Sell Info Edge, price target Rs 2,080: Bank of Baroda Capital Markets

Bank of Baroda Capital Markets (BoBCAPS) has initiated coverage on Info Edge with a sell rating and a target price of Rs 2,080 for 12 months ( Mar’21). The rating is based on the premise that Naukri, which accounts for more than 70 per cent of Info Edge’s revenue is facing structural threat from LinkedIn and property portal 99acres is yet to make profit. The Info Edge share closed at Rs 2182.95 on Monday, 4.78 per cent down from the previous close at 2292.45 on Friday.

Info Edge (India) Ltd., incorporated in 1995, is a largecap company with a market cap of Rs 26,798.57 crore, operating in Services sector. Info Edge (India) Ltd. key products/revenue segments include sale of services which contributed Rs 1098.26 crore to sales value for the year ending March 31, 2019.

Investment Rationale

As revenue growth slows, the brokerage expects lower operating leverage to drive 330bps contraction in Info Edge’s EBITDA margin over FY20-FY22 to 31.9 per cent. Any unexpected increase in competitive intensity may necessitate higher advertisement and marketing spend, putting margins at risk.

Info Edge’s mainstay Naukri business which has more than 70 per cent of the revenue share, is facing a structural threat to leadership in the online jobs market from Microsoft-backed LinkedIn. Over FY14- FY19, LinkedIn has clocked an 18 per cent CAGR in user base vs. 11 per cent for Naukri, backed by a unique networking proposition and high innovation spends. Profitability looks elusive in property portal 99acres as well.

BoBCAPS expects Info Edge's revenue/adjusted PAT CAGR to slow to 14 per cent/4 per cent (FY20/FY22) and thus find core P/E rich at 54 times FY22E. Earnings are expected to lag revenue growth over FY20-FY22. The brokerage reiterates that the recent stock correction in February 2020 (down 15 per cent+ from its peak) is largely due to growth concerns led by slow macro dynamics. The Street is not adequately factoring in the structural risk to Naukri’s leadership (at 71 per cent of Info Edge’s FY19 revenue, its sole cash generating business) from the LinkedIn juggernaut.

BoBCAPS initiated coverage on INFOE with SELL and a March’21 sum-of-the-parts (SOTP) target price of Rs 2,080. The SOTP model includes (1) Rs 1,101/share for Naukri (30x FY22E EPS), (2) Rs 218/share for 99acres (8.5x sales), (3) Rs 45/share for Jeevansathi (5x sales), and (4) Rs 531/share stakes in key investee companies (Zomato and PolicyBazaar) based on their latest funding rounds. A reverse DCF value of Rs 1,101/sh for Naukri implies a steep 15.7 per cent revenue CAGR for the business over the next ten years (vs. 16.7 per cent CAGR over FY10-FY19).

Financials

For the quarter ended 31-12-2019, the company has reported consolidated sales of Rs 335.06 crore, up 1.67 per cent from last quarter sales of Rs 329.54 crore and up 15.52 per cent from last year same quarter sales of Rs 290.04 crore. The company has reported net profit after tax of Rs 85.39 crore in the latest quarter.