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Info Edge (India) IPO : Too Many Questions.

Info Edge India Ltd. has an Initial Public Offer (IPO) going at a price of (between) 290 and 320 Rs. per share. The company is better known for its portals: Naukri.com, JeevanSathi.com and 99Acres.com. The offer document contains a lot of data and makes me ask a few questions I believe are relevant to my analysis of the issue.

But first, the basic details: The issue is about 170 Cr. in size at the upper end of the band. Post issue, they will have 2.729 crore shares. They’ve made profits of 13.2 cr. in FY 06, and 5.9 cr.* in Q1 FY07. Very wayward before that – 31 lakhs (2005), 2.43 cr. (2004), 1.67 cr. (2003).

* Update: I got this figure wrong. I took a consolidated profit figure, which is irrelevant. You should use Rs. 5.2 cr. instead.

The post issue EPS is Rs. 4.84 for FY06, and Rs. 2.16 for Q107. The P/E at the higher band is 66 (past) and 37.04 (FY07, prorated from Q107). I think the Q107 results are a bit of an aberration, and that is to be expected as a “dress-up” of results pre-IPO. We don’t have Q2 figures yet. (Why not? It’s end of October, and you’re going IPO, for heaven’s sake)

They have around Rs. 25 cr. in Investments and cash.

Naukri.com makes for 92% of it’s FY 2006 revenue, and that share has been above 90% over the last five years. They’re focussed on IT and ITES, and any slowdown there is a hurdle in Naukri.com’s growth.

My questions:

What’s the “other income” stuff?

FY06 has a total of 1.6 cr. other income, on investments (which were around 12.5 cr.) That grew to an income of Rs. 1.4 cr in Q107, with investments of 22 cr. Around 3.78 cr. has FURTHER been added through pre-IPO placements.

Basically, out of the 5.9 cr. Net profit for Q107, 1.4 cr. has come from Other income. Meaning that operationally, they earn lesser profits – the rise of the other income figure is quite dramatic, and not explained at all.

Why did promoters sell their shares at a discount immediately before the IPO?

Sanjeev Bikhchandani sold 410,400 shares to Murugan Capital at Rs. 245 per share on Sep 14, 2006. Hitesh Oberoi sold 109,181 shares to Sherpalo LLC at Rs. 245 per share on the same date. Why did the promoters sell their shares at a discount? Granted, their lock in is one to three years, so they may have wanted some money up front. But this is like losing 30% by selling one and a half months before the issue!

If they wanted cash, they could have placed the shares with a bank after the issue, and the bank would give them a loan, surely at less than 30% a year. At 15% bank interest, and if the shares were only at Rs. 320 per share (upper band) at the end of one year, the promoters would have made a lot more money than selling pre-IPO. (Plus they pay capital gains tax, since the shares weren’t sold on an exchange). To give you figures, Sanjeev Bikhchandani stands to lose at least 1.5 crores (plus capital gains tax) and Hitesh Oberoi Rs. 40 lakhs (plus cap gains) by selling pre-IPO.

Note also that Surabhi Bikhchandani also sold 436,723 shares to Sherpalo at Rs. 245 per share on Sep. 14, 2006. Another loss of money, by another promoter.

What if this means the promoters themselves don’t have enough confidence to stay invested for a year? If the VCs (Sherpalo and Murugan) wanted more shares, the company can issue them, and they have done to the tune of Rs. 3.5 crores. True, this is KPCB and Sherpalo, but please, no one hands out money for free.

Note here that some directors have PURCHASED shares in the pre-IPO placements on August 7 and September 7, 2006 at Rs. 280 per share. How did the price fall to Rs. 245 per share when the promoters were selling them?

What’s the money being used for?

The issue is between 154 and 170 crores. Expansion will be 20 cr. (10 in 2006, 10 in 2007), office space takes 30 crores (all in 2006, one single big office in Delhi).

Product enhancement will be 25 cr. (10 and 15), and 30 cr. is for acquisition. 25 cr. is kept for Jeevansathi.com and 99acres.com.

The remaining, they say, is for “General Corporate Purposes”. This is an amount between 24 and 40 cr. rupees.

My recommendation

I’m a little concerned about the valuation – it seems to be quite high at nearly 66 past, and 40 forward. But they are collecting more than 150 crores, twice their annual turnover. If they return profits of about 15% of the money they collect, their net profit should scale up. I would estimate a forward earning of Rs. 13.78 per share in FY 2008, which translates to a forward P/E of 23.2. That’s quite high.

Secondly, I’m concerned about the questions I’ve raised. I’m very suspicious of promoters selling their stake for a discount a month or so before the IPO. I don’t know what to make of it, but it can be nothing positive.

Overall, given these factors my vote to this IPO is “Do not subscribe”.

  • Anonymous says:

    >I Fully agree with your observation. This is too high a P/E which even giants like Infosys is not commanding.

    Your observation about Other income is valid.

    Remember, whenever in doubt, do not invest.

  • Anonymous says:

    >THANKYOU SO MUCH FOR THROWING LIGHT ON THIS ISSUE.

    THANKS ONCE AGAIN

  • Anonymous says:

    >Do you have any idea who Sherpao is and the credibility they brings to InfoEdge? Sherpao is run by Ram Sriram who has had a string of big hits including Google. He is a well connected Guru of the internet space. Sriram’s purchase price established a floor for the IPO. More importantly, it also gave FII the green light to invest in the IPO leading to the 55x oversubscription. It gives InfoEdge access to the big league whether it is in raising capital abroad in the future, finding talent to fill up their ranks or for doing merger deals with other. Plus it allowed the promoters to cash out some of the shares before the company went public. It is not in the shareholder’s interest for the promoters to sell their shares after the IPO.

  • Deepak Shenoy says:

    >I am quite aware of Sherpalo and Ram Shriram; My question is that why are they being sold at a price MUCH lower than the IPO price?

    In fact a few days BEFORE Sherpalo and KPCB got in, existing directors bought shares at Rs. 280 a share. So why were Sherpalo sold shares at Rs. 245 a few days later? I would not have seen it as a problem if they bought at Rs. 280.

    And why are promoters cashing out a month before the IPO? They only have a year more to wait! For fast cash, Post IPO promoters can even pledge the shares for a bridge loan; They’ll get it at about 12-15% a year, which, if they are confident enough of the company, can be made by the price increase in the share itself.

    Secondly why is it in shareholder’s interest to exit BEFORE the ipo, but not so AFTER the IPO? That makes no sense whatsoever.

    And why is all this happening ONE month before the IPO? If it had happened a year back it would have made sense; then Sherpalo and KPCB would have been “strategic” investors. Right now they’re just making 30% on three months of money, remember their money is not locked in. And that much is being lost by the promoters. So the promoters don’t have confidence?

    FII green lights etc.: I’m not sure why they’re not asking the same questions. Why is KPCB/Sherpalo getting in at Rs. 245 a share one month earlier, and everyone else pays Rs. 320?

    Lastly, I agree with the strategic input Sherpalo/KPCB provide. But most strategic PE investors put in money at HIGHER than market rates – check out the investments in Bharti, or Moser Baer.

    Credibility wise: I don’t see big credibility in a one-month investment, sorry.

  • Anonymous says:

    >There are some inherent assumptions in your arguments that are not justified.

    1. You are assuming that Sherpalo and Kliener-Perkins will sell in the open market. This is not necessarily true. Ram Sriram sold about 5% of his ownership in the IPO of Google (he owned > 5,000,000 shares); he has sold some more but still owns a lot. Their investment in Info Edge is very small in their scheme of things; that is not what intereted them. What it gets them is a leg into one of the top performing pure-play internet properties in India with access to public markets and hence a currency with which to drive future mergers.

    2. Info Edge’s negotiations with the Sand Hill VCs may have been going on for some time before the deal was closed. Because of the big names involved, the promoters would be willing to give a discount even if the newer lot of shares was being sold at a higher price.

    3. You are underestimating the effect of the Sherpalo/Kliener seal of approval. Info Edge is the first pure play internet company ever to go IPO in the Indian market (IndiaBulls etc are less about online). There are not that many valuation metrics available and the space is not that well understood here. The price paid by the Sand Hill guys, established a floor for the IPO. That is the way the dynamics work. The actual pricing of the IPO is influenced by a lot of factors and the current bull run has lead to a loftier valuation than originally anticipated. Sherpalo’s and Kliener’s investment certainly helps the company in the future and gets reflected in the interest for the stock.

    4. Any promoter selling shares on the public market (inside sales) is not considered a good sign, There are many web sites which track insider sales. Hence if the promote were able to place their stock pre IPO, they reduce their need to sell in the open market in the future. This is good news for the future public share holders of the company.

  • Deepak Shenoy says:

    >1) It doesn’t matter that Sherpalo or KPCB have or have not sold in the past. I’m not concerned about their holding or buying. I’m peeved that they valued the company at Rs. 245 a share in September, and then we “retail” investors get to buy at Rs. 320 in October. Not very nice.

    2) I do not believe the negotiations were on for a long time. Even if it was, this was not investment into the company, this was a pure buyout of promoter shares, so whether negotiations were on or not, the valuation makes the difference. They bought shares at Rs. 245, ten days AFTER current directors bought it at Rs. 280. Something’s fishy.

    3) Firstly, the price KPCB and Sherpalo invested was NOT a floor price. It was 20% less than the floor price. If they had invested at Rs. 280 like the other directors, I would not be concerned.

    Basically what this means is that KPCB and Sherpalo value the company at Rs. 245 in September. They buyout shares, but don’t pump in capital in the company. Suddenly in October the shares are worth 290-320 (finalised at 320). Nothing has changed in that one month, as far as I can see. If this is the way dynamics work, it’s wrong. I feel cheated, so I will not subscribe.

    Naukri’s employees have a tremendous potential to increase its value. Is the IPO giving a discount to employees? No. Then why give it to KPCB and Sherpalo? (The employee quota was severely undersubscribed, by the way)

    4) Well, it’s like this: Promoters have sold their shares, and I, the retail investor am aware of it from their offer document. How different is it from selling their shares post-IPO? Both ways it’s either of two things: They need the money, or they don’t have confidence. If they needed money they could have,instead of selling shares pre-IPO, pledged the shares for a loan (which would have cost them less than the eventual 30% discount they sold shares at) The only other option is that they don’t have confidence in their own company; which obviously scares me away.

    And why did Sherpalo/KPCB pay Rs. 245? Because they valued the company at that much in September. So why should I value it any more, given that I have lesser data than the VCs had?

    Finally, this “insider” trading business: Note that promoters of Infy, Wipro etc. keep selling shares and this is not construed as a big deal. In this case too, to get the same amount of money at a new selling price of Rs. 320, promoters would need to sell approximately 1-2% of the shareholding, which honestly is not a matter of concern. Every single tracking site I know of only tracks a constant selling, not one timers. So if they sold one quarter and didn’t for the next four, it still wouldn’t be a big deal.

  • Anonymous says:

    >NEVER LISTEN TO SO CALLED EXPERTS AND USE OWN WISDOM…

  • suresh says:

    >Deepak,

    Info Edge closed at 1161.05 yesterday. Is there a change in the fundamentals. Do you recommend this now?

    Cheers

  • NaukriForWomen.com says:

    >Hello Deepak,
    How are you? It would be our pleasure to get a review on our site http://naukriforwomen.com (India’s first women only job site) from a great blogger like you.

    What do you think about this noble initiative?

    Thanks,
    Radhika