Equity Research INDIA June 15, 2021 BSE Sensex: 52552 Info Edge India BUY

Upgrade from Sell ICICI Securities Limited is the author and Concerns around Zomato’s gig work unwarranted Rs4,682 distributor of this report

(1) Legislative / judiciary actions on gig work in US & UK (e.g. UK Supreme Court’s recent ruling), (2) Deliveroo’s IPO debacle (-31% on listing) due to legal / ESG Company update and concerns and (3) 2nd wave impact on Naukri’s billings led to ~15% correction in Info reco change Edge from its peak. As outlined in our food-tech thematic (link), the Indian Social Security Code 2020 is more conducive for gig work. Unlike in the West, we reckon Technology an average rider earns higher than minimum wage / PF threshold (~Rs20-23k / month) and is more satisfied with aggregators like Zomato/Swiggy. In the worst Target price: Rs6,000 case, we expect some mandatory contribution for the social security fund being rd envisaged for gig workers. Concerns around 3 wave may keep hiring decisions Target price revision off the corporate table for a couple of months. While NIFTY 50 / BSE 200 aggregate Rs6,000 from Rs2,135 revenue grew 52% / 47% over 2016-20, permanent headcount increase was anaemic at 16%/15%. Our analysis hints at a strong impending catch up on white collar hiring by India Inc., even accounting for technology led productivity gains. Given Shareholding pattern its track record of identifying scalable internet businesses early, we expect Sep Dec Mar ‘20 ‘20 ‘21 continued high IRR on investible cash (~Rs 44bn, incl Zomato OFS proceeds). We Promoters 38.5 38.5 38.4 upgrade the stock to BUY (from SELL earlier) with SoTP-based TP of Rs6,000. Institutional investors 52.0 51.9 50.6  Partner structure of Zomato / Swiggy riders and the legal nuances around it. All MFs and others 11.7 10.5 10.3 riders of Zomato / Swiggy are structured as partners who get paid on per delivery basis. Insurance Cos. 0.7 0.6 0.7 FIIs 39.6 40.8 39.6 This is due to two reasons which are critical to the survival of the business model – (1)

Others 9.5 9.6 11.0 to bring in flexibility in fixed costs and more importantly (2) to incentivise the riders do Source: www.nseindia.com more deliveries. World over, most new age business models (e.g. Uber, Deliveroo, Price chart DoorDash, Zomato etc.) follow the same model. However, in both US and UK, this 6000 partner model witnessed backlash both from legislative and judiciary bodies. 5000 In Sep-19, California state government brought about a legislation – California

4000 Assembly Bill 5 (AB5) / gig worker bill. This requires companies like Uber that onboard independent partners to reclassify them as employees, with some exceptions. 3000

(Rs) Recently (in Feb-21), the UK Supreme Court upheld a prior employment tribunal ruling 2000 that Uber drivers should be classified as workers rather than independent partners.

1000 This judgment also played a spoiler in Deliveroo’s IPO especially as investors focused on sustainable investing shunned the issue.

Jun-18 Jun-19 Jun-20 Jun-21  Dec-18 Dec-19 Dec-20 However, in India the gig employment – wage dynamic is different. The legal

activism in US & UK led to concerns around similar legal risks in India. Nevertheless, it should be noted that employment / wage / poverty dynamic in India is very different from those in the developed economies. Fundamentally, gig work in the West (largely formalised economies) is competing with and benchmarked against formal work. In India, with ~88% of the workforce being informal, gig work is still an upgrade for workers who would otherwise be left with informal or no work. Unlike AB5, Social

Security Code 2020 passed by the Indian Parliament shows no intent to establish employer – employee relationship between gig workers and platform operators.

Market Cap Rs603bn/US$8.2bn Year to March 2020 2021E 2022E 2023E Research Analysts: Reuters/Bloomberg INED.BO/INFOE IN Revenue (Rs mn) 12,727 11,075 14,050 17,845

Sudheer Guntupalli Shares Outstanding (mn) 128.8 Net Income (Rs mn) 2,057 2,834 4,123 5,858 [email protected] 52-week Range (Rs) 5521/2678 EPS (Rs) 26.8 21.9 31.9 45.3 +91 22 6637 7573 Hardik Sangani Free Float (%) 61.6 % Chg YoY 3.6 (18.3) 45.5 42.1 [email protected] FII (%) 39.6 P/E (x) 175.0 214.1 147.1 103.5 +91 22 6637 7504 Daily Volume (US$'000) 52,148 CEPS (Rs) 30.4 27.0 38.3 52.8 Absolute Return 3m (%) (2.5) EV/E (x) 141.9 183.8 128.9 91.5 Absolute Return 12m (%) 66.1 Dividend Yield (%) 0.1 0.3 0.3 0.4 Sensex Return 3m (%) 3.9 RoCE (%) 11.2 5.8 6.4 8.8 Sensex Return 12m (%) 57.7 RoE (%) 13.8 8.3 9.1 12.3

Please refer to important disclosures at the end of this report

Info Edge India, June 15, 2021 ICICI Securities

Secondly, unlike in the West with lower order volumes, we estimate Zomato / Swiggy riders to be earning (ex-tip / service charge) higher than minimum wages in the respective micro-markets. For instance, media articles (link) hint at multiple instances of protests by Deliveroo riders over making less than the national legal minimum wage (currently GBP 8.9 / hour). In India, assuming an average of ~16-17 fulfilments per day and 26-day work month, riders are likely to take home an average of ~Rs20-23k, which is more than the highest minimum wage in the country (Rs16-18k / month, in Mumbai & Delhi). Our channel checks with the riders of these platforms suggest they are satisfied in terms of income / quality of life style working for aggregators like Zomato / Swiggy.  Expect a worst case mandatory contribution to social security scheme. It should be noted that Provident Fund (PF) / ESIC contribution is mandatory only for those employees whose monthly salary < Rs15k / Rs21k, respectively. Given the income levels, minimum wage / PF compliance are not very relevant for Zomato / Swiggy riders. In the worst case scenario, we expect some mandatory contribution (e.g. ~1%-2% of net revenue, in form of additional tax or cess) for the social security fund being envisaged for gig workers by the government. So far, the labour ministry has not notified the source of funding for this scheme. However, labour law experts expect this scheme to be funded either solely or jointly by central government, state governments, CSR spend pools of companies or collected in the form of additional tax / cess from gig platforms like Zomato.  Strong impending catch-up on white collar hiring by India Inc. By Dec-20, Naukri’s billing run-rate was muted and ~20% lower than pre-covid peak (Mar-20). March, being an important month for field sales and collections, would have gotten impacted due to the panic around 2nd wave (especially in key metros like Mumbai, Pune, Delhi etc). Even as 2nd wave wanes, uncertainty around 3rd wave may keep hiring decisions off the corporate table for at least another couple of months. However, it should be noted that the weakness in white collar hiring in India started way before the onset of covid pandemic. We analysed the revenue and permanent headcount trends at NIFTY 50 & BSE 200 companies (proxy for India Inc.) over 2016-21. More often than not, permanent employees tend to be white collared in nature while temporary employees tend to be grey / blue collared. While headcount data for 2021 is still unavailable for most companies, it is likely to be lower than in 2020. Our analysis suggests that for NIFTY 50 companies, while sales grew 52% over 2016-20, headcount growth over the same period was anaemic at 16%. Similarly, for BSE 200 companies, while revenue growth over 2016-20 was robust at 47%, permanent employee count increased by a meagre ~15%. These trends hint at a strong impending catch up on white collar hiring by India Inc. even accounting for the technology led productivity gains. Given its near monopoly position in the recruitment category, we expect Naukri to be a key beneficiary of this trend.  Upgrade the stock to BUY with SoTP-based TP of Rs6,000. Regulatory concerns around Zomato’s gig workers are unwarranted, in our view. As highlighted in our thematic (link), we see very strong investment case for the company. Besides, the likelihood of a sharp recovery in Naukri’s demand going ahead is high. We are unperturbed by the optically expensive valuations which fail to capture the underlying optionality in many investee companies (e.g. Zomato, Policybazaar etc.). Given its track record of identifying scalable internet businesses early, we expect continued high IRR on investible cash (~Rs 44bn, incl proceeds from Zomato IPO). We upgrade the stock to BUY (from SELL earlier) with SoTP-based target price of Rs6,000.

Info Edge India, June 15, 2021 ICICI Securities

Summary in Charts

Chart 1: Significant headroom for catch up on white collar hiring

Growth (FY16-20)

55 52 Revenue Headcount 50 47 45 38 40 35

(%) 30 25 20 16 15 15 13 10 Nifty50 BSE200-ex Nifty50 BSE200

Source: I-Sec Research, Capitaline

Info Edge India, June 15, 2021 ICICI Securities

Financial summary (standalone) Table 1: Profit and loss statement Table 4: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E Operating Revenues (Sales) 12,727 11,075 14,050 17,845 Op. CF before WCap changes 3,223 2,197 3,058 4,291 Operating Expenses 9,068 7,738 9,599 12,507 Working changes (201) (2,399) 498 (1,029) EBITDA 3,659 3,337 4,451 5,337 Capex (240) (209) (300) (571) % margins 8,700 7,965 9,617 11,601 Free Cash flow 2,781 (411) 3,256 2,691 Depreciation & Amortisation 4,027 3,110 4,433 6,244 Cash Flow from other Invst EBIT 31.6 28.1 31.5 35.0 Act (Ex Capex) 2,210 843 1,358 1,896 % margins 414 450 536 571 Proceeds from Share Capital 3 18,750 - - Finance cost 3,614 2,660 3,897 5,673 Inc/(Dec) in Borrowings (2) - - - Other Income 28.4 24.0 27.7 31.8 Dividend paid (1,176) (1,756) (2,195) (2,635) Recurring PBT 67 57 57 58 Others (244) (57) (57) (58) Less: Taxes 876 1,103 1,658 2,196 Inc./(Dec.) in Cash & cash eq. 3,572 17,369 2,361 1,894 Less: Minority Interest 4,423 3,705 5,498 7,811 Source: Company data, I-Sec research Net Income (Recurring) 1,133 871 1,374 1,953 Add: Extraordinaries 0 0 0 0 Reported Net Income 3,290 2,834 4,123 5,858 Table 5: Key ratios Source: Company data, I-Sec research (Year ending March 31) FY20 FY21E FY22E FY23E Table 2: Balance sheet Per Share Data (Rs) EPS(Basic Recurring) 26.8 21.9 31.9 45.3 (Rs mn, year ending March 31) EPS(Reported) 16.8 21.9 31.9 45.3 FY20 FY21E FY22E FY23E Recurring Cash EPS 30.4 27.0 38.3 52.8 Assets Dividend per share (DPS) 3.5 12.0 15.0 18.0 Current Assets 13,046 32,087 34,836 38,965 Book Value per share (BV) 198.9 361.0 376.8 403.2 Current Liabilities & Provisions 6,225 6,415 8,009 10,119 Net Current Assets 6,822 25,673 26,827 28,846 Growth Ratios (%) Non-current investments 14,672 14,972 15,272 15,572 Operating Income (Sales) 15.9 (13.0) 26.9 27.0 Net Fixed Assets 1,325 1,084 848 848 EBITDA 18.0 (22.8) 42.5 40.9 Capital Work-in-Progress - - - - Recurring Net Income 4.4 (13.9) 45.5 42.1 Other Assets 2,067 3,005 3,722 4,637 Basic Recurring EPS 3.6 (18.3) 45.5 42.1 Total Assets 24,885 44,733 46,669 49,903 Basic Recurring CEPS 10.4 (11.3) 41.9 38.0

Liabilities Valuation Ratios (x) Borrowings 2 2 2 2 P/E 175.0 214.1 147.1 103.5 Other non-current liabilities 566 587 595 605 P/CEPS 154.1 173.8 122.5 88.8 Equity Share Capital 1,223 1,223 1,223 1,223 P/BV 23.6 13.0 12.4 11.6 Face Value per share (Rs) 10 10 10 10 EV / EBITDA 141.9 183.8 128.9 91.5 Reserves & Surplus 23,094 42,921 44,849 48,073 EV / Sales 44.5 49.6 38.9 30.5 Net Worth 24,317 44,144 46,072 49,296 EV / FCF 205.5 NA 175.5 212.4 Total Liabilities 24,885 44,733 46,669 49,903 Source: Company data, I-Sec research Operating Ratios Personnel Cost/Total Revenues (%) 42.4 48.3 45.7 40.0 Other op. exp. / total revenue (%) 26.0 21.3 20.7 23.3 Table 3: Quarterly trend Other Income / PBT (%) 19.8 29.8 30.2 28.1 (Rs mn, year ending March 31) Effective Tax Rate (%) 25.6 23.5 25.0 25.0 Mar-20 Jun-20 Sep-20 Dec-20 NWC / Total Assets (%) 21.9 50.2 49.1 48.1 Net sales 3,228 2,801 2,561 2,723 Fixed Asset Turnover (x) on average 13.4 9.2 14.5 21.0 % growth (YoY) 10.3 (10.4) (19.1) (15.0) Receivables (days) on average 2 3 3 3 EBITDA 965 1,046 516 682 Current ratio 2.1 5.0 4.3 3.9 Margin (%) 29.9 37.3 20.1 25.0 Other income 195 203 263 316 Return/Profitability Ratios (%) Extraordinaries Inc / (Loss) 372 0 0 0 Recurring Net Income Margins 25.8 25.6 29.3 32.8 Recurring Net Income 788 832 512 699 RoCE (Based on Avg) 11.2 5.8 6.4 8.8 Source: Company data, I-Sec research RoNW (Based on Avg) 13.8 8.3 9.1 12.3 Dividend Payout 13.1 54.8 47.1 39.8 Dividend Yield 0.1 0.3 0.3 0.4 EBITDA Margins 31.6 28.1 31.5 35.0 Source: Company data, I-Sec research

Info Edge India, June 15, 2021 ICICI Securities

This report may be distributed in Singapore by ICICI Securities, Inc. (Singapore branch). Any recipients of this report in Singapore should contact ICICI Securities, Inc. (Singapore branch) in respect of any matters arising from, or in connection with, this report. The contact details of ICICI Securities, Inc. (Singapore branch) are as follows: Address: 10 Collyer Quay, #40-92 Ocean Financial Tower, Singapore - 049315, Tel: +65 6232 2451 and email: [email protected], [email protected].

"In case of eligible investors based in Japan, charges for brokerage services on execution of transactions do not in substance constitute charge for research reports and no charges are levied for providing research reports to such investors."

New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

ANALYST CERTIFICATION I/We, Sudheer Guntupalli, PGDM; Hardik Sangani, CA authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the ICICI Securities Inc. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Recommendation in reports based on technical and derivative analysis centre on studying charts of a stock's price movement, outstanding positions, trading volume etc as opposed to focusing on a company's fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Institutional Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Retail Research. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities and ICICI Securities as a entity are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. This report has not been prepared by ICICI Securities, Inc. However, ICICI Securities, Inc. has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.