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Info Edge May Issue 500 cr. FCCBs

Info Edge, the owner of Naukri.com and Jeevansathi.com is looking to issue upto Rs. 500 cr. worth of FCCBs for a new portal, Shiksha.com, and for further acquisitions.

I have been fairly negative on the stock in the past but it looks like the market has decided I am stupid. The share has zoomed from Rs. 320 offered in the IPO to a high of Rs. 1600 recently, from which it has retraced to around Rs. 1400 now. Even with less than 10 cr. worth of shares trading daily on the NSE, it’s in the F&O segment now, no mean achievement. So this share, like GBN and GMR, is one of the shares I cannot understand but will wholeheartedly admit that I have been proved wrong.

So what’s the new announcement all about? Firstly, that the company intends to issue fresh shares (which is what FCCBs will amount to) partly to finance a new portal, shiksha.com and to build a new office in Noida, and of course for some acquisitions. Very nice, but that is nearly what they said with the IPO last year and guess what, they haven’t used any of the 170 cr. Other than, perhaps, a $500,000 (2 cr. Rs.) investment in an education company called Study Places, Inc.

That investment might result in a bigger shiksha.com – an education portal. This is an interesting space and depending on how the company approaches it there is a huge value waiting to be tapped. But a pure listing portal may not be of much use especially if there is no transaction capability (i.e. I cannot apply online or buy a short term course etc.) Let’s wait and see how this pans out.

A new office – the budget in their IPO report was 30 cr. which has now become 60cr. I guess real estate has gone up in cost, but still this money doesn’t use up even the IPO proceeds.

Now in their annual report they have around 215 cr. in cash or debt funds. That, plus the new 500 cr. is going to be used for acquisitions and stuff. Plus, they have the right to take further debt on, uptil another 500 cr. and then invest a FURTHER 300 cr. above their reserves if required. I can’t work it out off hand but this results in total accessible funds of more than 1000 cr.!

All I can say is that they should use this money wisely, not put it into a bank account to get FD level interest.

But do I like the company? I admire the company for being one of the few real players in the fledgling internet space in India, and I think there is a huge scope for more such companies. I also think the level of FII interest in this company is very high because it’s the only real listed player in the space, and very few shares are available. A large number of shares are “locked” as promoter shares, for one to three years since the IPO in Oct last year.

Another thing I like is their effort to provide information to all investors, through their corporate web site. This will attract more foreign investors, surely.

Now what are my thoughts?

  • For the half year ended Sep 2007, turnover was 110 cr. and profits, 27 cr. Of which, 11 cr. were “other income”. So 40% of their profit was “other income” – income resulting from the 215 cr. in cash that they own.
  • There’s some note in their annual report regarding stock option expensing. The auditors say: In respect of options vesting during the year under the intrinsic value method, had the fair value method been used, the profit for the
    year would be lower by Rs 35,706 Thousand (Previous Year Rs. 1809 Thousand) and the EPS would be Rs. 9.82 (Previous Year
    Rs. 6.00)
    . This is a 10% lower profit if accounting terms were different.

  • The projected EPS for the year is around Rs. 20. At current prices, the P/E is 70. Now they’ve grown at 100% (with help from the “other income” of course) so the P/E may be sustainable, but remember that once they get another 500 cr. their other income will straightaway increase to around 70 cr. (greater than this year’s projected profits!) and EPS will skyrocket (because they don’t need to consider FCCB dilution until it is “in-the-money”)
  • They may become the next google, acquiring their way to glory. I personally don’t believe the Indian internet space has the breadth required, but then I have been wrong in the past.
  • This is perhaps the best time to issue FCCBs. Given that their stock is way overvalued, they can get the best return for their money.
  • I think there will be a downturn in the US, in the next year. This will result in much lower hiring and a serious downturn for the “recruitment consultancy” business, a sector that I am sure accounts for a very large percentage of Naukri’s revenues. Secondly, with real estate slowing down and the marriage portals losing their sheen, revenues from their other portals will show lower growth.

So is this stock an investment I would skip? For fundamental reasons, yes, and even technically the stock is below its near term moving averages. Yet, I have a feeling the market will prove me wrong again and push this stock to stratospheric highs. I feel the need for caution, but also the need to tell you one thing: The stock has steady news flow, it has a lot of FII support and is an easily manipulated stock (low volumes, low floating stock). Plus, the near term (6 months to 1 year) results will sound spectacular if you consider the cash flow from investment (which will reach above 70 cr. if they get FCCBs worth 500 cr. and sit on it for a year).

The point is: there may be a higher rise for this stock, purely based on momentum and exuberance. Either you participate and make the best of it – and remember to respect your stop loss – or you stay away from this stock altogether. No middle ground.

Disclosure: No positions on the stock.