EXCLUSIVE! - Business Today - The New Dotcom Millionaire - Infoedge CEO

In less than a decade, Sanjeev Bikhchandani has turned a garage start-up into India's only listed internet company worth Rs 1,000 crore on the stock markets. Where does he go from here?

It's a recent wintry morning, and Sanjeev Bikhchandani is sitting in a shoebox cabin at his corporate headquarters in Noida, near Delhi. "I never knew going public would require so many of my signatures," he grumbles, trying to clear a small pile of papers on his table. It has been just six days since his internet company InfoEdge began offering shares in itself to public, and much to the 43-year-old entrepreneur's delight, the IPO has been oversubscribed 55 times. There are reasons why Bikhchandani should feel proud about it. For one, it's the first internet stock to list in India and the first since Sify and Rediff listed on the nasdaq during the dotcom boom days of 1999-2000. For another, InfoEdge, which owns the country's #1 job portal, Naukri.com, stands to unlock about Rs 1,000 crore in shareholder value. Not bad for a portal that was born in a garage less than 10 years ago.

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Info Edge India impresses on debut

Info Edge India was trading at Rs 574.45, a massive premium of 79.5 over the IPO price of Rs 320.

The company priced the IPO at the upper end of the Rs 290 - Rs 320 band. The public offer had received strong investor response. Post issue FII-holding in the stock is 7.9% wheread promoters own 54.6%. The company has a paid-up equity of Rs 27.29 crore.

The current price of Rs 574.45 discounts its Q1 June 2006 annualised EPS of Rs 7.70 (based on consolidated financials), by a PE multiple of a whopping 74.6.

Info Edge (India) is a leading provider of online recruitment and matrimonial classified and related services in India. Its online recruitment portal Naukri.com is currently India’s number one website for online recruitment services and its matrimonial portal Jeevansathi.com is presently India’s number third for online matrimonial classified services, in terms of number of unique visitors to the website, as per data provided by Comscore.

The online advertising market has grown from Rs 42 crore in FY 2004 to Rs 107 crore in FY 2005. This is expected to grow to Rs 162 crore in FY 2006 and reach Rs 218 crore in FY 2007 (Source: Internet and Mobile Association of India, IAMAI).

For Q1 June 2006, Info Edge reported a consolidated net profit of Rs 5.22 crore on revenue of Rs 27.92 crore. For FY 2006 (year ended 31 March 2006), it earned a net profit of Rs 13.29 crore on revenue of Rs 82.41 crore.

Info Edge (India) is currently over-dependant on recruitment services. Naukri.com contributed 93.47% (94.6% in FY 2006) of the operating revenue in the quarter ended June 2006.

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Info Edge (India) IPO

Info Edge (India), promoted by Sanjeev Bikhchandani, Hitesh Oberoi and Ambarish Raghuvanshi, is a leading provider of online recruitment and matrimonial classified and related services in India. It launched Naukri.com, an online recruitment classified website, in March 1997; acquired Jeevansathi.com, an online matrimonial classified website, in September 2004; launched 99acres.com, an online real estate classified website, in September 2005; and acquired Quandrangle, an offline executive search engine, in November 2000.

With a network of 45 offices in 30 cities in India as well as an office in Dubai, which primarily engage in sales, marketing and payment collection activities, Info Edge (India) has two subsidiaries, Naukri Internet Services Pvt Ltd and Jeevansathi Internet Services Pvt Ltd, which own internet domain names and related trademarks used in the business.

From the net proceeds of the issue Rs 20 crore are to be used for diversification and expansion into new markets, Rs 25 crore on enhancing its products, Rs 25 crore on developing alternate delivery models for its products, Rs 30 crore to purchase/lease real estate for its offices, Rs 30 crore on acquiring other companies and businesses, and Rs 25 crore to develop 99acres.com and Jeevansathi.com.

Strengths

• As per a study by Businessworld, about 10% of the job market has already moved online. The size of the online recruitment industry is estimated to be Rs 135 crore with a 35% growth rate last year. The service sector has a significantly higher employee turnover. Nasscom has estimated telecom, media, retail and IT&ITES to grow at a CAGR of 11.4%, 16.7%, 30% and 23.1% in FY 2005, FY 2006, FY 2007, FY 2008, respectively, generating recruitment requirements at much higher multiple. Moreover these sectors are more receptive to online recruiting.

• India has one of the lowest Internet penetration in the world. Internet users have grown at a CAGR of 68%, from 6.67 million in 2001 to 52.88 million in 2005. Despite the tremendous growth seen over the years, there is still a lot of potential to grow. Also, India has witnessed increase in urbanisation and literacy rates, and this trend is likely to continue.

• The online advertising market has grown from Rs 42 crore in FY 2004 to Rs 107 crore in FY 2005. This is expected to grow to Rs 162 crore in FY 2006 and reach Rs 218 crore in FY 2007 (Source: Internet and Mobile Association of India, IAMAI). The share of online advertising is still only about 2% of media advertising industry.

• Info Edge (India) has well-recognized and strong brand names. Naukri.com is currently India’s number one website for online recruitment services and Jeevansathi.com is presently India’s number three website for online matrimonial classified services in terms of number of unique visitors to the website, as per data provided by Comscore.

Weaknesses

• The online classified industry in India is highly competitive and the competition in this industry will continue to increase. The key competitors for Naukri.com and Quandrangle will be Monsterindia.com, Jobsahead.com and Timesjobs.com. Similarly, for Jeevansathi.com, the competition will be from Bharatmatrimony.com and Shaadi.com and the more traditional brick and mortar marriage bureaus and match making services. 99acres.com faces competition from the print media and some other Internet-based providers. Info Edge (India) competes indirectly with Yahoo and Google.

• Info Edge (India) is currently over-dependant on only recruitment services. Naukri.com contributed 93.47% (94.6% in FY 2006) of the operating revenue in the quarter ended June 2006. Other services and the planned entry into new businesses will require substantial investment of money and management time with the attendant risks of losses and failures.

Valuation

From FY 2003 to FY 2006, the operating revenue of Info Edge (India) has grown at a CAGR of 110%, though a significant profit was made only in FY 2006.

The quarterly annualised EPS in the quarter ended June 2006 on post-issue equity works out to be Rs 7.7. At the price band of Rs 290 – 320, PE is 37.6 to 41.5.

Info Edge (India): Invest at cut-off

Investors with a high-risk appetite can consider taking an exposure in the book-built initial public offering of Info Edge (India).

The price band for the IPO has been fixed at Rs 290-320 per share.

For investors aiming to broad base their overall portfolio, `online classifieds' (for recruitment, marriage or real estate among others) opens up another avenue from an investment standpoint.

Info Edge that operates naukri.com (the premier job recruitment site), Jeevansathi.com (matrimonial site) and 99acres.com (real estate) represents an early stage of investment whose success depends on innovation/customisation of services, brand recall and corporate online budgets. This is also evident from the five per cent exposure taken by Murugan Capital (100 per cent subsidiary of the US-based private equity investor, Kleiner Perkins, Caufield and Byers) and Sherpalo Mauritius in the company at $5.495 per equity share in April.

Investment rationale

For an early stage venture, the IPO is stiffly valued. Bidding at the cut-off price will be prudent, as investors will remain eligible to participate even if the final offer price is fixed at a lower level. Also considering the overall competitive risks, an offer price fixed at the lower end of the price band would be more comforting.

The price-earnings multiple at the lower- and upper-end of the price band works out to 43-50 times its consolidated 2005-06 per share earnings on its existing equity base. Despite its revenues growing at a robust clip of 75-125 per cent year-on-year for the past few years, the company's price/revenues at 7-8 times are higher than the mid-cap software industry average. As it is the first player to list in the online classifieds space, there are no comparable benchmarks.

The Up side and

the flip side

The positives linked to this offer are the early mover advantage, strong brand recall, a good management team and long-standing relationships with corporates that naukri.com enjoys in the online recruitment classifieds business. Moreover, its recent move to diversify its revenue stream through a foray into marriage and real estate business is also encouraging.

On the flip side, as its financials are predominantly dependent on online recruitment, it remains exposed to high risks arising from a slowdown in the recruitment budgets of corporates and the overall demand environment, especially for IT and IT enabled services.

Secondly, the competition in the online recruitment space is hotting up through consolidation, and with entry of newer players such as Dice, its scorching growth may slow down.

Core business

The recruitment classified and related services that are being offered through naukri.com and Quadrangle (an offline executive search business) accounted for 92 per cent revenues (including other income) of Rs 84 crore for the year ended March 31. The other verticals — Jeevansathi.com and 99 acres.com — contributed about 5-6 per cent during this period.

Info Edge acquired Jeevansathi.com in September 2004 and 99acres.com was launched in September 2005. Jeevansathi.com is the third most popular website in marriage services and faces online competition from Shaadi.com and Bharatmatrimony.com.

99acres.com, however, is competing primarily with the print media, real estate brokers and online real estate classified providers.

The overall revenues have grown by 86 per cent in 2005-06 compared to 130 per cent and 115 per cent in the last two years. On account of an all-round increase in total expenditure, particularly the step-up in advertising, marketing and promotion expenses following the acquisition/launch of Jeevansathi and 99 acres, the operating margins have been in the 25-28 per cent bracket in the past couple of years (after taking into account some adjustments for employee stock option scheme).

The improvement in operating margins will hinge on the scale of marketing and branding expenses in the coming years. If the company manages to get a better bang for its marketing buck (leaving its new ventures apart), it will show up in improved margins. In turn, this will improve the bottomline, which clearly has not kept pace with growth in revenues.

The offer document also states that as of June 30 Naukri.com had a database of over six million registered job seekers, including their resumes and over 82,000 live job listings from corporate customers.

According to data available from Comscore and furnished in the offer document, in terms of the share of total traffic, Naukri.com was the most popular website among its key online recruitment competitors, such as MonsterIndia.com, JobsAhead.com and Timesjobs.com.

In July, its traffic share at 54.84 per cent (based on unique visitors and average page hits) was higher than 34.9 per cent for Monster and Jobs Ahead and 10.27 per cent for Timesjobs.

Offer details: The company plans to raise around Rs 154-170 crore through this book-built IPO. Of this, Rs 20 crore is to be utilised for diversifying into other online classifieds market such as automobile, educational and industrial products and expand the current business to West Asia and South Asia. Of the balance, Rs 25 crore is to be used for development of Jeevansathi and 99acres,

Rs 25 crore towards product enhancement and alternate delivery models such as mobiles and Rs 30 crore towards acquisitions/alliances. The lead managers to the offer are ICICI Securities and Citigroup. The offer opens on October 30 and closes on November 2.