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Info Edge (Naukri) Results: Another Down Quarter

Info Edge released it’s December 2009 quarter results:

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A little disappointing in terms of growth, because they’ve stagnated in a way. True, the industry has been in a sorry state of affairs, but the hiring situation was supposed to be good last quarter and either it’s not, or Naukri wasn’t the beneficiary.

Info Edge’s primary business is Naukri.com, and they own sites like jeevansathi.com, 99acres.com, Brijj, AllCheckDeals and Shiksha.

Revenues at 59 cr. were 6% higher than the last quarter, but flat from December 09. Is it okay to compare Quarter on Quarter, or year-on-year? I’d say hiring is a seasonal business – that means what you might see in March is different from what you see in December. For multiple reasons – bonus handouts (people wait to quit after annual bonuses), school switchovers, festive seasons and so on.  And yet, Naukri’s business must come from HR consultants to a large extent – those will keep their subscriptions going regardless. Still, I’d use the YoY growth as a base indicator and let’s see where Naukri is, spectacularly graphed:

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Both the Trailing Twelve Month (TTM) EPS Growth and Quarterly EPS Growth (compared YoY) have turned negative.

Yet, they have 355 cr. in cash. This has yielded them lower other income, but 355 cr. is a reasonable chunk of money. Unfortunately, it doesn’t help too much in acquisitions, if that’s what you might think will help them scale. That’s because of the topsy-turvy nature of the VC investment model in the business.

Why Naukri can’t acquire it’s way out of the cash load:

VCs invest in businesses – and in the west, they are famous for investing in tech businesses. In India there are a number of them, with corpuses of between 400 and 2000 crores. Now each VC will invest in about 25 companies otherwise it gets unmanageable. That means they want to invest between 15 and 80 crores per company. They take around 30% of the company, I’d imagine; so the  company will be valued, at the lower end, around 50 crores post funding.

If the VC invested at a 50 crore valuation, he would consider a successful exit only if the company is worth 100 crores or more; otherwise, it’s a fire sale, nothing big.

Now if you consider the P/E ratio that Naukri commands – it’s trading at Rs. 870 for a TTM EPS of Rs. 21 – that’s nearly a 40 P/E ratio. Let’s assume the startup they acquire will be available for half that, and forget the big Indian Internet Hope of selling companies for 100 crores on eyeballs alone. A 100 crore buyout at a 20 P/E will add only 5 crores to bottom-line (a company needs to make 5 crores at 20 p/e to get valued at 100 cr.).

For the Rs. 350 cr. they have, and considering they only paid half their p/e ratio, they would get just Rs. 17 cr. additional in bottom line.

But they would lose all their “other income” which adds up to – believe it or not – Rs. 32 crores for the last four quarters. The businesses they buy must grow at 100% so that Info Edge just about breaks even on them in a year!

They’re stuck – the businesses they will want to buy will be funded by VCs looking for big exits. And at that price they can’t buy enough of them to make up even the lost interest income in a year.

So if they must acquire, they must get the new properties really cheap, and the acquisitions should have so much synergy that they start scaling up bottomlines very quickly. Or, they should acquire using their shares – richly priced as they are, they’re great currency; but that’s going to skewer EPS just as badly. (Fortunately though, no one in India gives a rat’s ass about EPS growth – they keep buying stocks like ICICI Bank or Reliance Power at insane P/Es)

Naukri isn’t a technology leader – you don’t hear of “high-tech” innovations that they do. They’re a first mover in the jobs space, and they have very good management (clean/suave/open). That commands a premium valuation – but I would seriously question the kind of P/E ratios they get. We have to wait for their conf call transcript to find out how the individual businesses fared, and I look forward to reading about what they have for the near future.

But as stocks go, this one’s expensive; as much as I love the industry – the Indian Internet – I don’t think I’ll go buy InfoEdge just yet.

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