We explore the business of India’s leading online classifieds company, and assess the opportunities and challenges it faces.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).
About Info Edge (India) Ltd. (IEL)
IEL is India’s leading online classifieds company with presence in the recruitment, matrimony, real estate, education and related services.
Unlike the first impression of it being an “Internet or dotcom” business, look deeper and you will see a “media” business (classifieds) that is on the Internet.
Let me briefly describe IEL’s key businesses and then take them up one by one –
1. Recruitment: This segment of IEL’s business comprises online recruitment classifieds (Naukri.com, India’s leading job site and Naukrigulf.com, a job site focused at the Middle East job market) and offline executive search (Quadrangle.com). This segment forms 56% of IEL’s consolidated revenues.
2. Online Restaurant Discovery: This segment forms 20% of IEL’s consolidated revenue and is represented by the company’s 46% stake in Zomato.
3. Real Estate: This comprises online real estate classifieds (99acres.com), and forms 12% of IEL’s total revenues.
4. Matrimonial and Others: In this segment, among others, IEL has presence in online matrimony classifieds (Jeevansathi.com). This segment forms 12% of IEL’s total revenues.
Let me now take up each of the key businesses and describe them one by one.
1. Recruitment (Naukri)
This is by far the biggest and most profitable business for IEL, and it has been the case ever since the company started its operations in 1997.
Naukri earns a majority of its revenues (90%) from recruiters, while the remaining comes from providing advisory services to job seekers. Job search, as the company mentions, is the fifth biggest activity on the Internet, after popular activities like emailing, search, and music downloads and this has benefited IEL over the past many years.
As a matter of fact, the number of résumés in Naukri’s database has increased at a CAGR of 19% over the past ten years – from around 9 million at the end of March 2007 to around 29 million at the end of March 2012, to 51 million at the end of March 2017.
You see, there are four key factors that decide the success of an online business like that of IEL.
1. The first key determinant of an online business’s success is traffic – number of people using the Internet.
2. The second is traffic share – number of people using a website as a percentage of total people using the Internet.
3. The third is the kind of engagement with a website that is either measured through page views (number of pages viewed by each website visitor) or through the time spent on a website.
4. The fourth and final piece of an online business’s success is how it monetizes the engaged traffic i.e., earns business from selling products or services to its website visitors.
Talking about traffic and traffic share, data from SimilarWeb (an agency that measures the Internet for data like traffic and traffic share) suggests that Naukri is by far the most preferred job search website in India, with around 75% traffic share of various recruitment websites operating in India…
A high (and rising) share of traffic has worked wonders for Naukri in the past, as seen from the rise in the number of unique customers from 27,500 in FY07, to around 45,000 at the end of FY12, to 65,500 at the end of FY17. Also, the average number of resumes modified daily has risen from around 22,000 in FY07 to 235,000 in FY17.
The best thing about Naukri’s business is this virtuous cycle that it operates in, which gives it a moat. This is something that is a product of years of brand building and offering a service/product that solves a real problem for its users in a better way than anyone else can do.
With IEL keeping its focus on this business and competition intact, the business continues to do well for the company.
Of course, there are key challenges that this business faces –weak hiring environment – but the management sees Naukri to remain its best and most profitable business for years to come.
As per the management, recruitment is a well-penetrated market and much of growth for Naukri in the future would come from a shift in job classifieds from print media to online, and the ability of the company to take away a larger share of this shift away from its competitors.
Another great characteristic of an online business like Naukri is that it has great operating leverage. In simple words, operating leverage measures a company’s fixed versus variable costs.
The greater proportion of fixed costs (costs that don’t change much with change in the level of business), the greater the operating leverage. Like financial leverage, operating leverage magnifies results, making gains look better and losses look worse.
In case of Naukri specifically, and IEL overall, its fixed costs (employee and network costs) are much bigger than its variable costs (like advertising costs), and thus a large part of sales revenue flows straight to profits after the fixed costs are met.
This is clearly seen from IEL’s recruitment business (led by Naukri) that has seen a gradual rise in its operating margins over the past seven years – from around 38% in FY07, to 51% in FY12, and to 56% in FY17 (the highest margin ever for this business).
Talking about competition, while Naukri.com is extending its lead over other key job classified websites like Monster and Timesjob (as seen from the chart above), one company that is serious competition is LinkedIn.
As per the management, IEL is investing in areas like improving search capabilities, making Naukri.com more social, and taking the site to mobile platforms to counter competition from LinkedIn.
But even while companies in India are largely taking to LinkedIn to view profiles of prospective candidates, large-scale hiring is still controlled by players such as Naukri, which is a good sign for IEL. Similarly, in most geographies, job sites have withstood competition from LinkedIn e.g. Australia’s leading job site Seek.com.
2. Online Restaurant Discovery (Zomato)
IEL’s second largest segment i.e., Zomato (20% of FY16 consolidated revenue) is a leader in the restaurant category in India and several other countries (it has presence in 23 countries).
Here are the various parts of Zomato’s business model (as per IEL’s latest presentation) –
o Banner ads on web and mobile apps relevant to a user’s search of restaurants in an area
o Events, sponsored spots in collections and corporate tie ups
• Digitise restaurant menus, provide relevant information (including map coordinates, pictures etc)
o Regular updating through feet on street beats
• Generate ratings and reviews and enable picture uploads from users
• Food ordering on the web and mobile app
o Online food ordering launched in India and UAE (Dubai & Abu Dhabi) in FY 15-16
Delivery done by restaurant or by Zomato’s logistics partner Grab and Delhivery
~2 million orders processed in March 2017
As per IEL’s FY16 annual report, Zomato has managed to cut costs drastically – the operating burn rate, which had peaked at US$ 9 million per month during the first quarter of FY16, had reduced to around US$ 1.6 million in May 2016. In the second half of FY16, Zomato managed to
double its revenues while actually bringing down costs and exposure to high risk, high burn areas.
However, one thing worth noticing here is that, despite the reduction in burn rates, Zomato’s overall loss widened during FY16 led by aggressive expansion. This even pushed IEL into losses on a consolidated basis.
3. Real Estate (99acres)
Real estate classifieds is the third largest independent revenue generator for IEL, and its fastest growing in terms of revenue growth (at 34% CAGR over the past four years).
This business derives its revenues from property listings, builders’ and brokers’ branding and visibility through micro-sites, home page links and banners servicing real estate developers, builders and brokers.
Here again, IEL has been a leader in traffic share against its key competitors…
Increasing internet penetration is facilitating a structural shift of advertising budget to the online space. However, real estate classified market is still predominantly offline. We can see this changing over the next five years as India’s young internet population enters “home buying” age. Online real-estate classified market growth is expected to be led by a) growth in the housing market in India; and b) higher share of advertising spend.
As mentioned earlier, large part of the revenue for 99acres comes from commissions from developers, builders, and brokers. The management sees this business as holding a tremendous future potential simply for the reason that real estate classifieds in print media is a much bigger business (at Rs 2,000+ crore) than job classifieds, and thus a gradual shift towards online classifieds will bring a great amount of business for leading brands like 99acres.
The shift is already being seen, as 99acres continues to clock higher number of paid transactions (number of invoices issued by the business to its paying customers) with every passing quarter. From 13,000 paid listings in FY07 (4% of total listings on 99acres), the number went up to 1 million in FY12 (83% of total listings), to around 3 million (68%) in FY17. That’s a superlative growth in the number of paying customers, and is seen in the 31% CAGR in segment revenue during the eight-year period between FY09 and FY17.
As far as profitability is concerned, 99acres still earns a loss before tax (Rs 486 million in FY17), but half of the loss incurred in the previous year (FY16). In this segment, the management is focussing on improving reach, investing in product and technology and features on the site all of which means hiring more people/quality people with relevant skill sets as also higher advertising spends. Importantly, these costs are classified as operating expenses on IEL’s Income Statement, while part of the same are really investments in the future which in an asset linked business would be classified as capital expenditure.
3. Matrimonial (Jeevansathi)
In a country where the dominant form of marriages continues to be “arranged”, a matrimonial classified business surely has a great potential. IEL’s matrimonial business, led by Jeevansathi.com, has been a key beneficiary of this continuing trend of marriages getting arranged by families.
However, unlike Naukri and 99acres, Jeevansathi is not the top website in this space in terms of traffic share. It stands at number three, lead by Bharatmatrimony.com at number one and Shaadi.com at number two. Plus, this market also has a lot of small, regional players.
IEL generates revenue when a website user (seeking a bride or groom) pays to get contact details of other parties. So, while a user is free to list on Jeevansathi, free to search for suitable spouse, and free to express interest, he/she has to pay a subscription fee to get the contact details of the people who match his/her profile.
One major drawback of the matrimonial business is that, unlike recruitment and real estate, repeat business is almost zero. This is because when someone finds a life partner, he/she has no reason to visit the site again.
Thus, the company has to continue looking for new customers for Jeevansathi, and thus it continues to spend big money on marketing, and thus this business continues to suffer losses.
As per the management, matrimonial is one business where it lacks good clarity for the future, and is thus trying our several things to prop it up.
4. Other Businesses
Apart from the above three businesses, IEL also has presence is a few other segments of the online market, which include an online education classifieds website called Shiksha.com. It also has key investments in other growing online ventures like:
The key reason the management has attributed to its faith and thus investments in these companies is their business potential and good teams managing them.
In fact, the quality of management is one of the biggest criteria that IEL looks at while deciding to invest in or avoid a new business. This is especially given that Internet is such a people-dependent business.
Of course, the quality of business and whether it solves a critical problem matters a lot. But it’s the people leading the efforts who can make or mar any such business, unlike most other businesses where it’s more about business economics than the quality of people leading them.
IEL has invested a total of Rs 800 crore in its various new businesses over the past few years, and around 70% of the funds have been deployed in just two of them – Zomato (Rs 480 crore) and Meritnation (Rs 97 crore).
It’s worth noting that IEL had also invested in an ecommerce business named ’99labels’ and later wrote-off its entire investment of Rs 29 crore in the company. The management indicated this was done for two reasons –
• 99labels required a great amount of funding than IEL’s balance sheet allowed, given the former’s capital-intensive nature of business; and
• E-commerce has become a very challenging business in India and it is difficult to eke out any profits given the poor economics, and the fact that almost every ecommerce company has been raising more and more funds thus starving out smaller players.
IEL’s management has also mentioned that, given the lessons learnt from 99labels, it would prefer investing in businesses which have sound economics and do not require a lot of capital to grow.
Anyways, the fact that IEL wrote-off its investment in a business where it sees poor underlying economics gives the comfort that the management is agile enough to cut off things could cause a bigger damage to its funds and reputation in the future.
Here are some facets of Info Edge’s financial performance…
During FY09 to FY16 (nine years), the company grew its consolidated net sales at a CAGR of 24%. On a standalone basis, the CAGR has been 20% during the same period.
During FY12 to FY16 (four years), the company grew its standalone net sales at a CAGR of 18%. The real estate vertical (99acres) led the growth with 34% CAGR in segment sales. Sales from the matrimonial (Jeevansathi) and recruitment (Naukri) business clocked 17% and 15% CAGR respectively during the same period.
Net margins have averaged around 19.5% over the past nine years.
On a consolidated basis, IEL reported its first ever loss in FY16, led by widening losses at Zomato.
Return on equity (on a debt-free balance sheet) has averaged around 17%, excluding the loss in FY16. Including the loss, ROE has averaged 13% over the past nine years.
The company works on a negative working capital – it has no inventories and its customers pay up faster than it has to pay to its vendors. This causes the balance sheet to remain clean, and without any debt.
Free cash flow has remained positive (excluding in FY16), thanks largely to a consistent rise in profits, low capital expenditure, and a negative working capital.
Overall, IEL’s management’s focus has consistently been on optimising working capital cycles, maximising margins and operating leverage, and stressing on capital efficiency to build business models that provide strong cash accretion. Consequently, even after adopting a high investment led business path especially in the last few years, as of March 31, 2016, IEL had around 55% of its assets in cash and cash equivalents (FD in Banks, Investment in Debt MF & FMP), while 86% of its liabilities were in terms of equity, only 14% was current liabilities and provisions and negligible debt.
Opportunities & Challenges
After discussing the specifics of IEL’s key businesses and its past financial performance, let me now enumerate my understanding of the key opportunities and challenges that the company faces in the future. Among the opportunities, the key ones are…
1. Rising Internet penetration in India provides the greatest opportunity to IEL. Led by downward trends in cost of Internet access and mobile devices, India’s internet penetration is rising rapidly – 26% of population in 2015, from 2.4% in 2005. After the first 100 million users came on stream in the first decade of this millennium, the next 100 million were added in four years — between 2010 and 2014.
Apart from rising number of Internet users, or possibly led by it, another key opportunity IEL has is that of more classified advertisement shifting from print to online, especially owing to increasing smart-phone penetration. As the company’s management has indicated, it sees the real estate segment (99acres) to be one of the biggest beneficiaries of this shift, largely given that real estate classifieds is a much bigger market than job or matrimonial classifieds.
Naukri (recruitment) remains IEL’s focus area where it plans to work towards maintaining a leadership position. The business has done decently in the past despite a weak job market. Any improvement in the job environment, led by an improvement in the economic environment, would benefit IEL. Also, given the business’s high operating leverage, any uptick in revenues will add to the company’s profitability.
Talking about concerns/risks for IEL, here are the key ones…
• Competition is the biggest risk IEL faces, combine with the fact that the barriers to entry are low in an online business. While IEL enjoys certain moats in the form of its brands and the virtuous cycle that I discussed above, there is no doubt that it’s a “have-to-be-smart-everyday” business where the management, its insights into customers’ problems, and the business’s capability to provide the right solutions for these problems will play a big role.
• IEL also faces an investment risk, given that it is investing a lot of money in ideas that have not been tested in the Indian markets in the past (like Zomato, Policy Bazaar, Meritnation, Mydala, and Canvera). There is thus a probability that its investments may not generate adequate returns and which may absorb more of the company’s cash.
IEL’s stock is currently trading at around Rs 1,007 (as on 15th June 2017), which implies a P/E multiple of around 60x its trailing 12-months (standalone) EPS of Rs 16.9 per share.
Warren Buffett said this in a lecture at the University of Florida, School of Business in 1998…
If I was teaching a class at business school, on the final exam I would pass out the information on an Internet company and ask each student to value it. Anybody that gave me an answer, I’d flunk.
Now, if I was to see IEL as an “Internet” business, I would not have bothered much about its valuations because I wouldn’t have the ability to calculate any valuations at all.
But since, in reality, IEL is largely a “media” business (classifieds in the job, real estate, and matrimonial spaces) that uses Internet as its platform, I will not really shun it like I would do with ecommerce businesses.
But the question now is – how do you value a business like IEL? I may try and do a DCF for IEL given that it’s one rare Internet company that has generated positive free cash flows year after year, but then any future cash flow projections will be like hitting the arrow in pitch dark, as it’s a growing, non-established business, and thus any calculations are bound to go grossly wrong. Analysts may also do a sum-of-the-parts (SOTP) valuation for the various business under IEL’s fold (add Naukri’s value to Zomato’s value to 99acres’s value to Jeevansathi’s value, and so on). But I find issues with that, given that it would end up being SOTP of a lot of fast-moving parts which don’t have an established past but have an uncertain future. Then I can look at the stock’s P/E and still scratch my head asking whether it deserves a 25x P/E or 50x (the last three year’s P/E range has been 40x to 85x).
Finally, I look at the market capitalization of IEL, which currently stands at around Rs 12,200 crore, or US$ 1.9 billion at the current currency rate. Now, in a market where loss-making Internet businesses (read Flipkart) are being valued at US$ 6 billion, IEL’s valuation of less than US$ 2 billion looks “not-very-expensive”, especially considering the quality of the latter’s business – high margins, negative working capital, clean balance sheet, and positive free cash flow generation – and the huge future potential.
Overall, I like IEL’s business given its…
Brand leadership in online classifieds, a space that is going to grow bigger in the future given the shift from print classifieds
Virtuous cycle of resumes and recruiters in Naukri
Management’s ability and experience in monetising a large traffic of website visitors
Rising profits (in the core, standalone businesses), clean balance sheet, negative working capital, and subsequently consistent FCF generation
Clean and efficient management that has been extremely forthcoming in disclosing a lot of business information with shareholders, and cleaning up the bad lemons (like 99labels) as soon as they pop.
But I also believe that the stock requires a high margin of safety because…
Technology disruptions that can impact IEL’s business can cause permanent loss of capital
Most new businesses IEL is investing in are untested and have an uncertain future, and thus may bring in a few surprises like 99labels
You must, as I always request, safely ignore my thoughts, assumptions, and actions, and instead do your own homework.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).[/show_to] [hide_from accesslevel=’almanack’]
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