Dotcoms: Value for money?

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Info Edge (India) Ltd IPO opens October 30,2006 Info Edge to come out with IPO of about 53 lakh shares Info Edge (India) Ltd plans public issue Info Edge to launch IPO for funding expansion ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Info Edge BSE | NSE 30/05/12 Are Mutual Funds betting on Info Edge?

Q:  Is that a reasonable comparison to set for Info Edge, how do you gauge the revenue model of this company itself?

Murthy: The value is always fixed by the market. So when you are out in the stock market, you are up there against every other stock in the market and the investor is valuing you, when he has thousands of stocks to look at.

When it comes to private investments and early stage investments, I think for venture capital investments in India, it's now very much a buyers market. There are very few good companies while there are so many venture capital funds with a lot of money out there.

I just sense a feeding frenzy going on that people are outbidding each other. I do know several companies that are playing around with 5 term sheets, each higher than the other waiting for the sixth term sheet to come, that is even higher than the first 5.

What is really happening is that in the investing stage of the market, the pre-public stage of the market, the valuations are actually now defying most logical norms and they are simply coming to a point of who in the markets wants to buy a into company and how desperately.

Q: It is only fair that we will let you respond to that, Mahesh's point is that it is almost like an auction out there and it is more demand-supply than any kind of justification of what could be the reasonable value

Singhal: I agree with Mahesh, I think there is definitely a hype ahead of the market and we have to be careful not to repeat the mistakes of past. We believe that in India Internet still is in its infancy; there are a lot of infrastructure bottlenecks. I completely agree with Mahesh on all the points he made with respect to valuations, which in some cases defy logic in the private company area.

Q: You made a point about revenue growth, but as you see it at this point, what is the biggest stumbling block for these businesses?

Murthy: If you look at the kind of companies that have been richly valued of late, a lot of mobile or VAS (Value Added Services) companies have been invested in extremely rich valuation, like travel companies. Extremely rich, meaning way beyond 10 times sales, 25 times earnings kind of numbers that you would expect in a mature business.

So only two things could explain this; one is the fact that either there are some extraordinary assumptions of growth of 300%, 1000% kind of growth YoY built into the investment valuations, or that it is a feeding frenzy.

As far as the stumbling blocks are concerned, once companies get the money, they have got the particular valuations, if the companies find it hard to service that kind of investment, investors are going to start to get anxious in a couple of years.

Eventually, the venture capitalist like Sandeep, myself and others will start putting pressure on the company. Eventually it will come back and hurt the companies. So what is really going to happen is that any kind of over-investment right now will deeply hurt the companies in the medium term.

Q: Info Edge will probably go on to do couple of Rs 100 crores in sales next year FY08. It has got a market cap now of about Rs 1,600 crores - is that overstretched or fairly valued?

Murthy: There are many companies out there, which are throwing a 10x. Another company, Geodesic, has a 10x kind of a rate. Suzlon and Reliance entities also, are not far off these numbers. Even if you look at the broad movement, if you look at the PE for the Sensex, that itself it has gone up from 12 to 15, 16, 17.

So I am not so worried. If you look at the curve, the average is about 17, you know you can take anything between 8 and 25, but when it goes beyond 25 and when it goes for 50 and 100 times earnings - that's when you sit back and wonder what is so special about this company that there are people who are investing at 50 times earnings. Those are the issues that do worry me.

My sense is that you have invested at such high valuations, somebody has to buy you out or somebody has to take you public and that's when the true guess comes - who is going to buy you at a high price, who is going to take you public at a high price? I think somebody is going to get hurt in a couple of years time in these companies.

Q: Come in on that -  why should you pay double the value for an Internet company- only because it is lower on the curve and could grow much faster for a few years?

Singhal: I guess financially speaking, that should be the logic. Internet definitely is a product sector, so companies that succeed in that sector have a product company type characteristic. So they tend to command higher multiples and valuations compared to services companies in general.

Having said that, in the name of Internet, there can be a large number of different companies. While some companies do have product type characteristics with their business and therefore should command higher valuations, there are a lot of others that may not.

As venture capitalists, we are interested in companies that have 'take-it-all' type of product characteristics. If one looks at Internet around the world, then 70-80% of the market cap of Internet sectors is taken away by the top 2-3 companies in that sector, which is not true for services companies. So that is the product type characteristic of the business for you.

We have invested in several companies at earlier stages like Guruji, travel guru and shaadi.com, which we believe have those type of characteristics but we have to be careful about not repeating mistakes of 2000 that all of us went through six years ago.

Q: So as someone who is watching this business, if you saw the three properties that Info Edge has - naukri, jeevansathi and 99acres, would you say that 600 per share is a fair price or even a price that you would look at this company at?

Singhal: Like I said earlier, no comments on the stock price, but it is a good company. They definitely have some good things going for them.