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Info Edge Q4 – A mathematical error?

InfoEdge has announced it’s 4th Quarter 2007 results:

Like earlier, they seem to have their mathematics wrong. This time they note an annual revenue for 2006-07 at Rs. 147 cr. and a net profit of Rs. 27.08 cr. The number of shares they have outstanding, is 2.7295 cr. shares.

My high school mathematics tells me Earning per share = Earnings divided by number of shares. EPS therefore is Rs. 9.92 per share. But they report it at Rs. 11.31!

They’ve done this for TWO quarters now, and this is not an accident anymore – someone’s trying to pull wool over our eyes. I understand that this is a new business, but reporting the wrong EPS twice in a row is plain incompetance.

More problems:
1) Company makes 27 cr. net profit, out of which “other income” is 7.6 crores. 28% of their profit comes from “other income”?

This is perhaps through the interest they received on their debt investments – I would say around 3% of their investments – which are about 170 cr. – would be the dividend income they would receive from debt funds. This is about Rs. 5 cr.

2) They got Rs. 170 cr. from their IPO, unused till now. Out of this Rs. 10 cr. was used for IPO expenses (wow) – so 160 cr. or so is left, but they had earlier reserves so I’m guessing they still have around 170 cr. in the bank. That’s about Rs. 75 per share. This itself can be a cash yield of 9% post tax – meaning, 15 cr. of “other income” in the next year. Great for the bottomline, but bad return on equity.

Now I’m not happy about the EPS misinformation at all. I will await their annual report and cash flow statement to check further – and I will report to the company and SEBI about this EPS business. Let’s see what I get back.

Note that with my calculated EPS of Rs. 9.92 per share, this company’s current stock price of Rs. 750 gives it a P/E of 75. Going forward how much will they earn? they will earn Rs. 15 cr. from interest (if they don’t use the IPO money), which is Rs. 6 per share or so. THe operations this time earned about Rs. 20 cr. and if they grow at about 50% they will make Rs. 30 cr. next year – which is about Rs. 11 per share. That’s about Rs. 17 per share, making the forward P/E about 44.

I reckon that is still high. With TimesJobs hot on Naukri’s trail, and Monster doing the ad-rounds on TV, and clickjobs.com muddying the turf even more, there is serious competition in the recruitment business, which is still 92% of revenues. Their property business (99acres.com) has competition in at least 10 visible sites, most obvious of them being magicbricks.com, indiaproperty.com and even craigslist. The jeevansathi matrimonial business has the big shaadi.com and a ton of smaller sites as competition.

Apart from the competition, it may just be that the dollar’s fall, riding at Rs. 41 today, is going to seriously impact revenues – and this may put recruitment plans of exporters and MNCs on hold. The bench size, which is typically 10-30% for infotech companies, is probably going to shrink and thus, recruiting revenues. Additionally, portals are ineffective recruitment sources in comparison with references and job fairs; therefore I predict that horizontal portals like Naukri.com will have a serious problem going forward.

When everyone and his uncle started a property broker business in 1995, my first thought was that it was time to exit the property business. When my local shopkeeper asked me to “buy digital equipment, it will go to 2000” , in 1999 – it was time to exit infotech. Now everyone and his uncle and auntie has a recruitment agency; time for the headhunters to head home?

  • RT Kumar says:

    >Excellent job Deepak…. I have been following up your previous blogs on Naukri.

    …not sure if the call on NOT investing in the IPO was right – given its rapid rise in sales + ofcourse stock performance.

    ….but I agree that the management does not seem to be 100% aligned with shareholders – mostly seeming to throw up arbit errors like this.

    Good stuff – would like to know if you would invest in good businesses led by inefficient / corrupt managements in general…. (not specific to naukri)

    Rgds
    RT Kumar

  • Deepak Shenoy says:

    >Kumar: Thanks! You’re right, my call has altogether been lousy because Naukri, GBN and GMR IPOs, which I analysed and found negative, have given excellent returns, 100% or more.

    I still stand by my analysis – nothing has changed since the time of my analysis on any of these IPOs, even GMR’s recent results convinced me the price was way higher than I was willing to pay.

    But do I invest in good companies with bad management? Perhaps I do – SRF for one is *supposed* to have shady management, yet I don’t have evidence to that effect. People say Reliance management is corrupt, but I’ve seen them over 30 years and they are actually the one eyed men in the Kingdom of the blind.

    Even Infy has PR persistent management – they seem to announce deals in a way that keeps their stock prices up all the time.

    Naukri’s management does not sound shady at all. Perhaps they are ignorant of these things. Or they’re plain But it definitely doesn’t look good at this point.

  • Viraat says:

    >EPS is calculated as per AS 20 of the Institute of Chartered Accountants of India norms. As per this, a weighted average of no. of shares outstanding are calculated to arrive at the EPS. If 100 shares are o/s for full year and another 100 are added mid way then average is 150 on which EPS is calculated. This should explain.

    Rgds,
    Viraat

  • Deepak Shenoy says:

    >Thanks Virat. Have checked AS 20 and under paragraph 48, AS 20 expects the company to disclose the number of shares used in the weighted average calculation as well.

    I’ve also noted that in another post that such reported figures may be of little value to an investor, since expectations of EPS growth are lulled by already effected dilution.

  • Anonymous says:

    >dear sir,
    i would like to know as to how did you arrive at the number of share outstanding(2.7 cr) of this company as its given right at the bottom tht the total non promtot holding is 1.23 crores, so i would like to know this

  • Anonymous says:

    >True EPS is only one number one should look at. Investing is a difficult science and art !
    Viraat

  • Anonymous says:

    >Sorry, mistyped. EPS is just one number out of the many things one has to consider before investing.
    Viraat

  • Deepak Shenoy says:

    >Viraat: Good point, though fundamentally speaking EPS growth and P/E are the most looked-at factors. Of course there would be sales growth, P/Sales, Margin expansion etc. but I’ve rarely, if ever, seen them in isolation of the P/E or the PEG value.

    While growth investing may choose to ignore earnings growth and look at other figures like sales growth, margins etc., the past has shown us that taking our eyes off earnings growth will usually result in a big bad crash.

    EPS expansion is a fundamental attribute of a fast growing company .

    An example – Bata was valued highly for two reasons – it’s “Batanagar” land bank and the fact that it moved from the black to the red. I ignored the former, and bought it for hte latter – at an average price of Rs. 85. I ended up selling between 180 and 240 – which I thought was pretty much fully valued for its earnings growth (which was HIGH because it had just turned black, and had lower tax impact etc). Now the land bank moved value higher, and I couldn’t handle that – eventually the share’s settled at 150 or so, post the real estate falling out of favour.

    Ignoring EPS growth is fraught with danger – especially with high growth companies. Yes, if you choose a low P/E company with a 10% dividend yield, you might not care about maintaining good levels of growth. But when you choose something with 75 P/E you better be sure this is going to grow fast.

    Only two things make a stock price grow: P/E expansion, or EPS expansion. WHen your P/E is 75, what you want is EPS expansion.

  • Anonymous says:

    >Yes without doubt earnings is the weather alert on which an investor must keep his eyes all the time while airborne else as you say you will crash land.
    Also did some checking on EPS/ reporting. The av. no. of shares to arrive at EPS have to be disclosed in the annual report as per AS 20. The abridged results published by Cos. follow the stock exchange/ sebi format.
    What stocks do you currently consider worth investing …. may be one you could let out.
    Viraat

  • Deepak Shenoy says:

    >Viraat: You’re right. Perhaps Info Edge will come out with the number of shares used in the calculation later.

    Now I don’t mean to demean the management of Info Edge. They are pioneers in the .com listed field in India and I am proud of them. The financial mumbo jumbo surprises me, that’s all – and as I’ve said, this is legal to report higher EPS than investors can see.

    Stocks worth investing even now? SRF, South East Asia Marine Engg. corp, Murudeshwara Ceramics, Finolex Industries and Kamat hotels. Reasoning: Each one has a good solid name in its industry and has a lower P/E plus higher EPS growth than others in the sector.