Info Edge rating ‘hold’; Zomato critical to future valuations

A food delivery rider for Zomato Media Pvt., right, rides a motorcycle in Mumbai, India, on Tuesday, Jan 21, 2020. (Image: Bloomberg)

Info Edge (IE) has a fractured street view (with an equal number of Buys, Holds and Sells) and an average TP around 20% lower than the CMP. Current consensus valuations of c66x PE on core EPS are baffling. So what drives the bulls, pushing the stock to an all-time high, despite a decline in short-term growth expectations brought about by COVID-19 for its core business? In this note we look at the potential pitfalls in the conventional way of analysing INFOE, and hence what could be the blue-sky scenario for the stock and why we still prefer to remain on the side-lines.

Firstly the attraction of big picture inferences from China: Mainland China internet plays have created billions of dollars of wealth for investors. Food delivery giant Meituan itself is close to a $200-bn valuation. In India,
ex Reliance, there are not many large public listed new age internet plays. So, IE commands a huge scarcity premium. If India follows the same path, IE could remain a perfect instrument to particulate in the foreseeable future.

Naukri.com value is already factored in: Naukri.com is trading at a PE of c60x on HSBC FY22e EPS. This obviously looks expensive. DCF with a 10-year revenue CAGR of 12% and average Ebit margin of 55% implies a P/E of c48x. There is little room for upside on these estimates.

Policy Bazaar can’t move the needle by much: PB is a long-term sustainable business. But, assuming a blue sky scenario where PB’s revenues grow 3x in 2-3 years and Ebitda margins hit 25%, valuations could be c$4 bn. This would only add 3% to IE’s market cap.

Zomato the real game changer: We value IE’s stake in Zomato at c$1.1 bn. In a blue-sky scenario, India food delivery could be valued at c$30 bn in long term, implying IE’s share in Zomato at $3.5 bn (c45% of IE market cap). This is the only scenario where IE stock can create value from current valuations. However, we believe the scenario assumptions are too simplistic and there are multiple pitfalls.

Valuations and change in estimates: We now value Zomato at $5.0 bn ($3.5 bn earlier), as COVID-19 has accelerated its path to profitability owing to lower discounts; leading to a revised INFOE target price of Rs 2,810.