Asia Pacific Equity Research 30 May 2015 Overweight Info Edge India INED.BO, INFOE IN Robust quarter with broad-based growth; 99acres Price: Rs778.60 ▲ Price Target: Rs1,000.00 could face near-term competitive pressures; stay OW Previous: Rs950.00 Info Edge reported a robust Mar-15 quarter with 25.4% Y/Y revenue growth India (the highest in the last 12 quarters) and significant EBIT margin expansion. Technology, Software & IT Recruitment Services revenues grew 24.6% Y/Y, while 99acres also registered services 33% Y/Y growth. We believe that Info Edge is a structural growth story, but with Viju K George AC potential for quarterly disappointment/aberrations. EBIT margin increased 190bp (91-22) 6157-3597 Y/Y to 29.3% driven by operating leverage. We believe economic recovery will be a [email protected] key catalyst for the recruitment business & 99acres – the two dominant businesses Bloomberg JPMA VGEORGE <GO> for Info Edge. Concerns are emerging for 99acres due to rising competitive intensity Amit Sharma (the emergence of new business models such as Housing.com and (91-22) 6157 3598 commonfloor.com) in real estate portals, but the company remains committed to [email protected] building credible leadership in this business. The Zomato story, in which Info Edge J.P. Morgan India Private Limited holds a majority stake, seems to be shaping up well and contributes materially to Price Performance Info Edge’s value. 90%+ of our target value for Info Edge is driven by these three 1,000 verticals. The success of other venture(s) is an embedded option. 900 Dominant leadership position in online recruitment services business will Rs 800 likely drive disproportionate gains. Info Edge has an enviable job portal 700 traffic share of 65-70% – about four times that of its closest competitor. In the 600 online businesses, leadership gains are disproportionate. Info Edge continues to May-14 Aug-14 Nov-14 Feb-15 May-15 INED.BO share price (Rs) innovate and invest in the launch of new services/features, such as career site NIFTY (rebased) manager, recruiter profile & referrals services to further expand market share. YTD 1m 3m 12m Abs -9.0% -0.7% -5.7% 11.5% Competition has intensified in the real estate segment, but Info Edge Rel -9.4% -1.1% 0.8% -2.0% remains committed to invest in this business. 99acres has delivered ~50% revenue CAGR over the last five years, which is impressive. However, due to the attractiveness of this segment, competitive intensity has increased materially over the last few months. Management sad competitors have spent Rs2.5 billion in advertising over the last three months in this segment. That said, real estate can be a larger opportunity than job portals in the longer term. Info Edge plans to continue investing in its product & marketing to build/maintain leadership in this segment. The competitive landscape in this space needs watching. Zomato is emerging as an important value driver for Info Edge. Zomato is now present in 22 countries with leadership positions in a number of countries. Zomato has the reach, access to capital, scale (hence, cost advantage), credible management, and ability to learn from multiple markets. There is no compulsion yet to manage costs and the company is in aggressive expansion mode. These factors position Zomato well for growth. It monetizes well in 7-8 cities in India and the UAE market currently, while most other markets are still burning cash. Bloomberg INFOE IN, Reuters INED.BO (Year-end Mar, INR mn) FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E Revenue 5,059 6,116 7,577 9,320 ROE(%) 18.4 16.0 12.6 14.752-Week range 1,015.00-639.50 Operating Profit 1,494 1,649 2,172 3,056 CORE ROIC(%) - - - -Share Out. (Com) 120MN EBITDA 1,668 1,822 2,355 3,244 Quarterly EPS (Rs) 1Q 2Q 3Q 4QMarket Cap 93BN Net profit (Reported) 1,285 1,939 2,203 2,862 EPS (16) E 4.05 4.34 4.64 5.29Market Cap(US) US$1,463MN EPS 11.77 16.49 18.32 23.80 EPS (17) E - - - -Free float 43.9% P/E (x) 66.2 47.2 42.5 32.7 Local 1M 3M 12M Avg daily val (Rs) 165.34MN EV/EBITDA (x) 53.1 44.7 33.7 23.6 Abs. Perf.(%) (0.7%) (4.7%) 11.5% Dividend Yield - Cash 4,842 11,981 14,049 16,768 Rel. Perf.(%) (1.1%) 0.9% (2.0%) Index 8319.00 Equity 7,622 16,624 18,347 20,661 Target Price (31-Dec-15) Rs 1000.00 Exchange rate 63.81 Source: Company data, Bloomberg, J.P. Morgan estimates. See page 22 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com Viju K George Asia Pacific Equity Research (91-22) 6157-3597 30 May 2015 [email protected] Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: • Leadership position in online • Macro environment improvement ahead of • Traffic share contraction due to competitive threat from recruitment services business with expectations or faster than expected LinkedIn and other players Naukri.com • Faster-than-expected shift to online in real estate • Advertising expenses may pick up in response to • 99acres.com and Zomato will likely be market competitors' actions the most important growth drivers given • Significant success of any of the investee company • Continued weak macro environment or continued high their leadership position competitive intensity in real estate portal business • Success of any of the investee company will be value accretive Key financial metrics (LC in mn) FY14A FY15A FY16E FY17E Valuation and price target basis Revenues (LC) 5,059 6,116 7,577 9,320 We maintain our OW rating on Info Edge. Our Dec-15 price target of INR 1,000 is based on our SOTP valuation. We value the recruitment Revenue growth (%) 16.0% 20.9% 23.9% 23.0% services based on EV/EBITDA, Zomato based on market valuations for EBITDA (LC) 1,668 1,822 2,355 3,244 recent funding, and other businesses based on EV/sales as all these EBITDA margin (%) 33.0% 29.8% 31.1% 34.8% businesses are still loss-making. We value recruitment services EBIT (LC) 1,494 1,649 2,172 3,056 business at Rs700 per share, while Zomato and 99acres contribute about Rs114 and Rs115, respectively, to our price target. We value EBIT margin (%) 29.5% 27.0% 28.7% 32.8% other Info Edge businesses and investee companies at about Rs71. PBT (LC) 1,902 2,675 3,193 4,147 Tax rate (%) 31.1% 27.5% 31.0% 31.0% Price chart Net profit (LC) 1,285 1,939 2,203 2,862 EPS (LC) 11.8 16.4 18.3 23.8 1,200 EPS growth (%) 25.7% 39.8% 11.4% 29.9% 1,000 800 DPS (LC) 2.5 3.0 3.5 4.0 600 BVPS (LC) 69.8 141.4 152.6 171.9 400 Net margin (%) 25.4% 31.7% 29.1% 30.7% Net debt (4,796) (11,913) (13,981) (16,700) 200 ROE 17.2% 9.9% 12.0% 13.9% 0 Key model assumptions FY14A FY15A FY16E FY16E No. of employees 3,168 3,817 4,087 4,507 Price (LHS) Target price (LHS) Recruitment business growth 10.2% 19.6% 23.2% 22.0% 99acres business growth 47.3% 32.3% 31.4% 30.0% Source: Bloomberg, Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates. Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity to FY16E FY17E FY16E FY17E EPS FY16E FY17E 1% chg in sales volume growth 1.0% 1.0% 0.7% 0.8% JPMe old 16.5 22.4 1% chg in avg. realization 3.3% 3.1% 2.4% 2.4% JPMe new 18.3 23.8 1% chg in emp cost per emp 2.0% 1.8% 1.4% 1.4% % chg 11% 6% Consensus 16.5 22.1 Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan. Comparative metrics CMP Mkt Cap P/E (x) EV/EBITDA (x) EV/Sales (x) YTD LC $Mn FY15E FY16E FY15E FY16E FY15E FY16E Stock perf. TCS 2,610 80,106 22.5 19.2 16.5 14.3 4.6 4.1 2% Infosys 2,023 36,225 18.6 16.2 12.7 10.9 3.5 3.1 3% Wipro 562 21,701 15.0 13.7 11.0 10.0 2.5 2.3 1% HCL Tech 1,011 22,350 18.3 16.0 14.2 12.6 3.2 2.9 27% Tech Mahindra 554 7,707 16.7 13.6 10.1 8.5 1.7 1.5 -14% Info Edge 817 1,538 44.6 34.3 36.4 26.4 11.3 9.2 -4% Source: Bloomberg, Company and J.P. Morgan estimates. Prices are as of May 29, 2015 2 Viju K George Asia Pacific Equity Research (91-22) 6157-3597 30 May 2015 [email protected] Solid broad-based revenue growth in Mar-15 quarter; expected economic recovery/improvement in India GDP growth has multiplier effect for Info Edge Info Edge reported a robust quarter with Y/Y revenue growth of 25% Y/Y (and 19% Y/Y) – marking the highest growth in the last 12 quarters.