Info Edge Rating – Hold: Profitability hit by rising costs

Info Edge is one of the best diversified internet franchises in India; Given its strong valuations, maintain a hold rating with a target price of Rs 5,460.

Info Edge (IEL) reported lower-than-expected revenue and margins for Q4FY21. However, traffic and billing are now well above pre-Covid levels, pointing to an improvement in business. We see limited impact of the second COVID wave on the Company as disruption to the recruitment business, particularly for the technology sector and white collar in general, has been modest.

The Zomato listing is an important near-term event to watch; We are building in an $8.1-bn valuation – 49% higher than the previous funding round – and believe the current valuation already factors into the valuation rerating. Info Edge is one of the best diversified internet franchises in India; Given its strong valuations, maintain a hold rating with a target price of Rs 5,460.

Profitability is affected by rising costs
IEL’s Q4FY21 revenue was at Rs 2.9 billion, down 10.2% year-on-year, below Street’s estimate of Rs 3.1 billion. An EBITDA margin of 18.3% was also well below the Street’s 31% estimate, primarily due to higher employee (8.9% annually) and advertising (15.1% annually) costs. Employee costs increased due to implementation of wage hikes along with higher variable pay-outs from December 2020. Billings improved sharply for the third consecutive quarter in real estate, along with recruitment — 22.1% yoy and 41.5% yoy respectively — albeit on a smaller basis. Improvement in billing trajectory indicates improvement in business outlook.

Capital allocation remains important
The company’s capital allocation track record has been impeccable. IEL already has Rs 35.9 billion in cash and is earning Rs 7.5 billion by selling stake in Zomato’s IPO. Media reports indicate the possibility of PolicyBazaar IPO later this year, which will lead to further increase in monetizable assets in the books. In this context, continued focus on capital allocation will be a key determinant of future value creation. Mgmt is exploring acquisition opportunities related to its core businesses, but we see high valuations as a major obstacle. The company has made a capacity-based tuck into the acquisition, which will be the way to expand the addressable market as we go forward.

Outlook: Bullish Valuations
While revenue growth for the quarter has been muted, traffic and billing growth indicate that recovery is underway. However, core business valuation remains costly (55.8x FY23e EPS). So, we maintain ‘Hold/SN’ with SOTP-based TP of Rs 5,460 as we move into Q2.