SUMMARY
JM Financial said that current macroeconomic trends, especially inflationary pressure, continue to dampen consumer sentiment
Despite the expected subdued QoQ numbers, the brokerage has a ‘buy’ rating on shares of Nykaa, Zomato and Info Edge
JM Financial expects Nykaa’s penetration in newer geographies and foray into newer segments to drive its Q1 growth
Equity research firm JM Financial said in a report on July 11 that it expects new-age tech companies to report relatively subdued quarter-on-quarter (QoQ) numbers during April-June quarter as the current macroeconomic trends, especially inflationary pressure, continue to dampen consumer sentiment.
The companies will report their financial results for the June quarter over the next month or so. The shares of new-age tech companies have been falling and trading lower over the last few months as the ongoing Russia-Ukraine war, rising inflation and fears of an impending global recession have hit market sentiment.
However, driven by a strong recovery from the Covid-19 pandemic-led lag, on a year-on-year (YoY) basis, the tech companies are expected to see healthy growth and margin improvement, JM Financial said in a report.
It is also pertinent to note that business trajectories of companies and sector-related trends also drove the analysts’ views.
Talking about Info Edge, which runs internet companies like Naukri.com, 99acres, Jeevansathi.com, the analysts at JM Financial said that its recruitment and real estate verticals are expected to report strong billing growth of 65% and 190% YoY, respectively, aided by macro tailwinds and last year’s favourable base.
However, on a QoQ basis, both the verticals are expected to see a decline in the billings at a rate of 19% and 18.1%, respectively, in Q1 FY23.
Moreover, its matrimony vertical Jeevansathi’s billings are expected to be a major drag in the quarter, reporting a 7.5% decline YoY and 21.2% decline QoQ to INR 44.7 Cr.
JM Financial expects Info Edge’s total revenue to increase 14.6% QoQ to INR 522.2 Cr in Q1.
On the other hand, the analysts believe that Nykaa’s penetration in newer geographies and foray into newer segments would drive its Q1 growth, as the overall consumer sentiment still remains suppressed.
Earlier this year, Nykaa stated that it is looking to bolster its omnichannel presence, particularly in the form of offline stores in 2022 and tie-up with various domestic and international brands. Its founder and CEO Falguni Nayar said that Nykaa would be launching 300 stores in 100 cities.
Nykaa also acquired stakes in three D2C brands – Earth Rhythm, Kica, and Nudge Wellness – in Q1 FY23.
The analysts at JM Financial expect Nykaa’s revenue to increase 32.3% YoY to INR 1,080.6 Cr in Q1. However, the increase would just be 11% on a QoQ basis and would be largely driven by its investments to bolster its omnichannel presence.
In fact, the analysts also said that this trend of penetration into newer markets would continue to drive the overall Indian internet story.
JM Financial said that it prefers Info Edge and Nykaa from a near-term perspective and Zomato from a long-term perspective. The brokerage has a ‘buy’ rating on all three stocks.
JM Financial expects Zomato, which recently acquired Blinkit for INR 4,447 Cr, to report over 10% sequential growth in food delivery gross order value (GOV) in Q1 to INR 6,457 Cr, driven by strong order volumes due to IPL seasonality.
“We also expect 1060bps QoQ contraction in reported EBITDA loss % due to sharp drop in ESOP expenses,” the report said. “However, due to growing company focus on profitability and demand concerns due to rising inflation, we tweak our revenue estimates by 3%-7% over FY23-25E, thereby trimming down our revenue CAGR forecast over FY22-25E to 29% from 32% earlier.”
While JM Financial analysts are quite bullish about gaming and sports company Nazara Technologies’ revenue growth in Q1 FY23, they said that the lower margin profile of Datawrkz and lower revenue share of the higher-margin Kiddopia/Telco segment are likely to drag its margins.
Nazara announced acquisition of a 33% stake in the advertising technology firm Datawrkz in March this year.
Despite all the pressures that the tech stocks are expected to face in the quarter, the analysts at JM Financial have an overall bullish view. All these internet stocks have “the strength to withstand a few blips,” it said. “We anticipate any dip in risk-off trading moves to bring renewed interest to this sector.”
However, the analysts also mentioned that the onus is on these companies to demonstrate their ability to continue improving the profitability trends. They should also “provide sufficient disclosures to deliver comfort to the investors and assuage the anticipated concerns”, they added.
Shares of Nykaa parent FSN E-Commerce closed 0.6% lower at INR 1,400.5 on the BSE on Tuesday, while Zomato shares ended over 5% higher at INR 58.9. Info Edge shares closed over 2% lower at INR 3827.3, while Nazara shares ended marginally higher at INR 585.75.
