India’s internet stocks trade at 30-50x EBITDA. UBS says growth can still pay for the premium

India’s internet stocks trade at valuations that would look expensive in many other markets. Yet UBS believes the premium can be justified if companies continue to deliver strong growth and demonstrate a path to profitability.

Indian internet companies trade at around 30-50 times EBITDA, according to Navin Killa, UBS’s head for Asia-Pacific media, telecom and internet. Chinese companies trade at lower multiples, while the US and most other regions sit somewhere in between.

The difference, Killa said, partly reflects India’s faster growth.

Internet categories in India are expanding at roughly mid-20s to low-30s percentages, compared with growth in the teens in China and high teens to low-20s in Southeast Asia.

But India’s faster growth does not mean its online market is already larger or more mature.

Online penetration is about 9% of total retail sales in India, compared with the high teens in Southeast Asia and close to 30% in China.

Food delivery shows a similar gap: India is at around 10% of the total food-services market, versus the 20s in Southeast Asia and 30s in China and Korea.

For UBS, that combination of faster growth and lower penetration is central to the valuation argument.

Growth matters more than the headline multiple

Killa said UBS looks at internet valuations after adjusting for growth and compares them with offline counterparts.

That matters because Indian offline companies also trade at a premium.

“For a business, which is delivering such strong growth, valuation is less of a concern, as long as there is a path to profitability,” Killa said.

That does not mean UBS takes a blanket view on the entire internet sector.

The approach remains stock-specific. Killa said simply operating in an attractive category does not automatically make a company a good investment.

The brokerage is generally positive on internet companies, with particular preference for leaders that continue to grow strongly and have a clear path to monetisation.

The margin assumption is not sacrosanct

The valuation debate becomes more complicated when investors start pricing in mature margins.

Killa said the 5%-6% margin figures often discussed by Indian internet companies refer to EBITDA margins. But he does not regard those steady-state margins as guaranteed.

The assumptions required to reach them include growth settling at around 1.5 to two times GDP and the absence of a fresh disruption.

China provides a precedent for why margins can move away from that target. Platforms have approached such levels at times, but profitability has subsequently moved lower before recovering.

Telecom is a different bet

UBS takes a more cautious view on telecom.

After three significant price increases, Killa said Indian mobile revenue as a percentage of GDP is already at the mid- to high end of the global emerging-market average.

That makes UBS sceptical that Indian telecom revenue can continue growing faster than GDP — or even necessarily in line with it.

Over a two- to three-year period, UBS is therefore more conservative than the rest of the Street on tariff increases.

The sector trades at around 10-11 times EBITDA, based on UBS’s preferred valuation measure for telcos. Killa said valuation is a concern because growth could ultimately be slower than market expectations.

On the threat of satellite broadband, he said, it is not yet changing the equation. At current costs, Killa said satellite broadband is not economical for dense urban markets. It could instead be useful for the roughly 5% of the population living in remote areas, making it more complementary than competitive for now.

But he leaves open the possibility that falling costs could eventually change that equation.