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Indian expansion: I think REA (ASX:REA) shares are worth watching

REA Group Limited (ASX: REA) is one to watch in my opinion after it announced it’s going to expand its Indian investment.

REA’s Indian expansion

The real estate property portal business announced that it’s going to increase its ownership of Elara Technologies, which it currently owns 13.5% of.

After the transaction is completed, REA will have 5 out of 9 board seats and it’s expected to have a shareholding of between 47.2% and 61.1%.

The total cost of the transaction is expected to be in the range of US$50 million to US$70 million, with US$34.5 million to be paid with existing cash reserves and the balance in newly issued REA shares.

The deal hasn’t been completely finalised yet, but it’s expected to complete in the second quarter of FY21 – meaning over the next couple of months.

What is Elara?

According to REA Group, Elara operates India’s fastest growing digital real estate business in terms of audience numbers. It has a few brands including housing.com, PropTiger.com and Makaan.com.

Elara has continued to increase its market share despite the impacts of COVID-19.

It offers a full range of property services across digital advertising and transactions including personalised search, virtual viewing, site visits, home loans and post-sales services.

Between FY17 and FY20 Elara has delivered revenue growth at a compound annual growth rate of 42%. FY21 revenue is likely to be negatively impacted by COVID-19 effects and the duration of the pandemic remains uncertain. But Elara’s audience levels continues to reach record highs. Listing volumes have rebounded from the lows in June, but are lower than pre-COVID-19 levels.

Assuming a completion data of 30 November 2020, REA Group expects its FY21 revenue will increase by between $15 million to $20 million, core operating EBITDA (click here to learn what EBITDA means) is expected to decrease by $20 million to $25 million and the contribution from associates is expected to rise by $3 million to $5 million.

Management comments

REA Group CEO Owen Wilson said: “India is an incredibly attractive market and one that provides excellent long-term growth opportunities, while complementing REA’s footprint in Asia and North America. The country is forecast to deliver strong growth over the next decade and continues to experience rapid digital transformation. 

With over 700 million internet users and roughly half a billion yet to come online, our increased investment in Elara will allow REA to be at the forefront of the considerable long-term opportunities within India, and the digitisation of the real estate sector.”

Summary

REA Group seems to have made a great move in my opinion. There’s a lot of growth potential with India over the next decade. Combined with the resurgent property market in Australia, REA Group looks like an exciting prospect.

But it’s certainly not cheap. At the pre-open REA Group share price, it was valued at 35 times the 2023 financial year’s estimated earnings (before the impact of Elara). It’s not ‘great’ value. However, at this low interest rate and the potential Indian growth, I think it could be worth a small long-term buy today or in the next couple of weeks.

But there are other ASX growth shares I’d rather buy first like Pushpay Holdings Ltd (ASX: PPH).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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