info Edge continuously tracks competition in each of its businesses and stays prepared for the challenges.
• Dependency Risk: The Company relies heavily on the recruitment business in India for its profits and cash flows. Info Edge has been consciously diversifying into other businesses to de-risk itself from this dependency. Already, other businesses have started contributing to almost 26% of their total standalone revenues.
• Tax Issues: The Company has had some income tax and service tax cases against it, which, if lost, may impact future cash flows. However, none of these are material.
• ERP: In order to promote efficiencies, the Company has promoted ERP across its activities. Any errors in billing or financial reports in the ERP system could affect the Company’s billing and statutory reporting.
• Capital Availability: Given the new phase of the expansion strategy, we may need additional capital and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all. So far investments have been managed through a strong proportion of assets still being maintained in cash and cash equivalents.

FINANCIALS:

• In FY22, the revenue stood at ₹1,589 cr (v/s ₹1,128 cr in FY21), and overall billings stood at ₹1,866 cr in FY22 (v/s ₹1,175 cr in FY21). In Q1 FY23, revenue increased by 66.5% YoY and stood at ₹547 cr. The recruitment segment reported a revenue growth of ~67.5% YoY, the 99acres segment reported a growth of ~34.8% and the Shikhsha segment reported a growth of ~37.4% YoY. Meanwhile, for the Jeevansathi segment, revenue declined by ~9.1% YoY on account of some free offerings launched in March 2022. Strong momentum in the recruitment vertical an increase in the number of private universities in India and expansion in the study abroad business in the education vertical indicate an increase in top-line growth going forward.
• In FY22, the EBITDA stood at ₹439 cr, an increase of ~56% YoY. This was led by an increase in revenue across all segments. In Q1 FY23, EBITDA stood at ₹93 cr, a decrease of ~7.5% YoY. In the quarter, advertising and promotion (A&P) spending has increased ~134% YoY reducing EBITDA. A&P cost has increased due to intense competition and increased A&P spending by the competitors. Going forward, the company expects to continue spending on A&P costs and subsequently expects an increase in revenue. The EBITDA margin (including other income) has grown from 29.7% in FY17 to ~27.6% in FY22 backed by healthy growth in the operating profits. EBITDA margin has been in the range of 25%-28% for the past 5 years.
• In FY22, the company reported a consolidated net profit of ₹10,687 cr, which was aided by mark-to-market gain of ~₹10,148 cr till the date of listing of PB Fintech & Zomato Ltd coupled with the share of profit from associate companies to the tune of ₹2,195 cr. For Q1 FY23, PAT stood at ~₹356 cr. PAT margin of the company has been volatile in the past several years. In FY22, on account of a one-time exceptional gain and increased operational profit, the PAT margin was at 673%.
• The company has been able to generate positive and growing CFO in the past few years indicating strong cash-generating capabilities of the company. In FY22, the cash from operations stood at ~₹707 cr aided by adjustment of share of associate profits. The cash outflow from investing activity stood at ~₹1,176.5 cr as it invested ~₹380 cr to purchase a stake in associate companies, ~₹431 cr to purchase current investments and another ₹307 cr in fixed deposits (net).

VALUATION

Info Edge is in the online classified business space in India. The major income source is from Naukri.com followed by the Real Estate business. The management is open for acquisitions, going forward, in the spaces it operates into. Through the Info Edge alternative investment fund (AIF) route, the company is looking to invest in one company every two or three years. Hence, it is not willing to distribute cash among the shareholders but will utilize it for growth opportunities. Most of the profits of the company have been from exceptional gains in the last 12 months which might not recur consistently in the future. In FY22, the company paid ₹13/share as a dividend. The company strives to maintain a dividend payout ratio of 25%-30% of standalone PAT.

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