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Info Edge, parent company of classified advertising portals Naukri.com and 99acres.com, could see an increase in pressure across its businesses.
“The only comfort is that competitive intensity in this space is receding. With $20 million revenue out of a total market size of $500-600 mn, the management is confident of the potential of this vertical,” says Alankar Garude, analyst at Macquarie Capital. In this scenario, the realty portal's break-even will get delayed further (earlier expected by March 2017), believe analysts.
Second, the information technology (IT) sector, key contributor to Naukri.com's revenue, could see rising costs on H1B visas for the offshore employees working for US clients. This could lower the pay increases for these employees and impact the portal, too. In fact, this segment's revenue growth moderated from 19-20 % earlier to 13 % in the latest, September, quarter.
Though there is continued momentum in the non-IT segment, 70 % of Naukri’s revenues, investors must watch growth trends in this business, as it contributes almost all of Info Edge’s profit. “We currently build in 17-18 % annual revenue growth for Naukri over FY17 to FY19. However, we believe these assumptions might be at risk if the IT slowdown is more than anticipated,” wrote Kawaljeet Saluja, IT analyst at Kotak Institutional Equities, in a recent report.
While this business hasn't been impacted by demonetisation, investors need to keep an eye on developments in the American IT segment as well as any impact from demonetisation.
Third, one of Info Edge's investee companies, Zomato, into the online restaurant search and food ordering business, is likely to raise money from investors in March-April. If analysts are to be believed, unlike earlier rounds of funding, Info Edge (it owns 47 % in this company) might not benefit much. This is because the coming fund raising might not happen at higher valuations unlike last rounds of fund raising. In May, leading brokerage HSBC had marked down Zomato's valuation to about $500 million. This might not be the consensus view but it rules out the possibility of an upward revision in this business in Info Edge's sum of the parts-based fair value.
More, some of the big e-commerce names have recently seen valuation write-downs, an indicator of investors becoming more realistic with online companies. “A Zomato funding of around $100 mn is round the corner and valuations are unlikely to be higher than the earlier round, which valued the company at $870 mn,” believe analysts at Motilal Oswal Securities.
Overall, Info Edge is a play on the online classified segment and its investments in a host of online companies owning portals — meritnation.com, policybazaar.com, mydala.com — could spring positive surprises over the next few years. Apart from enjoying strong positioning in their respective domains, the company is pushing them to achieve break-even. If done, these businesses could be catalysts for Info Edge's growth and profitability.
What needs investor attention is that between FY12 and FY15, the company reported good growth in revenue but profits kept declining, on a consolidated basis. In FY16, even as revenue grew, the company reported a huge loss. It will be interesting to see how it weathers the pressures in its key businesses in FY17 and after.
Though most brokerages are positive on the company, their average one-year target price of Rs 1,020 for the stock is only about 11 % from the current level.
