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Sunday, May 19, 2013

Just Dial Ltd. IPO Review


Issue Highlights

Issue Period
20/5/2013-22/5/2013
Issue Type
100% book building
Price Range
Rs. 470-543
Face value
Rs. 10
Market Lot
25 equity shares
Issue Size
1,74,97,458 equity shares
Listing
BSE,NSE,MCX-SX
Registrar
Karvy Coputershare
Maximum Retail Limit
Rs. 1,98,400/ 16 lots
Retail Discount
Rs.47
Industry
Advertising/local search
Safety Net Feature
Yes

The offer

The issue is ‘Offer for Sale’ and no fresh equity will be generated.



  
Industry Profile

Indian advertising market has generated revenue of Rs. 256 billion in 2011 and by 2015 it is supposed to grow to Rs. 370 billion at a CAGR of 9.6 %.
 Local search market comprises of online (localized portals using web, phone and mobile portals)  and offline (print directory and phone based searches) search services.
The players in the local search services include Just Dial Ltd., Asklaila, Burrp,Getit, infomedia18,Metromela,Onyyomo,Sulekaha and Timescity. Many of these companies provide both online and offline search services.
Classifieds is a distinct type of advertising medium and in years to come online classifieds shall surpass their offline counterparts but low presence of vernacular language in online classifieds hinders its growth to some extent.


Company Profile

Just dial, incorporated by Mr. V.S.S Mani in 1993 as A&M Communications Pvt. Ltd., is a leading search services provider in India which provides its services through multiple platforms like internet, mobile internet, telephone (voice), text (SMS).
The company started offering its search services in 1996 under the Justdial brand and launched its internet and mobile services in 2007. Just Dial Ltd. has a database of approximately 7.7 million listings (June 2012 figure).
If someone has to find the umbrella retailers or stationery shops in a new city, he can either call Justdial’s easy-to-memorize no. 08888888888 or make a search at Justdial’s portal; even if one does the Google-search Google usually displays the listings by Justdial on the first page.

Strengths


·              A myriad of Google-searches ‘Just Dial Ltd.’ results on the first page. For Many  key words Justdial tops the result list
·         Just dial is among a few companies that pioneered the business of local search services
·         Just dial provides both online and offline search services efficiently
      Just Dial Ltd. brand boasts  strong brand equity. The company had roped Amitabh bachchan to promote its brand. 

Concerns

1.    Criminal proceeding against the company and some of its employees including MD and a few directors is not a good omen and raise question on its corporate governance. Some grave allegations of unlawfully deducting money and signature forging are worrisome as it could lead to customer dissatisfaction and could end up in a business loss

2.       The company is highly technology-driven and any major technological failure or  company’s inability to keep itself abreast of the latest developments in technology could adversely affect its profitability

3.       This sector is highly competitive – there are many competitors like OLX.in, quicker.com, sulekha.com etc. Some of these names may belong to little different domain but they compete Just Dial Ltd. for the space in the result list of search engines.


4.       Company’s promoters and principal shareholders have a vested interest in a group company called, JD Global, which is involved in the same business in USA and Canada through its subsidiary JD USA. Just Dial Ltd. has sold its equity interests in JD USA and there is no no-compete-clause between the two entities. This may prove as a hindrance to growth in case  Justdial enters this market.
5.       Promoters and principal shareholders own almost 100 % equity in JD Global and this poses following threats-

a.       There may be a  conflict of interests in future due to the absence of no-compete-clause between JD Global and Just Dial Ltd.
b.      There may be a  spooking threat of promoters siphoning money from Just Dial Ltd. into JD Global (also refer point 8) – a deadly vulnerability as promoters hold only 37 %  (post issue 33 %) equity in Just Dial Ltd. while they own quite a chunk in JD Global

7         Just Dial Ltd. depends significantly on search engines that are also its competitors. Just Dial Ltd. has made arrangement with search engines through ad campaigns and pay-per-click programme. Any breach of rapport between Just Dial Ltd. and search engines could wreak havoc on its profitability.

8         Jusdial’s cancelling of its preference shares worth Rs. 72.48 crore in JD Global  followed by adjustments resulting in a decrement in its net worth by Rs. 72.5 crore  in the name of streamlining the business operations (of both entities) raises concerns

9         Recessionary period has seen a  decline in  the ad-spending by Justdial's customers resulting in a loss of income

10     Auditors have found slew of discrepancies in past few years

11     Top 11 largest cities contributed for 85 % of total campaigns with the company and a major chunk of revenue comes from these cities. Mumbai and NCR contribute for around 37 % of campaigns. Any sort of upheaval or turmoil in these cities could adversely affect the revenue of Just Dial Ltd..

12     ESOP to some employees was done at less than one-fifth of the present price band. Amitabh Bachchan, a well-known Indian celebrity who had promoted the brand Just Dial was issued 62,794 shares at just Rs. 10 per share, this shows how steep valuations of this IPO are!

Financial Analysis

# All calculations at the cap-price for retail investors i.e. Rs. 496 (considering the retail discount) and hence are different from the same for other investor categories
## for information purpose only as in FY 12 Just Dial Ltd. sold its shareholding in JD USA  and thus comparison with the past may not be meaningful

Parameter
FY 13 Annualized
FY 12 ##
Basic EPS
Rs. 8.8
Rs.7.2
Book Value
Rs. 57.9
Rs.14.8
P/E
56.6
68.5
P/B
8.6
33.5
NPM
17%
18%
Profit CAGR(3 years) ##
47%
89%
PEG
1.2
.8
Debt/Equity(exhaustive)
.4
1.4
ROE
15.1%
48.9%
EV/EBITDA
37.63
48.3
Current Ratio
3
1.4
M-Cap/Sales
9.6
12.6

The Analysis

·         Believing the authenticity of the financials shown in the prospectus, fundamentals of the company seems satisfactory. But the net worth of the company becoming almost 4 times in FY 13 (in just 9 months) of the same a year ago (FY 12) is difficult to believe.
·         Price to earnings ratio is on higher side but 3-year profit CAGR justifies the PEG ratio. But if in future Justdial  fails to maintain this growth, its valuation shall erode greatly
·         The biggest threat to such companies is from search engines like Google,Yahoo and Bing. An internet user’s first choice for doing a local search will be Google(with around 70 % search share) and presently Google shows the listings from Justdial. But, in future if Google enters in this niche-market or stops showing listings from Justdial or even restricts its listings to later pages, it shall affect Justdial adversely.A Smartphone user is more likely to search his needs on a search engine rather than either opening the portal of Justdial or giving a call to Justdial. There is very high probability that in future Google will try to grab this lucrative market.
·         As more and more SMEs and small traders going for their own web presence,they may not go for paid-advertising with Justdial. Besides, this may also result in the reduction of the site users.
·         Company being an almost debt-free company enjoys an edge over its competitor
·         Related party transactions as discussed in ‘Concerns’ are worrisome
·         The issue being an offer for sale, proceeds of the issue shall not come into the company to benefit it.

Inference

This IPO being highly priced and due to the underlying concerns, is a risky proposition. Though high price-to-earnings ratio can be justified by the present profit CAGR but it is doubtful that this growth shall be maintained in future especially under the looming threat of the growing prowess of search engines. This issue may not be suitable for risk-averse value investors but success of an IPO is determined not only by its underlying value but also by the market sentiment, overall liquidity condition and the euphoria about the issue. Those who have understood the underlying risks and are ready to take the risk may go for the issue as due to retail discount and the prevailing market sentiments there may be chances of listing gains in this issue.

      Disclaimer

Analysis is for the information purpose only. Though due care and caution have been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of this report.

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