Steep pricing reminds post-listing debacle of SKS Microfinance.

 

For the last full year (fiscal 2012) the company’s earning was less than Rs 8 per share. Yet, the investment bankers of Mumbai-registered Just Dial Ltd (JDL), Citigroup Global and Morgan Stanley, have advised a price band of Rs 470-543 for a Rs 10 paid up share. Being an `offer for sale’, the hefty premium will go only to the sellers and not the company. Also, except some `first mover advantage’ the company does not enjoy any unique status in its domain. What optimism can the promoters of Just Dial exude when their own holding would be less one-third of the equity and their average cost of holding is less than a rupee?  Thus, a market-cap of between Rs 3284 cr and Rs 3794 cr looks grossly unjustifiable. In 2010 the same merchant banker, Citigroup, had advised SKS Microfinance to aggressively price its Rs 10 paid-up share at Rs 985. What happened to SKS Micro is now history. 

OFFER AT A GLANCE
Name	Just Dial Ltd
Quantum	Offer for Sale of 174.97 lakh shares
Offer % on Total Equity	25.02% on Rs 69.87 cr
Post-IPO Promoter Stake	33.1%
Offer Price	Between Rs 470 and Rs 543
Offer Amount	Between Rs 822 cr and Rs 950 cr
Fresh Issue Amount	NIL
Application Quantity	25 & Multiples of 25
Bid/Offer Opens	May 20, 2013
Bid/Offer Closes	May 22, 2013
Rated By	CRISIL
Rating	5 out of 5
Book Running Lead Managers	Citigroup Global, Morgan Stanley India
Registrars	Karvy Computershare

 

Offer & Objects

The present issue is an `Offer for Sale’ from three promoter-directors viz. V S S Mani (15,57,658 shares), Ramani Iyer (6,18,174 shares) and V Krishnan (6,32,144 shares) and from existing investors namely Sequoia Capital India Investments III (32,07,934 shares), SAIF II Mauritius Company (59,51,231 shares), Tiger Global Four JD Holdings (28,21,232 shares), Tiger Global Five Indian Holdings (17,42,996 shares), EGCS Investment Holdings (6,47,793 shares) and SAPV Mauritius (3,28,296 shares). The offer is being made through book building route with a special discount of Rs 47 per share for retail individual bidders. Investors should apply for a minimum of 25 shares and multiples of 25 thereafter.

The objects of JDL’s IPO are to derive the benefits of listing the shares on the stock exchanges and carry out the sale of 1, 74,97,458 shares by the existing shareholders.

 

Grading

CRISIL has assigned a grade ‘5/5’ (pronounced ‘five on five’) to the IPO. While CRISIL certifies that the fundamentals of the IPO were strong as compared to other listed equities in India, the IPO grade awarded was not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. CRISIL has also clarified that the grade was not a recommendation to buy or hold the graded instrument.

 

Background

The mentor of Just Dial is V. S. S. Mani – the MD and CEO of the company. Along with his friends, the promoter had co-founded a local search engine – `Askme’ in 1989. Later, he transferred his stake in Askme to his friends. Prior to this, he had worked for the yellow pages of United Database India Pvt. Ltd.  Just Dial was incorporated in 1993 as A&M Communications Pvt. Ltd. The local search services business was started three years later. Over the years, Just Dial has expanded its operations across India with a strong presence in top 11 large cities to become India’s leading local search services player.

 

Business Model

Just Dial provides search services under two main classifications: company search – related to any specific or any business need; category search – products or services based on a given classification, location or key words. Having started with live operator-assisted phone (voice) search service, JD subsequently launched internet, mobile-internet and SMS-based services. The search service is free for users; the company generates revenues from paid advertisers who subscribe to its fee-based campaign packages to be given priority ranking in the search results.

JD has been able to monetize the growth in searches on its platforms by converting business listings into paid listings. Out of its database of 9 mn listings as of February 2013, 195,100 were paid listings. It provides annual and long-term membership to its paid advertisers on advance payment on a monthly or annual basis. Paid advertisers can opt for premium or non-premium advertisement packages. Premium advertisement packages (platinum, diamond and gold membership packages) allow preferential listing of these advertisers ahead of non-premium and free listing.

 

Global Business De-merger

JDL had started its global search services business through its subsidiary JD Global. In FY11, it cancelled 525,000 shares (aggregating Rs 52.50 lakh) held in JD Global and invested Rs 72.50 cr in cumulative redeemable (optionally convertible) preference shares. Thus, JD Global ceased to be a subsidiary of JDL and the balance shares were held by JDL’s promoters and Sequoia Capital. In Q2FY12, JDL de-merged its investment in JD Global and issued equity shares to JDL’s shareholders. This resulted in write-down of Rs72.50 cr in the value of investments and net worth on JDL’s balance sheet. Post this transaction, JDL’s promoters held 48.25% in JD Global and the balance shares are held by other existing shareholders of JDL.

JDL has entered into a licence agreement with JD USA (subsidiary of JD Global) for using Just Dial’s brand for an annual licence fee of 1% of net revenues. JD Global provides local search services in the US as Just Dial provides in India. If JD Global’s operations take away significant management bandwidth of Just Dial, it could adversely impact the latter’s core operations in India.

 

Prospects

Beginning with just two cities – Mumbai and Delhi – Just Dial’s services are today available across the country. New data is added and updated regularly by 314 employees. To expand its network in existing and new cities, the company has appointed resellers to collect data from their respective territories. More than just the scale of its database, Just Dial’s ability to consistently keep it updated has been the reason for strong growth in usage of its search services. Just Dial has made the database (listings) more relevant and convenient to use. Historically, Just Dial has always taken 100% advance for paid campaigns, which has enabled it to operate with negative working capital. As a result, the company’s receivables have been extremely low. This signifies its ability to consistently monetize growth across search platforms. Growth in urbanization, increase in domestic household income, high telecom penetration, growth in internet and 3G subscribers, etc. augur well for the future of search engine companies like JDL.

 

Threats

World’s largest search engine – Google – has been present in India for many years, providing search services and navigation services through Google maps. Providing local search services in any country is passé for a global player such as Google. In India, it introduced interactive voice response (IVR)-based local search service in Hyderabad in April 2008. However, it was unable to achieve scale, making the business unviable. As a result, it closed this service in December 2010.

A comparison of Google India and Just Dial’s FY12 financials highlights that the latter’s revenue was about 22% of Google India’s revenues. Globally, Google’s search services are based on technology while the search market in India requires collection and maintenance of database through feet-on-street and voice-based search option. Hence, the probability of Google re-entering the local search market is low but any such move by Google would pose a serious threat to companies like JDL. Further, the local search services industry has low entry barriers as any player with a strong balance sheet and willingness to invest in the initial period can enter and make an impact on the local search services industry.

While Just Dial has consistently innovated itself and stayed ahead of competitors so far, any aggressive move by larger players such as Google India may alter the equations. As JDL grows, maintaining management bandwidth to oversee the growth will be a challenge, particularly in the backdrop of expansion in the US and Canada through a different promoter-entity. Also, Just Dial has to keep itself abreast of new technologies and new applications to stay ahead of the pack.

 

Domestic Competition

While Just Dial started its services in 1996 and has had the first-mover advantage, it faces stiff competition from many players in the domestic front. `Getit’ has been operating since 1986 and `Sulekha.com’ has been present since 1998. Also, multiple players have been providing yellow page services and other search engines – such as Google – have been present and popular for years. Incidentally, JDL’s competitors too have received private equity funding which will make the competition more intense in the coming years.  

 

Valuation 

Globally famous global search engine scrip, Google, currently commands a P/E of about 26 and P/BV of 4. JDL’s comparable domestic peer in the listed domain, Info Edge, enjoys a higher discounting of 31 P/E and 6 P/BV thanks to its liberal distribution policy. JDL’s floor price of the band (Rs 470) discounts last full year’s earnings more than 65 times and book value around 32 times which certainly can’t sustain for long post-listing. The promoters’ negligible cost of holding and their unassumingly low stake in the company thus give enough indication what’s in store for JDL investors. 

HOW JUST DIAL COMPARES WITH INFO EDGE
CO NAME	M-CAP	P/E	P/BV	P/FV	P/R	P/NB	OPM	YLD	PRICE
	(Rs Cr)	(x)					(%)		(Rs)
Info Edge	4,090	31.1	6.1	37.5	9.4	40.7	34.1	0.3	374.65
Just Dial (High)	3,794	75.2	36.7	54.3	13.8	105.3	25.7	0.0	543.00
(Low)	3,284	65.1	31.8	47.0	11.9	91.1	25.7	0.0	470.00