Info Edge rating – Hold: Profitability took a hit as costs escalated

Info Edge (IEL) reported lower-than-expected Q4FY21 revenue and margin. However, traffic and billings are now well above pre-Covid levels, pointing to recovery in business. We see limited impact of second Covid wave on the company as the disruption in the recruitment business, especially for the technology sector and white collar in general, has been minuscule.

Zomato listing is a key near-term event to watch for; we are building in $8.1-bn valuation – 49% higher than previous funding round – and believe current valuations already factor in valuation rerating. Info Edge remains one of India’s best diversified internet franchises; considering its steep valuation, maintain Hold rating with a target price of Rs 5,460.

Profitability takes a hit as costs escalate
IEL’s Q4FY21 revenue at Rs 2.9 bn, down 10.2% y-o-y, was below Street’s Rs 3.1 bn estimate. Ebitda margin of 18.3% too was well below Street’s 31% estimate, primarily on account of higher employee (up 8.9% y-o-y) and advertising (up 15.1% y-o-y) costs. Employee cost surged due to higher variable pay-outs as well as salary hike implementation from December 2020. Billings improved sharply for third consecutive quarter in recruitment as well as real estate—up 22.1% y-o-y and 41.5% y-o-y, respectively—albeit on a smaller base. Improving billing trajectory indicates improving business outlook.

Capital allocation remains key
The company’s capital allocation track record has been immaculate. IEL already has Rs 35.9 bn cash on its books and monetise Rs 7.5 bn worth stake sale in Zomato IPO. Media reports indicate possibility of PolicyBazaar IPO later this year, which will further increase monetisable assets in books. In this context, sustained focus on capital allocation will be key determinant of future value creation. Mgmt is scouting for acquisition opportunities related to its core businesses, but we see high valuations as a key barrier. The company has made capability-led tuck in acquisitions, which will be the way forward as well to expand addressable market.

Outlook: Lofty valuations
While revenue growth has been muted for the quarter, traffic and billing growth indicate recovery is underway. However, core business valuation continues to be expensive (55.8x FY23e EPS). Hence, we maintain ‘HOLD/SN’ with SOTP-based TP of Rs 5,460 as we roll over to Q2FY23e.