It is worth revisiting the history of Naspers. Launched in 1915 as a newspaper, the South Africa-based company has a pay TV business and 50 domestic newspaper titles but its move to invest in technology companies changed its contours. In 2001, the company invested $32 million for 46.5% stake in Tencent, which was then just three years old. Though over the years, Naspers pared its holding in the Chinese internet powerhouse, the residual 30% is worth $120 billion.
Early this year, Naspers listed Prosus, the vehicle wherein the media giant has parked all its strategic investments, including stakes in Tencent, Russian social media company Mail.ru Group and German food delivery service Delivery Hero, on the Euronext Amsterdam stock exchange, ranking it among the global top 10 consumer internet conglomerates with a market cap of $134 billion.
The transition of that traditional media company into a new age digital media investment powerhouse is not lost on Vivekanand Subbaraman, who tracks the media and internet space at Ambit Capital. “Naspers was a newspaper company that diversified into classifieds and started investing globally. Similarly, Axel Springer and Schibsted too invested large sums in their classified business and eventually cannibalized their own newsprint business,” mentions Subbaraman.
Subbaraman finds similarities in the way the country’s premier online classifieds company has metamorphosed into a profitable pureplay internet company with a presence across recruitment, matrimony, realty, education and allied services. Though not comparable in scale to Naspers’ success with Tencent, Info Edge’s venture capital investments in Policybazaar (online insurance aggregator) and Zomato (online food and grocery aggregator) are the jewels in its Rs.500-billion market cap crown. “If Info Edge were to liquidate Policybazaar and Zomato at current valuations, it will make 35% IRR,” he says.
Info Edge bought into the insurance-comparison business more than a decade ago, in 2008, as a seed investor. Then, the internet company had handed over a cheque for Rs.200 million, and that number has multiplied 20x over the years. Two years later, in August 2010, followed its first investment of Rs.47 million in Zomato when it was still known as Foodiebay. Back then, Foodiebay was just a restaurant discovery platform with reviews, and soon after the investment round, was planning to expand overseas and become more than just food, wanting to answer the customers’ question, “Where should I go today?”
At present, Info Edge has an investment roster comprising 22 investees whose book value is Rs.11.48 billion (See: String of pearls). Of these, the two big investments are in Policybazaar ( Rs.5.76 billion) and Zomato ( Rs.1.52 billion), while the remainder Rs.4.2 billion is embedded across 20 companies. The company has also disclosed that it has written off and provisioned investments (fully and partially) of Rs.3.33 billion across 15 start-ups. Subbaraman points out that the write-offs are par for the course at Info Edge, given these are typical venture fund investing where the winners more than make up for the losses.
“It is quite possible that in a growth-starved environment, the public market may result in better price discovery for Zomato just like it happened with IndiaMart,” feels Subbaraman. IndiaMart, the online B2B platform, is now trading at 5x its IPO price of Rs.973.
The current pandemic has only swung the tide further in favour of internet companies, believes Rahul Malhotra of Bernstein, and he thinks the structural shift will outlast COVID-19. Zomato has claimed that it delivered over 92 million orders since the lockdown and expects the sector to grow 15% month-on-month. “The restrictions on movement due to the lockdown have led to increased adoption of online food /grocery and will ‘see high repeat & habit forming’ category for consumers,” mentions Malhotra in his report. He also notes that the Indian online space is now evolving into a concentrated market structure, with Zomato and Swiggy having 50% share in food delivery and Policybazaar having 90% share in online insurance.
Flush with funds
Info Edge’s crown jewels have raised enviable funding, despite the present climate. At the start of the year, Zomato raised $150 million from China’s Ant Financial, valuing it at $3 billion. However, friction at the border has resulted in a freeze on investments from China, and Zomato reportedly has managed to pocket only $50 million of the agreed amount. But, the aggregator has seen generous interest from other investors.
In September, it raised $62 million from Singapore state investment arm, Temasek, and an additional $103 million from US-based Tiger Global. According to media reports, Zomato founder and CEO Deepinder Goyal told employees in September that the $250 million in the bank (after latest fundraise), will be a war chest for future acquisitions and fighting off competition. Earlier this year, in January, Zomato had acquired the India business of Uber Eats in an all-stock deal for $206 million.
Even as Zomato is being primed for a public listing in the first half of 2021, in October, it again raised $52 million from US-based Kora Investments, ramping up its valuation to $3.3 billion. In FY20, Zomato doubled its revenue to $394 million even as loss moved up from $277 million in FY19 to $293 million in FY20. Hitesh Oberoi, co-founder of Info Edge, says, “My sense is that delivery business is here to stay and it’s a two-player market now.” Info Edge has more than doubled its investment in Zomato with its 22% stake valued at $0.72 billion.
Its investment in its other prized asset, Etechaces Marketing and Consulting (Policybazaar) soared in value after a secondary market transaction. SoftBank Vision Fund reportedly picked up an additional stake for $130 million, thus raising its stake to 15%. After that, Info Edge’s 15% stake has been valued at $0.22 billion. The online insurance portal, which has raised $364 million till date, aims to go public in 2021 at a valuation north of $3.5 billion.
The insurance aggregator helps its over 8 million users to compare life, health, auto, property and travel policies from 40-plus insurers, and claims to sell a million policies online. It has another vertical, Paisabazaar, which is a marketplace for loans, credit cards, mutual funds among others. However, unlike Policybazaar, which saw a rise in online insurance sales, business at Paisabazaar shrunk during the current fiscal. Sanjeev Bikchandani, co-founder, Info Edge told analysts during the Q1 concall that “business is badly hit largely because employees couldn't go out and do KYC of the prospective customers.” Oberoi is unperturbed. Though he concedes that Paisabazaar saw a “major decline” in business, Oberoi adds that it “has also seen a business bounce back in the last couple of months”.
In FY19, Policybazaar’s loss had shot up 21.6x to Rs.2.13 billion. However, in FY20, according to reports, the company's revenue jumped 3x and it doubled both market share and valuation. In FY21, the company is expected to log revenue of Rs.11 billion and post a marginal profit, according to Yashish Dahiya, co-founder and group CEO. Malhotra of Bernstein states that the company is profitable at a pre-marketing cost level and will benefit from higher internet penetration in online insurance in FY21.
Despite these minor hitches, the two unicorns have kept PE investors riveted and so has Info Edge. The holding company has managed to raise funds from investors amid the lockdown.
In August, Info Edge mopped up Rs.18.75 billion through a QIP. “We have been engaging with investors for a long time. Many already knew about us, had seen our journey and were familiar with what we do. So, that made things easier for us,” explains Oberoi.
The fundraise comes at a time when the company is already sitting on Rs.15 billion of cash as its core business, Naukri, continues to generate cash at a record pace. While Naukri brings in 71% of Info Edge’s standalone revenue, the real estate portal, 99acres, brings in the remainder 29%. Over the past decade, beginning FY11, the recruitment business (Naukri) has seen cash generating double from Rs.1 billion to Rs.2 billion in FY15, and in FY20, the number has more than doubled over Rs.4 billion. This is because Naukri continues to generate high margin at around 54%, which continued to be robust in Q1FY21 despite a drop in job listings.
With a robust recruitment business and over Rs.30 billion at its disposal, Info Edge is sitting pretty. The only question investors had for the management was: If Info Edge already had cash and was generating more cash, why did it need the money?
“We told them that while we were a clear leader in the job space, which is our largest business and generates all our profit, we are not as dominant in the other categories we operate. Whether it is real estate or matrimonial (Jeevansathi) or education classifieds (Shiksha), we have competition. This fundraise is to get all our businesses to leadership status in the next three to five years,” says Oberoi. While the zero-debt company will look at growing its business organically, it is also open to inorganic growth opportunities.
Pranav Kshatriya, analyst at Edelweiss Financial Services, believes the management’s strategy does make sense, “Although strategic acquisitions add little revenue and profit in the near term, they inherently enhance long term growth, further bolstering moat of the business.”
The other big change in Info Edge’s strategy of investing in new verticals is the creation of an alternative investment fund (AIF). Named Info Edge Venture Fund, it has already made fresh investments in its investee company, Happily Unmarried, that owns the brand Ustra and Bizness, which raised primary funding of Rs.600 million, co-led by two new institutional investors. Oberoi says the new vehicle will be for investments, with “likeminded” LPs, in areas that the company doesn’t operate in.
The AIF is to bring in discipline. One kind of investing is to deploy permanent capital. That is how Info Edge approached Zomato and Policybazaar. They backed Goyal’s strategy of expanding to the US and other countries, even though it was not paying off that well. “As they have themselves gone through the process of start-up funding for more than a decade now, they are probably experimenting with the idea of raising money from a likeminded LP, with the view of investing in start-ups such that they don’t provide permanent capital, but near permanent capital,” says Subbaraman.
Importantly, the AIF could participate in late-stage funding, which Info Edge doesn’t undertake. For instance, the AIF in February invested Rs.252 million in digital content company, Qyuki Digital Media. This was late stage at a valuation of around $50 million-60 million. “Unlike in start-ups where Info Edge takes a large stake that gets diluted in subsequent rounds, through the AIF it can hold a small stake where the valuation is high but has a much higher probability of success,” adds Subbaraman.
Making the cut
While Zomato and Policybazaar are looking to list, Info Edge is no hurry to cash out. “If we see them doing well over the next five to 10 years, why would we need to cash out,” asks Oberoi.
For now, investors are betting big on Zomato and Policybazaar but at the current level of Rs.3,900, the stock is trading at its most expensive level. While analysts believe that online business is here to stay, there is divergence in their outlook on the stock. Malhotra in April set a 12-month target price Rs.2,560, but the stock is priced way above that by Rs.1,400.
In the same month, Sachin Salgaonkar, analyst, Bank of America-Merrill Lynch, had turned bearish with a target price of Rs.1,875 against the then-trading price of Rs.2,444. The reason for Salgaonkar was the expensive valuation —71.4x/56.8x on FY21/22 EBITDA and 86.4x/60.2x on PE. “We find valuation expensive in context of its growth and hence find risk-reward unfavourable,” he had stated in his report.
The most aggressive price target was set by Subbaraman, who in July said the stock would touch Rs.3,675 and has been on the money (See: Flip side). Whether the stock will continue to trade at exorbitant valuation is anybody’s guess but the safety net around Info Edge’s valuation seems weak.