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Most internet companies have strong growth visibility but HDFC Securities believes more investments will be required to sustain the momentum. “The startups are focusing more on profitable growth. The latest buzzword in the Indian startup ecosystem is not technology and disruptive business model but “profitability"," it said in a note on India's internet sector. 

“It is driven by the decline in funding activity (P/E investment is down 40% from the peak in December 2021) and fall in valuations (Global/Indian P/S is down 55/35%)," the note stated. The brokerage likes high-quality and profitable franchises, and IndiaMART and Info Edge are its preferred stock picks with Buy ratings on both the stocks and is also bullish on Tanla Platforms shares.

HDFC Securities' top stock picks -

InfoEdge: “Hiring activity in the IT sector is strong, demand for non-IT talent is also witnessing traction and sectors like BFSI, retail, travel and transportation are showing strength. Naukri will grow at 15-20% CAGR and the EBITDA margin range will be 55-58%. 99acres and Shiksha will do well while Jeevansathi will witness a decline due to a change in strategy," it said. The brokerage house has a Buy rating on the stock with a SoTP-based target price of 4,700.

IndiaMart: “Higher investment in sales channel will boost growth, targeting 15%+ growth in paid suppliers. The churn has reduced and the quality of suppliers improving. Network effect and greater traffic will improve the RoI for a seller. Margins will be in the range of 30-35%, vs 25% pre-pandemic. We like the quality of the franchise/platform and have a DCF-based TP of 5,700," HDFC Securities recommended.

Tanla Platforms: The A2P messaging is witnessing strong growth; enterprise business has a 30% share and will clock 15-20% volume growth. Platform growth will be driven by Wisely and Trubloq. Margins for both enterprise and platform will be under pressure due to more competition and telcos demanding higher revenue share, it said while maintaining a buy rating, with a target price of 1,350.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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