INFO EDGE Recruitment Continues to Disappoint

RESULT UPDATE

INFO EDGE Recruitment continues to disappoint

India Equity Research| IT

Info Edge’s (IEL) Q2FY14 revenue at INR1,230mn was below our EDELWEISS 4D RATINGS estimated INR1,268mn. However, EBITDA margin at 35.5%, jumped Absolute Rating REDUCE 500bps QoQ primarily due to lower S&M expenses. Disappointment in Rating Relative to Sector Underperformer recruitment continued as it posted a tepid 8.3% YoY revenue growth (up Risk Rating Relative to Sector Medium 0.2% QoQ). Though IEL does not anticipate a pick-up in hiring activity in Sector Relative to Market Overweight the near term, decent recruitment by IT companies and market share gains are supporting growth. Non-recruitment segments grew 45% YoY MARKET DATA (R: INED.BO, B: INFOE IN) and the management intends to invest further in these to provide growth CMP : INR 345 impetus. We do not perceive any uptick in hiring activities given the Target Price : INR 310 uncertain macro environment. We maintain ‘REDUCE’ with TP of INR310 52-week range (INR) : 405 / 276 (19x FY15E Standalone EPS). Share in issue (mn) : 109.2 M cap (INR bn/USD mn) : 38/ 621 Naukri continues to disappoint Avg. Daily Vol.BSE/NSE(‘000) : 92.2

Hiring activity has been slow given the sustained uncertain macro environment which SHARE HOLDING PATTER N (%) is amply reflected from Naukri’s YoY subdued growth (below 20% in past six quarters). However, the management stated decent recruitment by IT companies and market Current Q1FY14 Q4FY13 share gains are supporting growth. Revenue from this segment grew 8.3% YoY, with Promoters * 52.2 52.2 52.2 operating margin at 50.7% (50.3% in Q1FY14). Further, deferred sales revenue, a lead MF's, FI's & BK’s 13.1 13.1 13.0 indicator of recruitment revenue, declined 7.6% YoY to INR1.21bn in Q2FY14. It plans FII's 23.0 23.0 23.5 to continue investing in product development to gain higher market share. Others 11.8 11.8 11.3 * Promoters pledged shares : NIL (% of share in issue) 99acres continues to fuel growth

Traction continued in 99acres as it grew 57% YoY to INR185mn in Q2FY14. We expect PRIC E PERFORMANCE (%) this segment to drive growth in the near term. The management is planning to invest EW further in this segment for product development and a scale-up in operations. Total Stock Nifty Technology listings on the portal scaled up to 685,000 (up 42% YoY) in Q2FY14. Index 1 month 11.7 4.6 9.1 Outlook and valuations: Slow pace persists; maintain ‘REDUCE’ 3 months 10.1 3.7 23.8 12 months (4.3) 11.1 50.0 IEL seems to be hit by the sustained slowdown in hiring activity over the last six quarters and we do not expect any improvement in the macro environment in the near term. While the non recruitment segment is gaining traction, its smaller scale is unlikely to offset the slow growth in recruitment business. The stock is trading at P/E of 21.2x FY15E (standalone), which we deem to be expensive. Maintain ‘ REDUCE/ SU’ with TP of INR310. Sandip Agarwal

Financials (Standalone) (INR mn) +91 22 6623 3474 Year to March Q2FY14 Q1FY14 Growth % Q2FY13 Growth % YTD14 FY14E FY15E [email protected]

Revenue 1,230 1,208 1.9 1,078 14.1 2,438 5,029 6,232 Omkar Hadkar EBITDA 436 369 18.3 370 17.8 805 1,757 2,250 +91 22 6620 3147 Net profit 333 294 13.1 333 (0.2) 627 1,396 1,778 [email protected]

Diluted EPS (INR) 3.0 2.7 13.1 3.1 (0.2) 5.7 12.8 16.3 Deepansu Jain Diluted P/E (x) 36.8 27.0 21.2 +91 22 4040 7576 [email protected] EV/EBITDA (x) 23.1 18.8 14.2

Market cap / Rev. (x) 8.6 7.5 6.0 October 18, 2013 Edelweiss Research is also available on www.edelresearch.com, Edelweiss Securities Limited Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Chart 1: Deferred sales revenue down QoQ 1,500 70.0

1,200 56.0

900 42.0 (%)

(INR mn) (INR 600 28.0

300 14.0

0 0.0 Q412 Q113 Q213 Q313 Q413 Q114 Q214

Deferred sales revenue YoY growth

Chart 2: Recruitment revenue (YoY) growth continues to be subdued 920 35.0

820 28.0

720 21.0 (%.)

( INR mn) INR ( 620 14.0

520 7.0

420 0.0 Q412 Q113 Q213 Q313 Q413 Q114 Q214

Revenues YoY growth

Chart 3: Revenue and EBITDA loss trend in non-recruitment segments 360 Q214

288 Q114 Q413 216 Q313 Q213 (INR mn) (INR 144 Q113 Q412 72 Q312

0 (108.0) (90.0) (72.0) (54.0) (36.0) (18.0) 0.0 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 (INR mn) Source: Company

2 Edelweiss Securities Limited Info Edge

Chart 4: Uptrend continues in number of listings, paid transactions in 99acres.com 700 18.0

560 15.0

420 12.0 ( '000) ( 280 9.0 '000) (

140 6.0

0 3.0 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 No. of total listings No of paid transactions (RHS)

Chart 5: Average revenue per client surge during the quarter in Jeevansathi.com 30,000 4,000

24,000 3,500

18,000 3,000 (INR) (Nos.) 12,000 2,500

6,000 2,000

0 1,500 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214

Unique paid customers Avg. revenue per client (RHS)

Chart 6: Jobspeak index subdued this quarter 1,500

1,200

900

600 (Jobspeak index) (Jobspeak 300

0 Jul 13 Jul Jan 13 Jan Jun 13 Jun Oct 12 Oct Apr13 Feb 13 Feb 13 Sep Dec12 Aug 13 Aug Nov 12 Nov Mar 13 Mar May 13 May Source: Company

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Financial snapshot (INR mn) Year to March Q2FY14 Q1FY14 % Change Q2FY13 % Change YTD14 FY14E FY15E Net revenues 1,230 1,208 1.9 1,078 14.1 2,438 5,029 6,232 Network & other charges 45 41 8.7 36 25.0 86 169 187 Staff costs 475 472 0.7 411 15.6 947 1,932 2,306 Direct costs 520 513 1.4 447 16.3 1,033 2,101 2,493 Gross profit 710 695 2.2 631 12.5 1,405 2,928 3,739 S&m expenses 139 197 (29.4) 138 1.1 337 649 841 G&a expenses 134 129 4.4 123 9.4 263 522 648 EBITDA 436 369 18.3 370 17.8 805 1,757 2,250 Depreciation 40 40 (0.2) 20 93.5 79 131 190 EBIT 397 329 20.6 350 13.4 726 1,627 2,059 Other income 97 134 (27.5) 112 (13.5) 231 446 518 Profit before tax 488 458 6.7 456 7.1 946 2,061 2,577 Tax 155 137 13.0 123 26.7 293 639 799 Core profit 333 320 3.9 333 (0.2) 653 1,422 1,778 Exceptionals - 26 (100.0) - - 26 - Net profit 333 294 13.1 333 (0.2) 627 1,396 1,778 Diluted EPS (INR) 3.0 2.7 13.1 3.1 (0.2) 5.7 12.8 16.3

As % of net revenues Gross profit 57.7 57.5 58.5 57.6 58.2 60.0 SG&A 22.3 27.0 24.2 24.6 23.3 23.9 EBITDA 35.5 30.5 34.3 33.0 34.9 36.1 EBIT 32.3 27.2 32.5 29.8 32.3 33.0 Reported net profit 27.0 24.4 30.9 25.7 27.8 28.5 Tax rate 31.8 30.0 26.9 31.0 31.0 31.0

4 Edelweiss Securities Limited Info Edge

Company Description IEL is amongst India’s leading online classified companies, with presence in online recruitment, matrimony, real estate, and offline executive search. It pioneered the online recruitment business under its flagship brand Naukri.com and operates offline recruitment business under the Quadrangle brand. The company’s online matrimony and real estate divisions operate under Jeevansathi.com and 99acres.com, respectively, and are currently in investment mode. New launches include Firstnaukri.com (fresher recruitment site), Brijj.com (professional networking site), asknaukri.com (career guidance website), and shiksha.com (education information portal). IEL’s TTM revenue is INR4.7bn and, employee strength of 2,722 people.

Investment theme IEL is a long term play on the internet space in India. With lead in the online recruitment market (through Naukri.com) and presence in the online classified space has the potential to establish a market leading position and grab large pie of increasing online adoption. As various businesses come out of the recent slowdown we see recruitment industry to grow significantly as it is highly correlated to the economic health of the growth of domestic corporate sector. We expect IEL’s earnings growth at 20% CAGR over FY13-15E. However, we see the valuations at P/E of 21.2x and EV/EBITDA of 14.2x FY15E as expensive.

Key Risks Faster than anticipated scale up of non-recruitment segments

Strong profitability from investee companies.

5 Edelweiss Securities Limited IT

Financial Statements

Key Assumptions Income statement (INR mn) Year to March FY12 FY13E FY14E FY15E Year to March FY12 FY13 FY14E FY15E Macro Net revenue 3,756 4,362 5,029 6,232 GDP(Y -o-Y %) 6.2 5.0 4.8 6.0 Cost of revenues 1,463 1,812 2,101 2,493 Inflation (Avg) 8.9 7.4 6.0 6.0 Gross profit 2,293 2,551 2,928 3,739 Repo rate (exit rate) 8.5 7.5 7.8 7.0 S&M expenses 516 577 649 841 USD/INR (Avg) 48.0 54.5 62.0 60.0 G&A expenses 369 492 522 648 Company EBITDA 1,408 1,482 1,757 2,250 Naukri Depreciation & Amortization 77 94 131 190 No. of unique customers (nos) 46,000 48,000 52,800 60,192 EBIT 1,332 1,388 1,627 2,059 Revenue per unique customer 66,109 70,313 69,945 73,792 Other income 409 475 446 518 Jeevansathi Interest expenses 1 19 12 - No. of unique paid customers (nos) 78,369 87,052 96,628 106,290 Profit before tax 1,740 1,844 2,061 2,577 Collection per client (in INR) 3,120 3,636 4,181 4,683 Provision for tax 511 528 639 799 99acres Net profit 1,230 1,315 1,422 1,778 No of paid transactions (in '000) 33 49 65 85 Extraordinary income/ (loss) (4) (293) (26) - Revenue per paid transaction (INR) 10,828 10,671 11,502 12,538 Profit After Tax 1,226 1,022 1,396 1,778 Cost assumptions Profit after minority interest 1,226 1,022 1,396 1,778 Employees cost 36.5 38.3 38.4 37.0 Basic EPS (INR) 11.2 9.4 12.8 16.3 S&M expenses (% of revenue) 13.7 13.2 12.9 13.5 Shares outstanding (mn) 109 109 109 109 G& A expenses (% of revenue) 9.8 11.3 10.4 10.4 Diluted EPS (INR) 11.2 9.4 12.8 16.3 Revenue growth (%) 27.9 16.1 15.3 23.9 CEPS (INR) 12.0 12.9 14.2 18.0 Financial assumptions Dividend per share (INR) 0.1 1.0 1.0 1.2 Yield on cash & cash equivalents (%) 8.1 7.8 5.9 5.6

Tax rate as % of PBT 29.3 28.7 31.0 31.0 Common size metrics Capex (INR mn) 77 529 352 400 Year to March FY12 FY13 FY14E FY15E Debtor days 11 7 6 5 Cost of revenues 39.0 41.5 41.8 40.0 Payable days 36 39 44 42 Gross margin 61.0 58.5 58.2 60.0 Depreciation as % of gross block 8.3 7.9 8.4 10.7 G&A expenses 9.8 11.3 10.4 10.4 S&M expenses 13.7 13.2 12.9 13.5 SG&A expenses 23.6 24.5 23.3 23.9 EBITDA margins 37.5 34.0 34.9 36.1 Net profit margins 32.7 30.2 28.3 28.5

Growth ratios (%) Year to March FY12 FY13 FY14E FY15E Revenues 27.9 16.1 15.3 23.9 EBITDA 44.2 5.3 18.6 28.0 Net profit 56.1 7.0 8.1 25.0 EPS 46.0 (16.6) 36.6 27.4

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Balance sheet (INR mn) Cash flow metrics As on 31st March FY12 FY13 FY14E FY15E Year to March FY12 FY13 FY14E FY15E Equity capital 546 1,092 1,092 1,092 Operating cash flow 1,008 781 1,300 1,702 Reserves & surplus 4,726 4,993 6,266 7,892 Investing cash flow (180) (577) (1,218) (982) Shareholders funds 5,272 6,085 7,358 8,984 Financing cash flow 69 (125) (133) (152) Minority interest (BS) (25) 105 105 105 Net cash flow 897 78 (51) 568 Borrowings 7 9 - - Capex (77) (529) (352) (400) Deferred tax liability (42) (45) (45) (45) Dividends paid (48) (127) (123) (152) Sources of funds 5,212 6,154 7,418 9,044

Gross block 936 1,454 1,654 1,904 Profitability & efficiency ratios Accumulated depreciation 389 488 619 810 Year to March FY12 FY13 FY14E FY15E Net block 547 965 1,035 1,094 ROAE (%) 25.5 18.0 20.8 21.8 Capital work in progress 94 98 250 400 ROACE (%) 39.6 35.2 33.2 37.6 Goodwill - 557 557 557 Debtors days 11 7 6 5 Non current investments 2,210 1,271 2,500 3,000 Payable days 36 39 44 42 Current Investments 942 1,343 1,400 2,000 Cash conversion cycle (days) (24) (32) (38) (37) Cash and equivalents 2,216 2,286 2,236 2,803 Current ratio 1.8 1.9 1.7 1.8 Sundry debtors 81 95 83 102

Loans and advances 219 309 335 375 Operating ratios Other current assets 752 1,285 1,285 1,285 Year to March FY12 FY13 FY14E FY15E Total current assets (ex cash) 1,051 1,690 1,703 1,763 Total asset turnover 0.8 0.8 0.7 0.8 Total CL & provisions 1,849 2,056 2,262 2,573 Fixed asset turnover 6.8 5.8 5.0 5.9 Net current assets (ex cash) (798) (366) (559) (811) Equity turnover 0.8 0.8 0.7 0.8 Uses of funds 5,212 6,154 7,418 9,044

Book value per share (INR) 48.3 55.7 67.4 82.3 Valuation parameters Year to March FY12 FY13 FY14E FY15E

Free cash flow (INR mn) Diluted EPS (INR) 11.2 9.4 12.8 16.3 Year to March FY12 FY13 FY14E FY15E Y-o-Y growth (%) 46.0 (16.6) 36.6 27.4 Net profit 1,226 1,022 1,396 1,778 CEPS (INR) 12.0 12.9 14.2 18.0 Depreciation 77 94 131 190 Diluted PE (x) 30.7 36.8 27.0 21.2 Others (697) (456) (420) (518) Price/BV (x) 7.1 6.2 5.1 4.2 Gross cash flow 606 661 1,107 1,451 EV/Sales (x) 8.8 7.8 6.6 5.1 Less: Changes in WC (402) (120) (193) (251) EV/EBITDA (x) 24.5 23.0 19.4 14.7 Operating cash flow 1,008 781 1,300 1,702 EV/EBITDA (x)+1 yr forward 22.4 19.5 14.7 - Less: Capex 77 529 352 400 Dividend yield (%) - 0.3 0.3 0.3

Free cash flow 931 251 948 1,302

Peer comparison valuation Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%) Name (USD mn) FY14E FY15E FY14E FY15E FY14E FY15E Info Edge 621 27.0 21.2 19.4 14.7 21.2 21.8 CMC 675 13.6 10.7 10.0 7.5 28.6 29.9 ECLERX SERVICES 472 12.4 12.0 7.5 6.8 47.2 39.7 HCL Technologies 12,383 13.7 12.2 8.3 7.4 34.1 29.5 Hexaware Technologies 639 11.2 10.8 7.4 6.9 26.0 24.1 Infosys 30,734 18.3 14.5 12.0 9.6 23.9 25.4 Infotech Enterprises 441 9.4 8.5 4.3 4.0 19.4 18.3 Persistent Systems 459 12.1 11.8 5.7 4.8 21.4 18.4 Tata Consultancy Services 67,574 21.9 19.3 15.5 13.9 40.9 36.3 Tech Mahindra 5,822 15.7 14.3 8.9 7.9 28.5 24.0 Wipro 19,981 17.3 15.4 12.4 11.1 23.2 21.8 Median - 13.7 12.2 8.9 7.5 26.0 24.1 AVERAGE - 15.6 13.7 10.1 8.6 28.6 26.3 Source: Edelweiss research

7 Edelweiss Securities Limited IT

Additional Data

Directors Data Mr. Kapil Kapoor Chairman Mr. Arun Duggal Independent Director Mr. Saurabh Srivastava Independent Director Ms. Bala Deshpande Independent Director Mr. Ashish Gupta Independent Director Mr. Naresh Gupta Independent Director Mr. Sanjeev Bikhchandani Founder & Executive Vice -Chairman Mr. Hitesh Oberoi Managing Director & Chief Executive Officer Mr. Ambarish Raghuvanshi Director & Chief Financial Officer

Auditors - Price Waterhouse & Co. Chartered Accountants *as per last annual report

Holding - Top10 Perc. Holding Perc. Holding HDFC Asset Management Co Ltd 5.65 Matthews International Capital 3.57 Equinox Partners Lp 2.99 Capital Research Global Investor 2.89 Reliance Capital Trustee Co Ltd 2.82 T Rowe Price Associates 1.84 SBI Funds Management 1.81 FID Funds Mauritius Ltd 1.73 Commonwealth Bank Of Australia 1.45 Norges Bank 0.98 *as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price 27 Aug 2013 Nalanda India Equity Fund Ltd Buy 902000 300.00 27 Aug 2013 NALANDA INDIA EQUITY FUND LIMITED Buy 804000 299.99 02 Apr 2013 Citigroup Global Markets Mauritius Pvt Ltd Sell 763000 354.00 29 Oct 2012 Sanjeev Bikhchandani Sell 557127 370.00 26 Oct 2012 Sanjeev Bikhchandani Sell 557127 370.00

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 02 Sep 2013 Reliance Capital Trustee Co. Sell 9500000.00 22 Mar 2013 Mr. Hitesh Oberoi Sell 197446.00

*in last one year

8 Edelweiss Securities Limited RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk CMC BUY SO L ECLERX SERVICES BUY SO M HCL Technologies BUY SO H Hexaware Technologies BUY SO M Info Edge REDUCE SU M Infosys BUY SO L Infotech Enterprises BUY SO H Persistent Systems BUY SO L Tata Consultancy Services HOLD SP L Tech Mahindra BUY SO M Wipro BUY SO L

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

9 Edelweiss Securities Limited IT

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400 , Email : [email protected] Vikas Khemani Head Institutional Equities vikas.khemani@edel weissfin .com +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): IT CMC, ECLERX SERVICES, HCL Technologies, Hexaware Technologies, Infosys, Info Edge, Infotech Enterprises, Persistent Systems, Tata Consultancy Services, Tech Mahindra, Wipro

Recent Research

Date Company Title Price (INR) Recos

17 -Oct -13 HCL Delivering on expectations; 1,083 Buy Technologies margin magic; Result Update 17 -Oct -13 Infotech In line quarter; outlook 241 Buy Enterprises positive; Result Update 16 -Oct -13 CMC Robust quarter; outlook 1,425 Buy positive; Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 127 44 8 180 Buy appreciate more than 15% over a 12-month period * 1 stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12 -month period Market Cap (INR) 112 54 14

10 Edelweiss Securities Limited Info Edge

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