This is my third experimental bet. You can read about my previous bets here.
As before, the intention is to seek feedback from the market and any generous reader; and for these bets to act as live case studies as I continue down my reading list on momentum investing and speculation.
Trade Summary
Bought Info Edge @Rs3071/- on 15 July 2020
Weekly Chart
Daily Chart
Bearings – Category
- I have looked at the business in the past. But I am not up to date on recent events
- I categorize Info Edge as a market leader that allocates cashflows from one vertical (Naukri.com) to fund other verticals (Jeevansathi.com, 99acres.com) and new investments in startups.
- I also categorize Info Edge as an Institutional favorite as many investors see it as a proxy to participate in the growth of online business models in India and to gain exposure venture capital investments. Info Edge may well be a stock where big institutions just “have to be” in the future.
Price – Volume
- The market is an uptrend
- Since there are no comparable companies to Info Edge, it’s not possible to say whether Info Edge is part of any leadership group.
- But prior to the covid19 crash, Info Edge made a new 52 week high and was in a long-term uptrend / Stage 2
- Post covid19 crash, a volatility contraction pattern is playing out (21W 50/6 4T)
- Price> 21 day ma > 50 day ma > 200 day ma; with all pointing upward
- 15 July breakout happened on high volumes. I interpret the breakout as confirmation of the 23 June and 7 July breakout
- Post these breakouts, the stock price has got support at the 21 day and 50 day ma line
- Even though the stock is approaching its 52 week high, sharp pull backs on 18 May and 24 June may suggest some overhead supply
Value
- Market Capitalization ~Rs37,000crs; Cash ~Rs1500crs
- Although I am no longer ramped up to value the business, my sense is that market price has run far ahead of value. However, whenever I have looked at Info Edge I have always made the same judgement and then seen the stock price double.
- So it’s very likely that I may just not understand the true value drivers here or I am simply too conservative in my valuation approach or my valuation toolkit is not equipped to value such a business model. The lesson here may well be that under such conditions if I “see” the trend I should get on its right side and not “listen” to my opinion.
Financials
- Nevertheless, one essential component for momentum is missing here: earnings growth. Quarterly operating profit growth has been flat for a few quarters.
- Moreover, given the current environment earnings growth is likely to be missing over the next few quarters.
Bull vs Bear Debate
- So the bull narrative at this point in time is probably some version of the following points:
- Covid19 is likely to accelerate existing trends of internet penetration and adoption of online services.
- Covid19 has forced people to adopt and experiment with online purchases and services. This forced experimentation has broken down resistance as the benefits and value of offered by online businesses and services is real. The assumption is that this habit will transfer beyond lockdown/covid days and to other online services.
- So what was previously seen as the total market potential for online businesses is now perceived to be the total addressable market. So growth prospects in the near to medium term have ballooned and are much higher than the available anchor of recent history. The fuel to sell this narrative is the low penetration of xyz online business/service vs other developing and developed countries.
- The likely beneficiary for this anticipated growth will be emerging online business models and online companies who have dominant market, attention/traffic and mind share.
- Most of Info Edge’s investment fall in the first category and some of its key investments such as Policy Bazaar and Zomato fall in the second category.
- A confluence of factors is likely to transform many of the existing cash guzzlers into cash cows.
- Since there is now a natural pull towards online services, previous push devices such as discounting and marketing expenses are likely to come down. This will reduce customer acquisition costs and bring pricing discipline.
- More customers and/or greater transactions per person (as the addressable market has now expanded) will lead to higher margins as operating leverage kicks in. As the benefits of scale are shared with customers, multiple reinforcing loops would increase of customer captivity and attract additional capital providers, thus starving out undifferentiated challengers
- But what about the next few quarters? Profit may not decline as Info Edge has a few levers that it can use. For example: it can cut back on some of its technology spend; significantly cut back on its marketing spend, especially in the JeevanSathi and 99acres vertical. Of course for this to happen competitors such as Bharat Matrimony and Magic Bricks need to reciprocate.
- On the other hand, the bear narrative is probably some version of the following points:
- Past performance is not a guide for future performance: The bull narrative is viewing access to venture capital deals through the prism of valuations that Zomato and Policy Bazaar have been able to secure. But it is unlikely that this success can be replicated in the future. The competition for deals and access to capital is much more now than in the past. In fact if the above scenario of internet penetration plays out, Indian startup ecosystem may be flooded with foreign capital.
- Besides the low hanging fruits may have been already been taken: A poor analogy here is the capital allocation decisions at Mahindra & Mahindra. The initial success at diversification into IT services may have set them up for investing in a large number of unrelated businesses. Most of them are making losses and guzzling cash from the high quality farm equipment business. With the benefit of hindsight, shareholders would have preferred to get dividend payments instead partnering in a venture capital / turnaround fund.
- Good money may chase weaker opportunities: Info Edge is sitting on a huge cash pile. In the current environment, the temptation may be to use this pile of money and increase market share for 99acres.com and Jeevansathi.com. Both are cash guzzlers and are likely to remain so. As recent history shows that all competitors mimic each other’s advertising and marketing spends to maintain relative market shares. In fact, the interesting move would be to sell Jeevansathi to either Shaadi.com or BharatMatrimony.com
- Paper profits don’t build wealth: Info Edge despite effectively running a venture capital fund has not had too many exits. The risk here is that emergence of new cash rich or irrational competition (think Jio for telecom) or entry of long-term player (think Amazon for Flipkart etc) in key verticals will lower realizable values. For eg: Amazon is entering food delivery and is carrying out a pilot in Bangalore.
- Longer-term threats to Naukri.com are emerging: The competitive environment for Naukri.com seems to have changed. A cash crunch here, and the whole empire may come tumbling down. At the very least, prospects of Naukri.com may not be as predictable as they were in the past. This means the multiple you use to value Naukri.com should be lower now vs the past.
- Threat#1: What is the implication of the growth of temporary staffing companies? Why did Quess acquire Monster.in ? The largest staffing company in India is gaining a foothold in the job seeker side of the market place. Does this indicate that the recruitment market is shifting more towards enterprise solutions vs transaction model of listing ?
- Threat#2: Then you have LinkedIn. It is seems like a natural competitor to Naukri.com. Each profile is nothing but a resume. So everyone on LinkedIn is a potential job seeker. Growth of profiles at LinkedIn India is now higher than growth in profiles at Naukri.com. Further, India is now the second largest LinkedIn market after the US, where Linkedin has made inroads in recruitment.
- Threat#3: As with anything that involves search algorithms Google is a long-term threat.
- Please note I view the above narratives as hypothesis, possibilities and scenarios to track, monitor, compare and update as and when data comes in.
How the trade gets screwed?
- This is a forced trade: I am eager to implement the lessons from my momentum investing reading list; so I am actively hunting for patterns that I think are consistent with momentum/growth investing
- The base may be faulty: Last 2 up weeks were on low volume
- Valuations seem high in the context of absent earnings growth.
- The bull case is too far out in the future leaving the stock price very fragile to any negative news that plays to the bear narrative
- Market is setting up for a correction: The narrative is shifting to the disconnect between business reality and market rally, and the need to re-balance portfolios
Please note the above is not an investment recommendation.
The Peach Investor 