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Swiggy and Zomato last week said they had received permissions to start alcohol home delivery service in Jharkhand. (Reuters)
Swiggy and Zomato last week said they had received permissions to start alcohol home delivery service in Jharkhand. (Reuters)

Zomato valuation upgrade holds key to prospects of re-rating in Info Edge

A sharp run up in the tech firm’s shares signifies that investors are capturing a brighter picture already

Stocks of a few companies are now trading higher than their respective pre-covid prices seen in January-February. A case in point is Info Edge (India) Ltd. Last month, the shares touched a new high in 2020 and are currently just about 6% lower since.

For a while now, expectations of better valuations for Zomato, in which Info Edge holds 22.7%, has been a key reason for optimism for the latter’s shares. Recent news reports have said HSBC Global Research has valued Zomato at $5 billion. Axis Capital Ltd analysts said investments such as Zomato/PolicyBazaar may further drive Info Edge’s valuation given there is still room for growth. Axis estimates Zomato’s valuation at $4.5 billion.

But some analysts reckon these valuations appear to be on the aggressive side. Plus, according to a Mint report, Temasek Holdings has recently invested $62 million in Zomato, valuing it at $3.25 billion. In any case, the sharp run-up in Info Edge’s shares indicates investors are capturing a better picture already.

Pandemic blues
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Pandemic blues

On Tuesday, the Info Edge stock inched marginally higher after June quarter results beat Street estimates. Standalone revenue declined 10% year-on-year last quarter to 280 crore even as billings fell sharply by 44% thanks to the lockdown. According to the firm, the immediate impact of a drop in billings on revenue tends to be lower as revenue is recognized over the contract’s tenure.

In other words, the company’s revenue in the June quarter was helped by deferred revenue growth from previous quarters. On the flip side, this means that the sharp decline in billings would reflect in the current quarter’s performance.

Nonetheless, Info Edge fared well on the profitability front with its earnings before interest, taxes, depreciation and amortization (Ebitda) increasing by 3.5%. This was helped by a substantial fall in advertising and promotion expenses, and other costs, although these expenses are expected to increase once activity picks up.

Meanwhile, Info Edge raised 1,875 crore through a qualified institutional placement last month. The funds would be used to develop internal businesses and make strategic investments.

Analysts maintain that the company has done well on the capital allocation front. Going ahead, the pace of recovery remains a factor to monitor. Info Edge has said July and August have witnessed decent recovery trends. Axis Capital expects gradual recovery from the December quarter led by a pick-up in billings.

Even so, the stock’s high valuation may cap meaningful upsides in the near term. So far in 2020, the shares have gained almost 31% and are about 8% from their pre-covid highs in February.

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