For the last two years, the Trailing Twelve Month EPS has been between 20 and 23 and it is now near the low of the range. The profits have hardly grown much, even in a job market that has seen a substantial recovery, or so we are told.

This time, the cash flows are negative. But that’s just a little accounting thing – they’ve moved from fixed deposits to mutual funds (the latter being “investments” and therefore not cash equivalents). Overall, they have 107 cr. in MFs and 277 cr. in FDs, making for a cashable hoard of 384 cr, up from 340 cr. last year. With 2.73 cr. shares, that’s Rs. 140 per share in just cash.

The stock though, is at Rs. 955, up Rs. 40 today, or 4.4%. While it is strange, consider this – the volume traded was a piddly 3,881 shares, for a total turnover of 36 lakhs. Heck, anyone can manipulate this stock up or down with such low volume, so I shouldn’t even harp on the 4% increase.

Scary bits: insiders are selling hand over fist. Kapil Kapoor, the non-exec Chairman, has sold 68,000 shares just this quarter. That should have netted over 4 crores, and he’s sold another 70,000 last quarter. Sandeep Murthy, another big-name director, has sold around 50,000 shares in the year. The plus point is that management – Sanjeev Bikhchandani, Hitesh Oberoi etc. have not sold their shares.

Naukri’s been doing some improvements to their sites lately, though I’ve not used their main site (naukri.com) too much, or the jeevansathi type portals. I do use 99acres.com a fair bit, and I’ve seen allcheckdeals too. But I doubt it’s worth the 45 P/E they are getting now, especially since they have shown an EPS growth of about zero in the last eight quarters.

And it’s equally important to say that every time I have dissed their EPS growth, the stock has gone up, so if you’re the quant type, this is probably a great time to buy. (I don’t have any holding and don’t plan to either)

This post is written by Deepak Shenoy, at Capital Mind.

• Day Traders 2.0 – Wired, Angry and Loving It (NYT). Indian markets are also full of day traders, and it’s as difficult a deal here. The interesting part is in a web offering I think will make a lot of sense for India as well, but more on that later.
• Shankar Sharma, the person toted as the big angry bear on CNBC, has a one-year ban reinstated by SAT, and steps down from the board of First Global.
• Brett Steenbarger on the Longer Term View (Weekly) of Risky asset performance. The global recovery may not exactly be gaining steam.
• Sunk Costs, an invisible, pervasive peril : This line made me think - “Just touching an item in a store makes you more likely to purchase it.”
• KPCB and Sherpalo exit Info Edge. They sold 4.05% of stake for 86 cr. a few days back. Remember they bought it for Rs. 245 in 2006, and the share’s quoting above Rs. 800 now. It seems that Insiders are selling the shares in HUGE numbers; Kapil Kapoor, the exec chairman, recently sold 50,000 shares. Info edge might see negative sales growth for FY10, says Hitesh Oberoi, COO.
• (In the above article – turns out StudyPlaces.com got $3m funding, $1m each from KPCB, Sherpalo and InfoEdge, and was recently acquired by Educomp for half - $1.5m. Another unfortunate money losing story of the Indian Internet)

This post is written by Deepak Shenoy, at Capital Mind.

A little disappointing in terms of growth, because they’ve stagnated in a way. True, the industry has been in a sorry state of affairs, but the hiring situation was supposed to be good last quarter and either it’s not, or Naukri wasn’t the beneficiary.

Info Edge’s primary business is Naukri.com, and they own sites like jeevansathi.com, 99acres.com, Brijj, AllCheckDeals and Shiksha.

Revenues at 59 cr. were 6% higher than the last quarter, but flat from December 09. Is it okay to compare Quarter on Quarter, or year-on-year? I’d say hiring is a seasonal business – that means what you might see in March is different from what you see in December. For multiple reasons – bonus handouts (people wait to quit after annual bonuses), school switchovers, festive seasons and so on.  And yet, Naukri’s business must come from HR consultants to a large extent – those will keep their subscriptions going regardless. Still, I’d use the YoY growth as a base indicator and let’s see where Naukri is, spectacularly graphed:

Both the Trailing Twelve Month (TTM) EPS Growth and Quarterly EPS Growth (compared YoY) have turned negative.

Yet, they have 355 cr. in cash. This has yielded them lower other income, but 355 cr. is a reasonable chunk of money. Unfortunately, it doesn’t help too much in acquisitions, if that’s what you might think will help them scale. That’s because of the topsy-turvy nature of the VC investment model in the business.

Why Naukri can’t acquire it’s way out of the cash load:

VCs invest in businesses – and in the west, they are famous for investing in tech businesses. In India there are a number of them, with corpuses of between 400 and 2000 crores. Now each VC will invest in about 25 companies otherwise it gets unmanageable. That means they want to invest between 15 and 80 crores per company. They take around 30% of the company, I’d imagine; so the  company will be valued, at the lower end, around 50 crores post funding.

If the VC invested at a 50 crore valuation, he would consider a successful exit only if the company is worth 100 crores or more; otherwise, it’s a fire sale, nothing big.

Now if you consider the P/E ratio that Naukri commands – it’s trading at Rs. 870 for a TTM EPS of Rs. 21 – that’s nearly a 40 P/E ratio. Let’s assume the startup they acquire will be available for half that, and forget the big Indian Internet Hope of selling companies for 100 crores on eyeballs alone. A 100 crore buyout at a 20 P/E will add only 5 crores to bottom-line (a company needs to make 5 crores at 20 p/e to get valued at 100 cr.).

For the Rs. 350 cr. they have, and considering they only paid half their p/e ratio, they would get just Rs. 17 cr. additional in bottom line.

But they would lose all their “other income” which adds up to – believe it or not – Rs. 32 crores for the last four quarters. The businesses they buy must grow at 100% so that Info Edge just about breaks even on them in a year!

They’re stuck – the businesses they will want to buy will be funded by VCs looking for big exits. And at that price they can’t buy enough of them to make up even the lost interest income in a year.

So if they must acquire, they must get the new properties really cheap, and the acquisitions should have so much synergy that they start scaling up bottomlines very quickly. Or, they should acquire using their shares – richly priced as they are, they’re great currency; but that’s going to skewer EPS just as badly. (Fortunately though, no one in India gives a rat’s ass about EPS growth – they keep buying stocks like ICICI Bank or Reliance Power at insane P/Es)

Naukri isn’t a technology leader – you don’t hear of “high-tech” innovations that they do. They’re a first mover in the jobs space, and they have very good management (clean/suave/open). That commands a premium valuation – but I would seriously question the kind of P/E ratios they get. We have to wait for their conf call transcript to find out how the individual businesses fared, and I look forward to reading about what they have for the near future.

But as stocks go, this one’s expensive; as much as I love the industry – the Indian Internet – I don’t think I’ll go buy InfoEdge just yet.

This post is written by Deepak Shenoy, at Capital Mind.

(Click for a larger image)

• Revenues have flattened since Jan 2008, and aren't recovering much at all.
• "Other Income" forms a substantial part of their profits even today. The most recent quarter had 14.74 cr. of net profit, and they had "other income" of 8.35 cr. The business literally hinges on the other income figure!
• They have around 320 cr. in the bank, going from their recent financial statements. That is generating most of the other income - at 8% yield you'll get about 6 cr. per quarter of income.
• Other income is useful, but paying 35 P/E for a company whose biggest contributor to the bottom line has been other income for the past four quarters is, in my opinion, crazy. They might as well return the money to investors if they aren't using it. (The cash comes to Rs. 115 per share)
• Look at the EPS - it's flat throughout. The last two quarters add up to a measly Rs. 10.27, and the earlier financial year was Rs. 21.87. No serious growth in EPS since last year.
• But as you see the stock price and went up beyond 800 and a P/E ratio of nearly 40 - it has since dipped to 770 and p/e of 35. But such a high P/E for a stock which has barely grown in the last two years - very surprising.
• Like in 2007-08, the annual report for 2008-09 also contains a scary piece of information: If option grants were calculated using "fair value" versus "intrinsic value", profit would have been lower by Rs. 10.8 crores and the EPS would have been Rs. 17.91, nearly 1/5th lower than the 21.67 they reported.
• Insiders have been consistently selling over the last year. Some Info Edge insiders seem to have sold between 5-20% of their holding over the last year, but note that usually insider sells don't mean much to stock prices.

(Related: All Info Edge Posts)

This post is written by Deepak Shenoy, at The Indian Investor's Blog.