As internet usage has surged in the past year, internet-related stocks have witnessed a positive trend, and this very boom in the stocks, analysts say, is here to stay.
India’s internet economy is booming, aided by a surge in smartphone penetration and declining internet costs. The internet penetration in the country reached 56 percent in January 2021, and the country’s internet economy is expected to grow from $250 bn in 2020 to $335 bn in 2025.
A report by BOB Capital Markets said India’s listed internet stocks have rerated “50 percent plus’ on average since April 2020, rallying in the range of 75-240 percent (110 percent rise in combined market cap), thus pricing in the pandemic-led inflection in digital adoption and internet penetration.
“We see little scope for similar large incremental returns in the near-to-medium term and believe stock performance ahead will hinge on business fundamentals, these are, revenue growth recovery, operating margin resilience and earnings growth.”
On the stock of IndiaMart InterMesh, the report said that while its leadership in online B2B classifieds, strong networking effect, and solid financials, growth recovery looks elusive given the challenges faced by its client base, the normalization of its operating margin as pandemic cost savings retract is likely to weaken EPS growth (15 percent FY21-FY24E CAGR).
AFFLE has gained from the Covid-led digital boom and growth momentum should sustain given a robust portfolio (90 percent of revenue from digital, Covid-resilient verticals including ecommerce, edtech, fintech, food tech, health tech) and marquee clientele (Amazon, Flipkart, Zomato).
“We forecast a 32 percent EPS CAGR over FY21-FY24.”
JustDial, on the other hand, holds promise but needs investments to gain scale.
“In our view, JustDial’s strategic expansion of its B2B offering via JD Mart carries growth potential but will require heavy investments to scale up. Moreover, the financial distress of buyers and suppliers (due to the second Covid wave) signals slow demand recovery. We forecast flat earnings over FY21-FY24.”
As per Statista, the number of internet connections in the country will increase at a 2020-24 CAGR of 7 percent to reach 927 million connections by the end of 2024 and further rise to 975 million by 2025. IBEF estimates that India’s internet economy will grow from $250 billion in 2020 to $335 billion in 2025.
Experts noted that the post-Covid period will continue to be a dream run for internet-based companies.
The post-Covid era will be particularly beneficial for internet-based companies in India because more and more customers are being compelled to adopt digitization and ecommerce in order to compete and survive. “We note that India lags well behind China when it comes to online service users and online shoppers, signifying considerable room for improvement,” it said.
While Covid-19 has significantly impacted small-scale businesses, big technology companies have benefited from the ensuing digitization wave. The pandemic has hastened the digitization process by 3-5 years as technology became imperative for clients to survive and capture future demand. In India, the pandemic has particularly fuelled demand in areas such as online entertainment, edtech, ecommerce, fintech, food tech, gaming, and health tech.
As per data analysis firm Global Data, FAANG (Facebook, Amazon, Apple, Netflix, and Google) sentiment scores reflect a company’s financial and operating metrics have rebounded in Q2CY20. These scores indicate that big tech companies are poised for a growth boom amid Covid-19 as cloud computing, ecommerce, conferencing and video streaming have energized the industry during the crisis.
The 2021 McKinsey Consumer Pulse survey covering 899 C-level executives across all major geographies showed that respondents are now three times likelier to interact with customers digitally across all geographies, indicating the exponential movement of consumers online during the pandemic.
Further, the prospective growth in the segment and interest of investors in online-based stocks can be gauged from the robust subscription of shares by retail and institutional investors in the Rs 9,350 crore Zomato IPO. By the end of the issue on Friday, the Zomato IPO was subscribed 38.25 times.
On Friday, Paytm filed for Rs 16,600 crore IPO with the SEBI and many more tech companies seem to be in the fray to go public.