Info Edge (IEL) reported lower than expected revenue and margin in Q4FY21. However, traffic and billings are now well above pre-Covid levels, suggesting a recovery in business. We see a limited impact of the second wave of Covid on the business as the disruption in recruiting, especially for the tech industry and white collar workers in general, has been minimal.
Zomato’s list is a key short-term event to watch out for; We are building a valuation of $ 8.1 billion – 49% higher than the previous funding cycle – and believe that current valuations already take the revaluation into account. Info Edge remains one of India’s most diverse Internet franchises; Considering its high valuation, hold the Hold odds with a target price of Rs 5,460.
Profitability takes a hit as costs rise
IEL’s turnover at T4FY21 at Rs 2.9 billion, down 10.2% year-on-year, was lower than Street’s estimate of Rs 3.1 billion. The EBITDA margin of 18.3% was also well below Street’s estimate of 31%, mainly due to rising employee costs (up 8.9% year-on-year) and advertising ( up 15.1% year-on-year). Salary costs have increased due to the increase in variable pay as well as the implementation of the salary increase from December 2020. basis. The improvement in the invoicing trajectory indicates an improvement in the business outlook.
Capital allocation remains the key
The company’s track record in capital allocation is impeccable. IEL already has Rs 35.9 billion in cash on its books and monetizes Rs 7.5 billion from sales of shares in Zomato’s IPO. Media reports point to the possibility of a PolicyBazaar IPO later this year, which will further increase monetizable assets on the books. In this context, a sustained focus on capital allocation will be a key determinant of future value creation. Mgmt is looking for acquisition opportunities related to its core businesses, but we see high valuations as a major hurdle. The company has made capability-driven acquisitions, which will also be the way forward to expand the addressable market.
Outlook: high valuations
While revenue growth was moderate for the quarter, traffic and billing growth indicates that the recovery is underway. However, the valuation of basic activities remains expensive (55.8x EPS FY23e). Therefore, we maintain ‘HOLD / SN’ with an SOTP based TP of Rs 5,460 as we move to Q2FY23e.