Info Edge (India) Ltd Management Discussions.

Info Edge (‘the Company’) is a multi-brand online classifieds company with its principal market in India. Each of the brands in its portfolio addresses specific customer domains and are in di%erent stages of their growth life cycle. Most of the Company’s o%erings are market leaders and their progress are largely governed by the overall development of the online spaces where they operate. Having said so, in each of these di%erent markets, the Company’s brands face varying kinds of competition, and the Company’s success so far is attributable to its continuous e%orts at successfully deciphering consumer behaviour and always staying ahead of the competition. In this endeavour, Info Edge maintains a fine balance between generating cash and making continuous investments in business development.

Each of the brands in its portfolio is nurtured and invested into independently with the core objective of attaining market leadership. While adopting a diversified and independent business management model for each brand, Info Edge continues to leverage its strong centralised functions like technology, financial management and human resource development.

The Company’s core business continues to be its %agship brand – naukri.com (online recruitment), which is clearly the significant player in a well-established business space. Among the other brands, 99acres.com (online real estate) is a market leader in a fast growing domain, while jeevansathi.com (online matrimonial) and shiksha.com (online education information services) are gaining traction while maintaining their respective competitive positioning.

The impressive success of naukri.com over the years has provided Info Edge with a strong annual cash generating proposition that has helped build solid cash reserves. While a portion of these reserves is always maintained as internal ‘war chest’, the Company has been investing in developing these brands as well as in technology based start-ups with the objective of generating good returns from share value appreciation. Some of these investee companies — including zomato.com (online restaurant classifieds and food delivery business) and policybazaar.com (online insurance) — have made significant strides in running large scale operations seamlessly, which not only helped them create a great brand but also generate considerable investor interests in them.

From an internal perspective, customer research, product positioning, brand development and technology adoption continue to play critical roles in establishing specific value propositions for each of the brands under the Company’s management. On the external front, much of the success and progress of the business is attributable to the evolving online business space in India. The rapid pace of internet penetration and adoption of internet based services in the country has further contributed to the growth of Info Edge. In the recent years, the swi adoption of mobile based internet services across the country has further enhanced and transformed the business space where the Company operates.

Business Environment: Macro Economy and the Indian Digital Sector

The second advance estimates for FY2019 released by the Central Statistics O$ce (CSO) in February 2019 revised India’s real gross domestic product (GDP) growth downwards to 7% from 7.2%. Chart A gives the data for real GDP growth in India over the last five years. Despite soer growth, the Indian economy still remains one of the fastest growing globally and, as of now, one of the least a#ected by the world economic slowdown.

The Government of India’s (GoI) focus on its ‘Digital India’ programme along with market enablers like availability of cheaper smart phones, declining data tari#s, and increasing digital literacy is clearly helping to make products and services more accessible.

I-Cube 2018, the annual internet tracking study which gauges the changing digital ecosystem in India by measuring internet usage by demographic, activity and device segments, continued to highlight the accelerated pace of internet penetration in the country. The number of Internet users in India has registered an annual growth of 18% and is estimated at 566 million as of December 2018. This translates into an overall internet penetration of around 40%.

The report also suggests that this rapid adoption growth will continue and there will be double digit growth in calendar year (CY) 2019. Consequently, the number of internet users is estimated to reach 627 million by December 2019. Chart B plots the data for the estimated number of internet users in India.

In the last few years, the rural-urban divide in terms of internet penetration is being bridged. While internet users grew by 7% in urban India, reaching 315 million by December 2018, rural India registered a 35% growth. It is now estimated that there are 251 million internet users in rural India, and the number of rural users is expected to reach 290 million by the end of 2019.

Importantly, not only is rural India adopting to internet connectivity but is also regularly using it. As per the I-Cube report, of the total user base, 87% or 493 million Indians, are defined as regular users, having accessed internet in the last 30 days. Among these regular users, while 293 million reside in cities and towns, there are 200 million active users in rural India. Moreover, the adoption of internet in rural India has been at a rapid pace in the last four years with internet penetration increasing from 9% in 2015 to 25% in 2018.

Chart C plots the data for rural and urban users in India.

The single most important driver of rapid internet penetration across India is the widespread adoption of mobile internet in India. In fact, 97% of the users of internet utilise mobile phone as one of the devices — if not the primary device — to access the net.

With this kind of penetration in India, internet is transforming the way consumers and marketers interact with each other in today’s digital world. In particular, the increase in the digital usage in rural India is opening up a new dimension for internet based businesses in the country. Interestingly, in rural India today, more than two-thirds of active internet users are now accessing the internet daily to meet their entertainment and communication needs.

However, despite the large base of internet users and the rapid growth in the recent past, India still continues to lag peer countries when it comes to the level of internet penetration. There is still a very large population that remains to be penetrated.

The growing digital economy — coupled with rising per capita income and favourable demographics — presents a huge market potential for internet based technology-led disruptions. High growth potential and the size of the market continue to attract significant interest from global capital providers like Private Equity (PE) and Venture Capital (VC) funds. PE/VC funds have already invested over USD25 billion over the last five years in Indian e-commerce and consumer internet. The confidence of investors has grown as evidenced by the increase in the size of deals in these spaces. India is now considered as a profitable investment destination for e-commerce and consumer internet.

Traditionally, much of Info Edge’s business success was attributable to the widespread on-ground sales support provided to promote and support its online products and brands. With widespread adoption of internet and mobile technology across India, there is now a transition to a more technology driven growth phase, involving the adoption of newer elements of consumer facing technology. To increase direct online solutions to customer issues, Info Edge is investing intensively to further gear up its product platforms to become more interactive with its clients. And in line with this, the Company’s operational processes and human resources are also being realigned with emphasis on further enhancing the organisation’s technical and managerial capabilities.

While there is an emphasis towards greater online client acquisition, Info Edge continues to leverage its widespread sales network to gain greater market access.

Today, the Company has a nation-wide physical presence through 75 company-level branch o$ces spread across 48 cities in India. Through this network, it has almost 3,000 sales, servicing and client facing sta#. In the present business environment, this network is playing a very critical role in expanding the Company’s services to semi-rural and rural India.

In a market like India with rapid fall in data usage costs, a clear shi is underway from desktop to mobile consumption of internet based applications. It is now well established that the users’ entry point in India is the mobile device. With lower costs of mobile access to internet, data usage has started increasing at a fast pace. And with customers having more time on the net, online usage is transforming with greater emphasis on content consumption. Hence, content marketing is now a growing trend.

To better cater to these trends, Info Edge is focusing on transforming customer experiences across its platforms to much more personalised o#erings. This is being done through the use of artificial intelligence, deep learning technologies and appropriate content.

With a large User Interface (UI) and User Experience (UX) division and a well-established business analytics team that was incubated back in 2007, Info Edge is today focused on developing more user-friendly products, especially for mobile applications across its di#erent brands. This is supported by the Company’s data science team that works on deep learning, machine learning and technological tools to improve algorithms for serving customers better. The Company is on course to implementing its business philosophy of investing in technology and creating innovative products to maintain and grow its market leadership.

In today’s competitive environment, while product quality and sales support are important, it is critical to keep reinforcing and developing the brands in the consumers’ mind-space. Consequently, in FY2019, aer some years of lower spends, Info Edge gave a fillip to its brand development activities and increased spends on brand promotion particularly for its principle brands: naukri, jeevansathi and 99acres. This has created greater awareness and rejuvenated the brands.

On the human resource front, continuing with the trend established last year, there is a gradual shi towards developing larger teams in the higher skilled core functions of technology, product development, artificial intelligence, analytics, design and customer experience.

While such teams always existed in-house across most of these domains, their size and scope are being augmented to cater to a more technology driven market requirement. In doing so, Info Edge continues to maintain its emphasis on team building with a focus on providing a culture of talent empowerment to %ourish while maintaining a strong sense of meritocracy. At the corner stone of Info Edge’s human resource management culture is the ability to align entrepreneurial drive with organisational discipline. This continues to be the foundation on which the Company plans to grow in the near future.

Standalone Performance

Billing grew by 20.51% to Rs.11,769.54 million in FY2019, while revenues increased by 19.96% to Rs.10,982.56 million. Operating expenses, excluding depreciation, increased by 22.44% to Rs.7,569.14 million in FY2019.

A major proportion out of Rs.1,387.38 million incremental expenses were on marketing and technology enhancements of the various platforms. This is re%ected in a 50.98% increase in marketing and promotion spends from Rs.1,163.69 million in FY2018 to Rs.1,756.93 million in FY 2019. Similarly, there has been incremental investments in areas like technology, product design, AI and data science and to build a healthy pipeline of innovative new products and features keeping in mind the long-term opportunities in recruitment and other verticals.

While most of these spends are in the nature of long term investments, given that they are primarily accounted for as people and promotional costs in accounting terms, these are absorbed as operational expense and has led to dilution of operating margins.

Even so, Operating EBITDA increased by 14.81% from Rs.2,973.15 million in FY2018 to Rs.3,413.42 million in FY2019. However, given these investments, the Operating EBITDA margin reduced marginally from 32.48% in FY2018 to 31.08% in FY2019. Operating EBITDA, adjusted for ESOP non-cash charges, increased from Rs.3,150.28 million in FY2018 to Rs.3,564.98 million in FY2019, while adjusted Operating EBITDA margins reduced from 34.41% in FY2018 to 32.46% in FY2019.

Deferred sales revenue has increased by 19.91% from Rs.3,956.46 million as on March 31, 2018 to Rs.4,744.38 million as of March 31, 2019. Cash balance increased from Rs.15,618.97 million as on March 31, 2018 to Rs.16,170.80 million on March 31, 2019. Cash %ow from Operations decreased marginally from Rs.3,067.09 million in FY2018 to Rs.2,956.49 million in FY2019.

The Board has recommended a final dividend of 20% for FY2019. This would take the dividend for the year to Rs.6 per share, including the two interim dividends of Rs.2.5 per share and Rs.1.5 per share paid during the course of FY2019.

Financial Highlights : Standalone

Table 1A shows Standalone Abridged Profit and Loss Statement.

Table 1a STANDALONE ABRIDGED PROFIT AND LOSS STATEMENT

(In Rs. Million)

FY2019 FY2018
Revenue from Operations 10,982.56 9,154.91
Network, internet and other direct expenses 220.58 143.19
Employee Benefits Expenses 4,586.39 3,930.57
Advertising and Promotion Costs 1,756.93 1,163.69
Other Expenses 1,005.24 944.31
Total Operating Expenses 7,569.14 6,181.76
EBITDA 3,413.42 2,973.15
Depreciation and Amortisation 203.80 215.49
Other Income 1,111.52 970.88
EBIT from ordinary items 4,321.14 3,728.54
Finance Costs 0.84 0.84
PBT for ordinary items 4,320.30 3,727.70
Exceptional items (334.08) (913.37)
PBT 3,986.22 2,814.33
Tax 1,169.19 990.66
Other Comprehensive Income, net of tax (22.28) (1.58)
Total Comprehensive Income 2,794.75 1,822.09

Table 1B shows details of Significant Changes in Key Financial Ratios.

Table 1B DETAILS OF SIGNIFICANT CHANGES IN KEY FINANCIAL RATIOS

FY2019 FY2018 CHANGE
1 Debtors Turnover Ratioa 62.26 29.93 108%
2 Inventory Turnover Ratio Not applicable Not applicable
3 Interest Coverage Ratiob 5,144.21 4,438.74 16%
4 Current Ratio 2.54 2.84 -11%
5 Debt Equity Ratioc 0.27 0.25 8%
6 Operating Profit Margin(%)d 29.22% 30.12% -3%
7 Net Profit Margin (%)e 25.65% 19.92% 29%
8 Return on Net Worthf 12.12% 8.65% 40%

a Increase in Debtors turnover ratio is due to increase in credit sales without any corresponding increase in average debtors.

b Interest coverage ratio is computed on interest over profit before Interest, tax Th exceptional item.

c Debt Equity ratio is computed on total liabilities over total equity.

d Operating profit margin is computed on profit before interest, tax, exceptional item Th other income over revenue from operations.

e Net profit Margin is computed on profit of the year over revenue from operations. Change in Net profit margin is in view of reduction in exceptional items by 63.42% , from Rs.913.37 (FY 2018) to Rs.334.08 (FY 2019).

f Return on net woth is computed on profit of the year over total equity. Change in return on Net worth is in view of reduction in exceptional items by 63.42%, from Rs.913.37 (FY 2018) to Rs.334.08 (FY 2019).