SKS MICROFINANCE LIMITED: ADD CORE VALUE TO PORTFOLIO !!!

Scrip Code: 533228 / SKSMICRO

CMP:  Rs. 616.00; Market Cap: Rs. 7,842.36 Cr; 52 Week High/Low: Rs. 607 / Rs. 360.60.

Total Shares: 12,73,11,106 shares; Promoters : 33,77,333 shares –2.65 %; Total Public holding : 12,39,33,773 shares – 97.34 %; Book Value: Rs. 82.27; Face Value: Rs. 10.00; EPS: Rs. 20.35; Dividend: 00.00 %; P/E: 30.27 times; Ind. P/E: 25.00; EV/EBITDA: 12.53 times.

Total Debt: Rs. 3,279.84 Cr; Enterprise Value: Rs. 9,684.74 Cr.

SKS MICROFINANCE LTD: SKS Microfinance Limited was incorporated in 1997 and is based in Andra Pradesh, India. SKS Micro is a non-banking financial company – micro finance institution, provides micro finance services to women in the rural areas in India who are enrolled as members and organized as joint liability groups. It offers income generation and mid-term loans to self-employed women to support their business enterprises, such as raising livestock, running local retail shops, tailoring, and other assorted trades and services. The company also provides mobile loans for financing mobile phones and telephone services; housing loans for the construction of new houses, or improvement and extension of existing houses; and gold loans secured by gold jewellry to meet short term liquidity requirements. In addition, it provides life insurance products. The company came with an IPO on July 28, 2010 with issue of 1,67,91,579 equity shares of Rs. 10 each issued at Rs. 985 per share raising Rs.  1653.97 Cr. A discount of Rs. 50 per share on Issue Price of Rs. 985 was given to Retail Individuals making their issue at Rs. 935 per share. The object of the issue was to meet future capital requirements arising out of growth in business and to achieve the benefits of listing on the Stock Exchanges. The shares got listed on August 16, 2010 at Rs. 1,040.00 making an intraday high of Rs. 1,162.00 and intraday low of Rs. 1,040.00. SKS Microfinance is among the Largest microfinance companies in India with presence across 16 states covering 1,00,000 villages. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000 (about $30-$180) to poor women so they can start and expand simple businesses and increase their incomes. The Company’s products are categorized into proprietary products and distributor products which include; Income Generation Loans (IGL) – Aarambh, Mid-Term Loan (MTL) – Vriddhi, Long Term Loan (LTL), Solar Loan, Mobile Loans, Housing Loans, Swarna - pushpam Gold Loan, and Life Insurance. SKS Microfinance Ltd is locally compared with L& T Finance Holding ltd, Sahara Housingfinance ltd, IIFL Holdings Ltd, Shalibhadra Finance Ltd, Rajath Finance Ltd, Indiabulls Housing finance ltd, Vardhman Holdings Limited, SRG Securities Finance ltd, Equitas Holdings ltd, Ujjivan  Financial ltd, Capital First Ltd, IFCI Ltd.  

Investment Rationale:

SKS Microfinance was incorporated in 1997, it was named as "Swayam Krishi Sangham" or SKS. SKS Microfinance Ltd is the largest MFI in India in terms of total value of loans outstanding, number of borrowers, who they call members, and number of branches. SKS Microfinance is a non-banking finance company, or NBFC, registered with and regulated by the Reserve Bank of India (RBI). They are engaged in providing microfinance services to individuals from poor segments of rural India. Company's core business is providing small loans exclusively to poor women predominantly located in rural areas in India. These loans are provided to such members essentially for use in their small businesses or other income generating activities and not for personal consumption. These individuals often have no, or very limited, access to loans from other sources other than private money lenders that they believe typically charge very high rates of interest. SKS uses the group lending model where poor women guarantee each other’s loans. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans. SKS microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people access to financial services, such as credit and insurance. SKS distributes small loans to poor women so they can start and expand simple businesses and increase their incomes. Their micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall. Borrowers undergo financial literacy training and must pass a test before they are allowed to take out loans weekly meetings with borrowers follow a highly disciplined approach. Re-payment rates on our collateral-free loans are more than 99 % because of this systematic process. The company offers micro-insurance to the poor as well as financing for other goods and services that can help them combat poverty. It is committed to creating a distribution network across underserved sections of society in order to provide easy access to the full portfolio of microfinance products and services. It also looks at using this network to add value to the lives of its members by providing quality goods and services that our members need at less than market rates. India’s gross domestic savings (GDS) as a percentage of gross domestic products (GDP) has mostly remained around 35 % in FY15. It is expected that the domestic savings in India will reach US$ 1,272 billion by 2019 from US$ 683 billion in 2013. The financial services sector consists of the capital markets, insurance sector and non-banking financial companies (NBFCs) and bits of microfinance institutions and companies. A major portion of India’s poor population has no access to banking channels on account of lack of documentation. As a result, demand for microfinance remains strong. As per World Bank statistics, 23.6 % of the country’s population earns less than US$ 1.25 a day, whereas 59.2 % of the population earns less than US$ 2 a day. Mean household size is 4.8 members per household based on 2005-06 National Family Health survey, this is translating into 15 Cr household below the poverty line which are necessarily demand generators for microfinance sector. Assuming the average credit requirement is Rs. 15,000 to Rs. 20,000 per house-holds, it translates into overall potential industry size of Rs. 2.25 trillion to Rs. 3.00 trillion. In India, microcredit is provided by two types of institutions - one is by bank-sponsored Self-help Groups (SHGs) and other is through Microfinance Institutions (MFIs). The SHG bank-linkage model has reached out to around 9.7 Cr households through 74 lakh SHGs with gross loan outstanding of Rs. 43,000 Cr. Microcredit services provided by MFIs in a tailor-made fashion reached out to 3.3 Cr individuals with an outstanding loan portfolio of Rs. 33,500 Cr. However, the demand-supply gap remains huge. On the one hand, it requires an enabling and supportive policy and regulatory environment. On the other hand, the MFI industry has to be responsive, responsible, sustainable and scalable. MFIs have grown very rapidly at a 59 % CAGR over FY07-FY15, whereas SHGs managed only a 26 % CAGR. As a result, MFIs’ market share in microcredit went up from 22 % in FY07 to 43 % in FY15. The Operating environment deteriorated for MFIs post AP government’s ordinance impacting loan origination and collection efficiency. Some of the large MFI players in AP viz. Spandana, Share, BSFL and Asmita had to restructure their debt with banks. SKS was the only large player which was able to service its debt on time without any need for corporate debt restructuring or CDR. After the AP crisis, the Reserve Bank of India or RBI set up Malegam Committee to probe the activities and impact of MFIs across the country and to make recommendations regarding improvement in their functioning. After the Malegam Committee submitted its report in January 2011, the RBI issued a set of guidelines to cover the operations of non-banking financial companies or NBFCs functioning as microfinance institutions or MFIs in March 2012. These guidelines created a new category of NBFCs called NBFCs-MFIs and specified that all NBFCs undertaking microfinance business, having capitalisation of Rs. 5 Cr and having over 85 % or more of their exposure in ’qualifying assets’ (microfinance portfolio) should apply for an NBFC-MFI licence accordingly. Now the GNP as of non-AP MFI portfolio at less than 1% is far superior to SHGs’ GNPAs of 6.8 %. Now the Branches were brought down by 21 % in FY15 from their peak in FY11. Similarly, the number of employees was brought down by 31 % during the same period. Post FY13, branches have increased 19 % and employee count was increased by 35 %. Considering the fact that the sector’s dynamics have stabilised post regulations issued by the RBI, consolidation phase is still behind. SKS was able to survive the AP crisis as it had started early in diversifying its portfolio outside the state and raised capital through an initial public offer (IPO) just months before the AP ordinance, and also qualified institutional placement (QIP) of shares in July 2012. SKS successfully managed its debt obligations without taking recourse to the CDR route and controlled costs through downsizing. It raised equity capital several months before the IPO. Post issuance, SKS completely wrote off its AP loan book and had the necessary capital to restart growth. It again raised Rs. 400 Cr in May 2014 to support future growth. Loan growth should also be supported by higher ticket sizes and so the average outstanding loan in non-AP markets has been rising consistently over FY11-FY15, yet significantly lower at Rs. 11,434 as against maximum borrower indebtedness of Rs. 100,000 allowed for NBFC-MFIs. The Average AUM per borrower for the industry is Rs. 13,160. This limit was recently increased by the RBI, which indicates the regulator is comfortable with the rise in ticket size. The disbursement per client is also lower at Rs. 15,869 as against industry average of Rs. 16,327. It can be expected that growth in ticket size could be in CAGR of 11 % over FY15-FY18E to Rs. 12,618, as the management is targeting higher growth in long-term loans having a higher ticket size of Rs. 28,691. The proportion of long-term loans increased to 16 % in FY15 against 2 % in FY14. The proportion of long-term loans is likely to increase further with a disbursement cap of 25 % on overall disbursement. Although there are more than 45 players in the domestic MFI industry, it is dominated by top 5 players with a combined market share of over 60 % in gross loan portfolio (GLP) and disbursement. Post imposition of stringent regulations, top 5 players further strengthened their operations. Two of the top 5 players viz. Bandhan and Equitas, are concentrating on West Bengal and Tamil Nadu. Two of the other top 5 players viz, Janalakshmi and Ujjivan are urban MFIs. Thus, SKS is the only MFI with an efficient geographical diversification which has a huge network comprising 1,268 branches and 227,125 centres through which it distributes micro loans. Taking advantage of its network, it distributes those products which enhance income-generating activity of the members. Such products and services offering fee income enhance its overall RoA. SKS posted a sharp decline in AUM after the AP crisis, as it had to write down its loan portfolio in the state and higher credit losses eroded its net worth and the ability to lend in other states. While loan growth and collection in AP remains subdued, the crisis did not spread to other states. With balance sheet clean-up now over as its AP portfolio is entirely written off and access to funds both equity and debt are now improving, SKS reported strong AUM growth of 32 % in FY14 and 34 % in FY15. Its non-AP portfolio reported AUM growth of 40 % in FY14 and 47 % in FY15. Given the low penetration and strong underlying demand, it can be expected that in FY15-FY18E, disbursement and AUM CAGR could be at 33% and 40%, respectively. The company firmly believes that Technology is one of its biggest differentiator in the industry. It has designed and deployed a web-based Business Intelligence portal using state-of-art technology and a highly flexible and scalable platform to support the business growth and operations and has also built an integrated and encrypted MPLS communication network encompassing a world class Data Centre delivering mission critical services and enhancing collaboration across the organization.  

Outlook and Valuation: 

SKS Microfinance Limited is an India-based financing company. The Company is engaged primarily in providing microfinance services to women in the rural areas of India who are enrolled as members and organized as Joint Liability Groups (JLG). The Company has its operation spread across 15 states. The Company’s segment includes lending to members. SKS Microfinance is the largest microfinance company in India in terms of gross loan portfolio. Its core business is providing small value loans and other basic financial services to its customers, who are predominantly located in rural areas. The company extends loans to them mainly for use in small businesses or for other income generating activities and not for personal consumption. India is home to 21 % of the world's unbanked adults and about two-thirds of South Asia's. 

Indian microfinance industry is dominated by NBFCs-MFI with an 88 % share of the market. Though India’s account penetration increased from 35 % to 53 % between the year 2011 and 2014, it is still low when compared to other BRICS countries. RBI guidelines in 2011 stipulate that all for profit microfinance institutions in India should operate as NBFC-MFIs. Not for profit institutions can operate as trusts or Section 25 companies. The microfinance sector in India witnessed rapid growth in the value of outstanding loans post 2000-01 once RBI granted priority sector status to bank loans advanced to MFIs. In Union Budget 2016, the government announced setting up Micro Units Development and Refinance Agency (MUDRA), which will act as regulator for MFIs and also provide them refinancing services. MUDRA will have a corpus of Rs 200 billion and serve as a regulator for MFIs and provide them refinancing services. It will be financing cooperative banks, MFIs, regional rural banks, etc., at cheaper cost than bank funding. Incorporation of MUDRA is expected to be a major growth driver for the industry as it will bring the much needed uniformity in regulations and provide the required funding support at cheaper cost as currently MFIs are heavily dependent on higher cost funds from banks. Government of India, the Reserve Bank of India (RBI) and banking system are striving to further the financial inclusion agenda. The RBI has identified that the strategy to realise this goal will comprise of a mix of conducive policy environment, use of innovative channels-technology and optimal utilisation of the BC model. Financing needs in India have risen with the notable growth recorded by the economy over the past decade. Along with Banks and Financial institutions, NBFCs play a major role in meeting the need for financing needs of entities across the segments. To their credit, NBFCs help fill the gaps in availability of financial services with respect to products as well as customer and geographical segments. A strong linkage at the grassroots level makes them a critical cog in catering to the unbanked masses in rural and semi-urban reaches, thereby enabling the government and regulators to achieve the mission of financial inclusion. The RBI guidelines have been instrumental in restoring confidence in lenders and investors, improving the inflow of both equity and debt to the sector. MFI’s has strong moat due to stringent regulations by the Reserve Bank of India (RBI), which has improved transparency and mitigated political risk. Further, the setting up of credit bureaus and geographical diversification of its loan portfolio has kept credit risk under check. JLG model has tremendous strength of its own, with peer pressure acting as a biggest deterrent for group members to default. Despite pruning its non-AP loan portfolio, collection efficiency in those markets was at 97 %, dispelling ever-greening myth. Currently, the spread is capped at 10 % and operating expenses are very high and, therefore, larger and established companies have an advantage over new entrants, given their scale of operations. With the restriction on lending - like not more than two MFIs can lend to the same borrower - new players will find it difficult if the new territories are dominated by two or more strong players. Also there’s an entry barrier to as the spread is capped at 10 %, it is crucial for microfinance players to contain their operating expenses in order to enjoy decent RoA. Microfinance is a manpower-intensive business involving cash disbursement and collection, and frequent interaction with customers. Given the higher operating expenses involved in loan origination and collection, larger and established companies have an advantage over new entrants; given their operating scale and being adequately capitalised SKS has been able to raise equity capital in a timely manner. Also not more than two MFIs can lend to the same borrower, so the Players intending to enter unrepresented geographies will find it tough to get ample borrowers if new territories are dominated by two or more strong players. As a result large players like SKS with a strong presence across states with a reasonable vintage branch will significantly benefit over smaller players. Even without utilising the forbearance given by the RBI for its AP loan portfolio, its capital adequacy ratio has always been higher than the minimum regulatory requirement of 15 %. RBI has recently increased disbursement and intentness limit, which indicates the regulator is comfortable with the rise in ticket size - for disbursement cap in first cycle earlier cap was Rs. 35,000 now it is Rs. 60,000; for Disbursement Cap in Second cycle first the cap was Rs. 50,000 now it is Rs. 1,00,000; Indebtedness of borrower was Rs. 50,000 earlier now it is Rs. 1,00,000; Annual Income of rural household cap earlier was Rs. 60,000 now it is Rs. 1,00,000 ; Annual Income of urban household ca earlier was Rs. 1,20,000 now it is Rs. 1,60,000; Loan for income generating purpose cap earlier was 70 % now it is 50 %. SKS Micro follows very stringent norms laid by RBI NBFC-MFI which classifies assets as Standard asset for 0 to 90 days whereas SKS compliance standard asset it at 0-60 days; for substandard asset -  RBI lays 91-180 days whereas SKS has 61-180 days;  for Loss Asset- more than 180 days whereas SKS also has same more than 180 days. For provisioning the norms by RBI for standard asset is 1 % of overall portfolio reduced by provision for NPA (if provision for NPA < 1 % of overall portfolio) whereas SKS has 0.25 % to 1.00 % depending on NPA, or as stipulated by RBI whichever is higher; for Substandard asset RBI has 50 % of instalments overdue whereas SKS has 50 % of outstanding principal; for loss asset RBI has 100 % of instalments overdue which also SKS follows as 100 % of outstanding principle-write off. So being much capitalised and RBI compliant, SKS looks forward for small bank licence, after the final guidelines released by the RBI for small-finance banks, SKS is one of the applicants for getting a licence for small-finance bank under section 22 of Banking Regulation Act, 1949. Given the regulatory requirement that a minimum of 75 % of loans disbursed of a total small bank’s loan portfolio must be priority sector loans, SKS is the ideal candidate for a small bank licence as 100 % of its portfolio complies for priority sector. SKS will benefit in various ways. It can leverage its network and raise deposits, thereby lowering its funding costs and also enable the company to diversify its funding structure. It will also help the company in mitigating political risk by eliminating state government intervention. For SKS rate cuts have been supported by a declining cost of borrowing; the marginal cost of borrowing on balance sheet, including processing fee was 10.9 % as of Q3FY16, a 0.60 % lower than the weighted average cost of borrowing. The drop in lending rates has enhanced the company’s competitiveness vis-à-vis other players. The Fee income from cross-selling and business correspondence grew 8 % q-o-q and 65 % y-o-y. So looking forward SKS Microfinance could have AUM growth over 40 %, and can easily command price to book of 3.5x on book value of Rs. 184 FY18. With successful listing of Equitas Holding Ltd and with forthcoming of another MFI Ujjivan financial services would freshen up the interest in already listed and best performing SKS Microfinance Ltd. Ujjivan financial services Ltd is asking for PE of 19.80 times on FY15 profits, and Ujjivan’s diluted EPS for 9 month FY16 was Rs. 13.37 which takes its annualized EPS to Rs. 17.80 and at offer price of Rs. 210 this translates into PE of 11.80 times. But when we look at the exposure Ujjivan has 28 % rural exposure and 72 % in Urban while SKS Microfinance has 80 % of rural and 20 % Urban, so better rainfall could benefit SKS more. As for Collection Ujjivan does this on monthly basis and for SKS Micro does it on weekly basis, the lending rates is 23 % by Ujjivan and SKS Micro has 20 %. The average ticket size for Ujjivan is Rs. 19,884 while for SKS Micro its Rs. 15,869. At the current market price of Rs. 616.00, the stock is trading at a PE of 26.55 x FY16E and 17.80 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 23.20 in FY16E and Rs. 34.60 in FY17E. The company plans to change its name from SKS Microfinance Ltd to "Bharat Financial Inclusion Ltd", the company's core business has gone into a transformation and the new name will reflect thie new change complementing the role in fulfilling the national priority of financial inclusion, the new name is subect to regulatory approvals.It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	524.00	802.70	1,166.10	1,525.40
NET PROFIT (₹ Cr)	187.80	295.00	439.00	564.90
EPS (₹)	14.90	23.20	34.60	44.50
PE (x)	38.00	24.40	16.40	12.70
P/BV (x)	6.80	5.40	4.00	3.10
EV/EBITDA (x)	16.57	11.97	10.24	9.08
ROE (%)	24.90	24.70	28.10	27.40
ROCE (%)	3.90	4.30	4.60	4.20

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*As the author of this blog I disclose that I do not hold  SKS MICROFINANCE LTD in my any of the portfolios.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.  

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INFOEDGE INDIA LTD (Naukri.com) : BEST E-COMM STOCK TO OWN !!!

Scrip Code: 532777 / NAUKRI

CMP:  Rs. 809.05; Market Cap: Rs. 9,782.72 Cr; 52 Week High/Low: Rs. 938 / Rs. 688.10.

Total Shares: 12,09,16,159 shares; Promoters : 5,21,25,403 shares –43.10 %; Total Public holding : 6,87,90,756 shares – 56.89 %; Book Value: Rs. 137.54; Face Value: Rs. 10.00; EPS: Rs. 13.78; Dividend: 30.00 %; P/E: 58.85 times; Ind. P/E: 25.93; EV/EBITDA: 38.04.

Total Debt: Rs. 0.70 Cr; Enterprise Value: Rs. 9,747.81 Cr.

INFO EDGE INDIA LTD: Info Edge (India) Limited was incorporated in 1995 and is based in Noida, India. Info Edge (India) Limited is an India-based company engaged in the business of providing online classifieds and certain related services. The Company operates its business principally through four different divisions: Naukri.com, Jeevansathi.com and 99acres.com. It provides recruitment classifieds and services through its Naukri.com and Quadrangle business divisions. The company came out with an IPO on November 2006 offering 53,23,851 equity shares of Rs. 10 each for Rs. 320 per share raising Rs. 170.36 Cr, the shares of INFO EDGE got listed on 22 November 2006 at Rs. 623.80 per share. The company has given bonus shares in the ratio of 1:1 in the year 2010 and second bonus shares in the ratio of 1:1 in the year 2012. Info Edge (India) Limited provides recruitment classifieds and related services to job seekers and employers and recruitment consultants through its website: www.naukri.com, as well as through its office network. Through the Quadrangle division, the Company provides executive search services to its various corporate customers in the information technology and information technology-enabled services. Naukri.com is an online job posting website that offers services for recruiters, job seekers, and employers. Jeevansathi.com provides matrimonial classifieds and related services for prospective brides, grooms, and relatives. The Company also offers a real estate classifieds service through its Website: 99acres.com and an education portal Shiksha.com. Info Edge also owns Allcheckdeals.com, an online real estate brokerage firm which is run as a subsidiary company. Company also owns naukrigulf.com in Middle East. It also operates brijj.com, a professional networking site; firstnaukri.com, a fresher hiring site; quadrangle.com, an offline executive search business site; Meritnation.com that offers kindergarten to class 12 assignment and tuitions; and zomato.com, an online food guide portal. The company’s subsidiary as on 31 March 2016 includes: Naukri Internet Services Private Limited and Jeevansathi Internet Services Private Ltd both of which is own internet domain names and related trademarks used in it business, Allcheckdeals.com India Private Ltd, Applect Learning Systems Pvt Ltd which owns and operates meritnation.com, Zomato media Pvt Ltd , MakeSense Technologies Pvt Ltd and Info Edge (India) Mauritius Ltd. Info Edge India Ltd is locally compared with Infibeam, HOMESHOP 18, Justdial Ltd and Globally compared with Monster.com , Seek.com, carsales.com , Truila Inc, HomeAway Inc, Zillow Inc, SouFun Holdings, REA Group, Rightmove PLC, Yelp Inc of USA, Yahoo! Inc of USA, eBay Inc of USA, Googlr Inc of USA, Facebook Inc of USA, Linkedin Corp of USA, Pandora Media Inc of USA, Shutterstock Inc of USA, Sciquest Inc of USA, Zillow Inc od USA, Monster Worlwide Inc of USA, America OnLine from USA, Bazaarvoice Inc of USA, Xo Group Inc of USA, Twitter Inc of USA, Verisign Inc of USA, Yelp Inc of USA, Carsales.com Ltd of Australila, Moneysupermarket.com from UK, XING AG of Germany, United Internet AG of Germany, Opera Software ASA of Norway, Vistaprint N.V. of Netherlands, Baidu Inc of China, Beijing 58 Information and Technology Co Ltd of China, 21Vianet group Inc of China, iProperty Group Ltd of Malaysia, Nifty Corporation of Japan, Wix.com of Israel, Ateam inc of Japan, CROOZ Inc of Japan, F@N Communication Inc of Japan, Infomart Corp of Japan, Excite Japan Co Ltd of Japan, Asahi Net Inc of Japan, Nexyz Corporation of Japan, Drecom Co ltd of Japan, Zappallas Inc of Japan.

Investment Rationale:

InfoEdge (India) Ltd operates a wide range of online websites. It enjoys leadership position in recruitment website-Naukri.com, in property website-99acres.com and is among the top 3 players in matrimony website-Jeevansathi.com. Apart from this, InfoEdge has made significant strategic investments into emerging internet companies like meritnation.com, policybazaar.com, mydala.com, Canvera.com and zomato.com. The company employs over 2,460 people and operates through a network of 57 offices located in 32 cities throughout India. These offices primarily engage in sales, marketing and payment collection activities for company’s businesses. To cater to the Gulf market they have 2 offices in Dubai and 1 each in Bahrain, Riyadh and Abu Dhabi. Over the last few months Zomato has acquired four other companies, including MenuMania in New Zealand; Lunchtime in the Czech Republic; Obedovat in Slovakia; and Gastronauci in Poland and Urbanspoon. The Information Technology (IT) and information technology enabled services (ITeS) industry has been one of the key driving forces fuelling India's economic growth. India is among the world's youngest nations with a median age of 26 years. 65 % of Indian population is estimated to be below 35 years of age and India will have 7 Cr new entrants to its work force over the next 5 years. India currently has about 21.4 Cr internet users, the third largest in the world and is likely to have 33 Cr to 37 Cr internet users in 2015 which would then be the second largest in terms of incremental growth. Due to declining costs of Internet access and mobile devices, nearly 55 % of aggregate user base in 2015 is expected to have an access to the internet from a mobile or tablet device in India. Economic contribution from Internet in India can be potentially doubled from current 1.6 % of GDP to 2.8 % to 3.3 % by 2018. INFOEDGE is focused on investing in Naukri.com to raise product quality and maintain its dominance. Naukri is looking to enter new verticals and also improve its recruiter-jobseeker matching engine. The growth outlook is steady but the macro climate and growth rates need to improve for any material margin gains. Company will continue to invest in 99acres. The competition among real estate portals has reduced at the margin, but 99acres.com is expected to continue to invest in products and improve its share of new homes. Management believes that the real estate portals are an advertisement-led model and that new homes drive most of the real estate ad spends. INFOEDGE continues to maintain a war-chest of Rs. 570 Cr which is the cash on balance sheet to fend off competition if Quikr turns aggressive. Notably Quikr bought Commonfloor. 99acres will look to maintain traffic leadership and focus on expanding its share here to 60%+. Structurally, management expects real estate advertising spends to move online, as was the case in the jobs market. Zomato.com is focused on curbing its capital burn rate. It is introducing new products like table reservations and online ordering which will be rolled out in select markets, while at a broader level the focus will be on ad revenues and paid listings in its key markets of India and the UAE. Paid listings in key markets are in the teens and management intends to raise this to 25 %. This coupled with the addition of new cities for traditional restaurant discovery will be its key growth drivers. INFOEDGE’s Jeevansaathi.com portal is the number 3 player in India’s online matrimony market. The business has seen an uptick in volume growth led by new initiatives. Management believes that valuations of startups have cooled off and expectations have become reasonable. INFOE is therefore looking at new opportunities to deploy capital and its investment sweet spot is Rs. 6 Cr to 90 Cr for startups. During Q3, InfoEdge invested additional Rs. 15 crore in Canvera at a premoney company valuation of Rs. 75 crore resulting in an increase in its stake to 49 %. It also acquired 35 % stake in Rare Media, an early stage company looking to develop mobile-based applications for Rs. 7.4 crore taking the total amount invested in investee companies to Rs. 797 crore as of January 20, 2016. The current quarter also includes the profit of Rs. 34.2 crore resulting from transfer of its entire shareholding in Policybazaar to its wholly-owned subsidiary MakeSense for a consideration of Rs. 101.3 crore, the quarter also includes additional provision of Rs. 2.94 crore for bonus related to April 1, 2014 to March 31, 2015 pursuant to retrospective amendment to the "The Payment of Bonus Act, 1965" notified on January 1, 2016, and diminution in carrying value of investment amounting to Rs. 42.8 crore related to Canvera. The November 2015 Naukri Job Index reading was at 1,599, up 9 % YoY. IT-software index grew 18 % YoY to 2,175 while BPO-ITeS index grew 11 % to 1,460. Telecom witnessed maximum YoY growth 61 % while banking and financial services moderated at 2 % YoY. Pharma and biotech index declined 6 % YoY while oil & gas saw a decline of 34 % YoY to 759. It is expect that InfoEdge can deliver revenue CAGR of 19.7 % in FY15-17E, below its CAGR of 25.9 % in FY10-15 as growth moderates in other verticals like 99acres, Jeevansathi due to structural issues. It can show a revenue growth of 20 % For FY16E, led by a recovery in the Naukri business. It is believed that with the upturn in the economy, new product launches and client additions will spur growth. With market share of 65-70 %, the company can maintain margins in 50 % range. Info Edge had expected the Zomato business to break even at a top line of Rs. 40. Cr to Rs. 50 Cr. It is believed that Zomato will leverage its recent acquisitions to cross-sell products and establish a presence in new markets. Presently most of the revenues of the portal come from India and the UAE. In all Infoedge has good prospects looking forward and with the brand recall and diversified portfolio surely gives clear vision on company’s financial growth.   

Outlook and Valuation:

Info Edge (India) ltd is India’s one of the largest leading online company with its strong brands and sustainable growing businesses. It has a very excellent and experienced management team. The company have invested in several internet start-ups ventures. Info Edge’s Naukri has garnered higher market share in this slowdown, also its innovative products helps naukri to combat threat against Linkedin.com, naukri continues to invest in its brand, sales team, customer service, tech and product innovation and support. Info Edge’s 99acre.com is benefiting from the increase in the real estate advertising and has increased its market share. 99acres.com have improved its site by improving user experience- pricing trends, photos and videos, android Apps and the site is now have spread its sales coverage across cities, this has helped 99acres.com to bring in more traffic, 99acre.com soon plans to launch a verified listings. Info Edge’s Jeevansathi.com has leveraged its IP built over last 5 years through investing in brand building. Management will continue to invest its analytics and algorithms. Info Edge’s other brands like Shiksha, FirstNaukri, naukrigulf continues to perform well. Management is committed to invest in potential big businesses of future like zomato, meritnation, policybazaar and is vouching for potential start-ups and M&A’s. On financial side non-recruitment business grew 18 % YoY slower than average 24.3 % reported in FY15 to Rs. 44 crore and declined 4.1 %QoQ. Also, 99acres reported 12.7 % YoY growth to Rs. 25.9 crore in Q3 as real estate market continues to be weak amid sluggish sales. Paid transactions grew 23.4 % YoY and declined 3.7 % QoQ to 23,700 while paid listings grew 27.2 % YoY to 748,000. Jeevansathi grew 20 % YoY to Rs. 11.7 crore led by 36 % YoY growth in unique paid customers to 37,435 while pricing declined 13.5 % YoY and 9.4% QoQ to Rs. 3,182. As of Q3, outstanding profiles stood at 7.4 million compared to 6.6 million in Q3FY15 and 7.2 million as of Q2FY16. Shiksha revenues grew 41 % YoY to Rs. 6.4 crore. During Q3, InfoEdge invested additional Rs. 15 crore in Canvera at a premoney company valuation of Rs. 75 crore resulting in an increase in its stake to 49 %. It also acquired 35 % stake in Rare Media, an early stage company looking to develop mobile-based applications for Rs. 7.4 crore taking the total amount invested in investee companies to Rs. 797 crore as of January 20, 2016. Exceptional item during the current quarter includes. For Naukri the management attributed growth to a recovery in IT markets like Bengaluru which is growing at 20 % to 25 % while non-IT markets like Mumbai, Delhi grew 15 % to 20 %. Economic recovery bodes well for non-IT markets and could aid growth pick-up, and help sustain margins profile which is currently at 51.8 % as overall recruitment business starts growing in excess of 20 %. The management highlighted that Naukri corporate sales continue to see demand uptick while EBITDA margins at 58 % are near its all-time high of 62 %. For Naukri the overall hiring outlook continues to look good and is improving, led by IT while investee companies be volatile. Though the valuations appear rich, the shares are a play on economic recovery while Zomato and 99acres could be potential money spinners. Listing of its subsidiaries can also be supporting to the company’s valuation. On SOTP (sum-of-the-parts) basis, the value of INFO EDGE alone comes at Rs. 763.00 per share valueing 32 x its FY17E EPS of Rs. 23.90. The valuation of the Investee companis - the value of 99acers comes at Rs. 54 per share, Zomato Media valueing it at 50 % stake comes to Rs. 182 per share; Meritnation at 56 % stake at Rs. 18 per share; Policy Bazaar a 10 % stake at Rs. 10 per share and other investments at Rs. 30 per share totaling this gives us the value of its subsidiaries at Rs. 294 per share. And valuing the whole gives us the value of INFO EDGE of Rs. 1057.00 per share. At the current market price of Rs. 809.05, the stock is trading at a PE of 66.31 x FY16E and 46.76 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 12.20 in FY16E and Rs. 17.30 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

SOTP VALUATIONS :

Business Subsidiary	Value Per Share (₹)
InfoEdge Standalone	763.00
99acres (Non-Listed)	54.00
Zomato (Non-Listed) 50 % stake	182.00
Meritnation (Non-Listed) 56 % stake	18.00
Policy Bazaar (Non-Listed) 10 % stake	10.00
Other Investments	30.00
TOTAL	1057.00

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	611.50	724.50	871.70	1,054.40
NET PROFIT (₹ Cr)	194.10	148.00	210.00	308.60
EPS (₹)	16.50	12.20	17.30	25.40
PE (x)	47.40	64.30	45.30	30.80
P/BV (x)	5.70	5.30	4.90	4.30
EV/EBITDA (x)	50.70	59.80	33.90	24.30
ROE (%)	16.00	8.60	11.30	14.80
ROCE (%)	9.80	5.50	8.90	11.10

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*As the author of this blog I disclose that I do not hold  INFOEDGE LTD in my any of the portfolios.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.   

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