India has an exciting e-commerce story, with online retail growing 4.5x in the last three years. This has been fuelled by a mixture of structural factors (growth in data subscribers and smartphone penetration) and strong venture capital and private equity backing. While the latter has slowed recently, we still expect India’s ecommerce market to grow 2.8x in the next five years to $120 bn, as we foresee the business environment improving in the next 9-12 months. In particular, we expect data tariffs to fall significantly.
A narrow investable universe: While the rapid growth of e-commerce in India and rising valuations of Indian start-ups have whetted the appetite of investors, especially in light of the success of Chinese internet stocks, India’s equity market has a narrow universe of internet stocks and the growth of start-ups could raise competition for these established names. In this report, we initiate coverage of the largest of India’s internet names by market cap, Info Edge, with a non-consensus Reduce rating. We provide a differentiated framework to understand India’s online classified advertising space and detailed analysis regarding how start-ups across all market segments may impact Info Edge.
Info Edge is a prominent operator in online classified advertising in India, with a presence across recruitment, real estate, food education and matchmaking. The company operates the leading job listings portal in India, but its other businesses have yet to break even and, unlike consensus, we don’t see the situation improving any time soon. First, we foresee competition from start-ups forcing Info Edge to continually invest in upgrading its job portal, which would cap margins. Second, its real estate portal is operating in a weak property market and is struggling to take market share from print. Lastly, we don’t think its restaurant search portal has a sustainable business model. To survive, the portal needs to switch away from an advertising heavy model and invest significantly in food delivery in all key markets, which suggests sustained breakeven may be a long way away.
Initiate coverage on Info Edge with a non-consensus Reduce. We set our DCF-based SOTP fair value TP for Info Edge at R655, implying 17.2% downside. Our FY17e earnings estimates are 28% below consensus. Key downside catalysts include increasing competitive intensity in the next 6-9 months in the food and real estate segments.