The curious case of a meteoric rise in Info Edge share valuations

Shares of Info Edge (India) Ltd have risen about 11% so far in 2021, taking its rise compared to the lows of March to more than 200%. The meteoric rise in the stock price has left many analysts struggling to justify valuations. Info Edge shares are now 55% higher than the average target price of 16 analysts, based on Bloomberg data.

“The rise is perplexing,” said an analyst requesting anonymity. “Note that over the past six months or so, whenever there is news flow on Zomato, the Info Edge stock has seen a movement.” Info Edge has a 19.3% stake in online food delivery company Zomato Pvt. Ltd.

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News that the latter will soon list its shares has raised hopes of value unlocking.

For Zomato, 2021 has begun on an upbeat note. First, Deepinder Goyal, founder and chief executive at Zomato, tweeted that gross merchandise value increased 60% year-on-year on New Year’s Eve. Second, Zomato’s FY20 financials, based on data from Tofler, show the company’s losses before exceptionals have reduced as a proportion of revenues. The losses amounted to 98% of revenues, which means expenses were nearly double its revenues. But this was better compared to FY19 when expenses were as high as at 270% of revenues.

True, this is encouraging news flow, but hardly enough to justify the steep increase in Info Edge shares. “It appears that investors are assuming Zomato’s covid-19 tailwinds will persist forever. What happens when a vaccine arrives, and ordering in won’t be required as much?” asks Vivekanand Subbaraman, analyst at Ambit Capital Pvt. Ltd.

One reason for the excitement around Zomato’s initial public offering is the recent euphoric listing of DoorDash Inc., an American online food delivery firm. Subbaraman says, “The big difference between DoorDash and Zomato is the sales trajectory; the former’s 2021 sales are 5.6 times vs 2019 while for the latter, FY22E sales will only return to FY20 levels.”

The way Info Edge valuations are soaring, it looks like investors are betting on a DoorDash type mega listing premium for Zomato. But even a doubling of Zomato’s value on listing would mean Info Edge’s stake in it will account for only around 15% of its total market capitalization.

This means investors are valuing other parts of Info Edge’s business much higher as well. As per Ambit’s calculations, even if the mainstay recruitment business Naukri is valued at a 79x FY23E earnings, 99Acres at 24x FY23E revenues, Jeevansathi and Shiksha at 7x FY23E revenues, and PolicyBazaar at $2.5 billion, a 66% premium to its last funding, all of this adds up to a per share value of ₹3,687. Assuming Zomato doubles from its previous funding valuation, that would add another ₹800 or so to the sum-of-parts valuation, taking the total to ₹4,500. Meanwhile, Info Edge shares closed at ₹5,260 apiece on Wednesday.