Just Dial Ltd Bloomberg Code: JUST IN

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1 Communications - Internet Media Oct 14, 215 Bloomberg Code: JUST IN India Research - Stock Broking India s local search engine, warming up with add-on services Just Dial is now into a platform where people can transact or buy and sell, not just a destination for local information, Search plus service with more added listings from online shopping to book a table in restaurant, doctors appointment, travelling services, buy grocery online, ordering flowers, B2B service and on demand services like plumber, electrician, with user reviews and ratings. To promote Search plus, JD is planning to spend around Rs.1 Mn for advertising campaign in. It has also added 12 more employees in Q1FY16 for sales and marketing teams. JD s revenue grew at a CAGR of 34% during (FY11-FY15), we expect the top line will further grow by 28% & 3% in and with 29% CAGR (FY15- ) on the back of awaited launch of Search plus with the new look, more added services, real time price discovery, more images, reviews and ratings. JD is actively entering into about 25-3 Tier-II and Tier-III cities with the new Search plus backed by aggressive sales and marketing teams (JD added 12 new employees in Q1FY16 out of which 65 on sales force and 4 on service front, total employees: 17) and Search plus advertisement/promotion campaigns (expecting Search plus ad campaigns would start by the end of Oct 216), we expect these factors will drive the top line growth by attracting more paid listings and more users. EBITDA Margins are growing consistently from the last five years at a 3% CAGR (FY13-FY15). Expecting the EBITDA margins would go down to 24.% in due to substantial promotional expense in, as the management also highlighted that advertising spend of Rs.1 Mn kept aside to coincide with the launch of Search plus, we expect EBITDA margins would recover to 27.% in. Valuation and Outlook Given the market conditions, we chose to value Just Dial on a P/E basis. Since listing, Just Dial has traded in the range of 52-62x with P/E averaging to 68.3x of earnings which we believe is unsustainable given the forward earnings and return ratios. We initiate coverage on Just Dial with a BUY rating for a price target of Rs.1316 representing an upside potential of 23% based on 51.2x (25% discount to mean P/E of 68.3x) of EPS of Rs.25.7 for a period of 9-12 months. Key Risks ycompetition risk, strong vertical players in the online search market. Recommendation (Rs.) BUY CMP (as on Oct 13, 215) 169 Target Price 1316 Upside (%) 23 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 179 / 748 3M Avg. daily volume (mn).7 Beta (x) 1. Sensex/Nifty / 8132 O/S Shares(mn) 7.5 Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 32.6 FIIs 38.7 DIIs 6.2 Others 22.5 Stock Performance (%) 1M 3M 6M 12M Absolute 31 (9) (18) (35) Relative to Sensex 25 (5) (11) (36) Source: Bloomberg Relative Performance* Jul-14 Dec-14 May-15 Oct-15 Just Dail Sensex Source: Bloomberg; *Index 1 Exhibit 1: Valuation Summary (Rs. Mn) YE Mar (Rs. Mn) FY13 FY14 FY15 Net Sales EBITDA EBITDA Margin (%) Adj. Net Profit EPS (Rs.) RoE (%) PE (x) ; *Represents multiples for FY13, FY14 & FY15 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Analyst Contact Abhiroop Varma abhiroopvarma.v@karvy.com 1

2 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) FY15 Net sales Optg. Exp EBITDA Other Income Depreciation Interest PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net margin (%) P/E (x) EV/EBITDA (x) Dividend Yield (%) Balance sheet (Rs. Mn) FY15 Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Current Liabilities Debt Other Liabilities Balance Sheet Ratios RoE (%) RoCE (%) Debt/Equity... Equity/Total Assets P/BV (x) Exhibit 2: Shareholding Pattern (%) Company Background Just Dial limited is India s leading local search engine with the registered & corporate office based in Mumbai. The company started offering local search services in 1996 under the Justdial brand, under the leadership of Mr.V.S.S.Mani (Managing Director). It also has offices across India in Ahmedabad, Bengaluru, Chandigarh, Chennai, Coimbatore, Delhi, Hyderabad, Jaipur, Kolkata and Pune. Just dial ranked 4 among the top websites in India. Its search service platform provides users with information and user rating & reviews from the company s database of local businesses, products and services. JD s search service available in multiple platforms like PC internet with website mobile internet having Just dial Apps available on the Android, ios, Windows, and Blackberry platforms and voice/sms with 24/7 service with the easy to remember numbers ( and ). Just Dial went for an IPO in May 213 to get listed on exchanges with an allotment price of Rs.53 per share. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY15 PBT Depreciation Tax (517) (722) (119) Changes in WC Others (369) (38) (78) CF from Operations Capex (681) (559) (785) Investment (5666) (15) (2) Others 4761 CF from Investing (1585) (259) (2785) Change in Equity 23 Dividends & Interest (164) (17) (168) CF from Financing (141) (17) (168) Change in Cash DIIs 6.2% Others 22.5% FIIs 38.7% Promoters 32.6% Search related services 99.8% Other operating revenue.3% Source: BSE, Karvy Research 2

3 Just dial has a huge opportunity in SMEs sector, through growing their business by migrating SMEs from offline to online. Just dial s business model rests on the vast potential of the SME sector. SMEs are contributing nearly 8% of India s GDP, 45% of industry output and 4% of industry exports. As of FY15, there are nearly 49 Mn SMEs have been recorded and increasing by 5% YoY, out of which 55.3% SMEs are from rural areas. Just dial has a huge opportunity in SMEs sector to grow their business. JD is also actively entering into about 25-3 Tier-II and Tier-III cities with the new Search plus and aggressive sales & marketing teams. Search plus advertising/promoting campaigns are expected by the end of Oct 216 and these factors will drive the top line growth by adding more paid listings and attracting more users. Exhibit 4: Working Enterprises 5 Exhibit 5: SMEs area-wise share Urban 44.7% Rural 55.3% FY'7 FY'8 FY'9 FY'1 FY'11 FY'12 FY'13 FY'14 SMEs (Working Enterprises in Mn) Just dial has also recorded over 3.5 Mn (July 215) app downloads for its mobile platform, internet users are also growing significantly in India with 31% CAGR (FY13-15) As of June 215, 354 Mn internet users have been recorded in India out of which 6% access internet from mobile Exhibit 6: Internet users growth Business Overview: Oct-13 Oct-14 Dec-14 Jun-15 Intenet users growth in india (Mn) India stands as second largest country by the number of internet users, and internet market is growing significantly from the last few years with the introduction of low cost smart phones with 3G/4G services (368 low cost smart phone models have been released in the price range of Rs.5-15 this year). As of June 215, India has reached 354 Mn internet users increased by 73% from 213 with 31% CAGR (213-15). Out of this, 6% access internet from mobile, with the increasing penetration of smart phones, mobile internet users in India grew from 173 Mn in December 214 to 213 Mn users in June 215. Just dial s top and bottom-lines have been growing consistently from the last 5 years at 33.8% and 48.2% CAGR (FY11-FY15). We expect the top line (revenue) will further grow by 28.% and 3.% in and with the consistent growth in the paid campaigns (CAGR 3.% (-)). Expecting JD s new Search plus would take 2-3 years to show the full effect on JD s revenue growth, management of JD also highlighted that the monetization for Search plus would start by. Exhibit 7: Revenue (Rs. Mn) FY11 43% 38% 2621 FY FY13 27% 28% 4613 FY FY15 28% % % 4% 3% 2% 1% Total Revenue from operations (Rs. Mn) Growth (%) % Exhibit 8: EBITDA, PBT, PAT (Rs. Mn) FY11 FY12 FY13 FY14 FY15 EBITDA PBT PAT

4 Search plus and other upcoming add-ons: Oct 14, 215 JD is also coming up with the new add-ons (expecting in the next quarter) like JD cash which also allows the micro payments to vendors like news paper vendors milkmen, etc. through JD cash. With JDs OMNI systems for the vendors with Plug-in-play solution, in just 1 minutes one can just plug-in and shift entire shop into just dial s cloud hosted solution which gets automatically published on Just dial online platform. Exhibit 9: Listings & paid campaigns % 5.8 FY11 2.4% 2.3% 2.2% 2.2% 2.3% 2.4% 7.2 FY FY13 Exhibit 1: Listings & paid campaigns Just dial is also maintaining Low price model of the product: JD s revenue growth is in line with the paid campaigns growth, which indicates that JD is maintaining the consistent price levels. As of Q1FY16, 3,47, paid campaigns have been recorded, which is 2.2% of listings (15.3 Mn). We expect the percentage of paid campaigns from listings would increase to 2.3% (of 19 Mn listings) in and 2.4% (of 24 Mn listings) in. JD has also gained its market share within the short span of time due to their low price model, we expect the same price movements will continue further. JD is also spreading their network in Tier-II and Tier-III cities, consistent price movement can quickly gain the market share and attract more SMEs (paid advertisers),which in turn will increase the top line growth. Year FY12 FY13 FY14 FY15 No of Listings (Mn) Listings Growth (%) No of campaigns ( s) Campaigns Growth (%) % of campaigns from listings FY FY No of Listings in Justdial (Mn) % of campaigns from listings 3.% 2.5% 2.% 1.5% 1.% 4

5 Exhibit 11: Business Assumptions Y/E Mar (Rs. Mn) FY14 FY15 Comments Consolidated Revenue Revenue Growth (%) EBITDA EBITDA Margins (%) PAT (normalized) Diluted EPS (Rs.) Capex (29) (681) (559) (785) Net CFO Debt Free Cash Flow We expect revenue will grow by 28.% and 3.% in and, on the back of new "Search plus launch by increasing sales and marketing teams; and Search plus advertising/ promotion campaigns, actively entering into Tier-II and Tier-III cities will drive top-line growth. We expect EBITDA margins will fall to 24.% in due to substantial promotion expenses and the same will recover in to 27.%. PAT margins will fall slightly to 17.% and 18.5% in and, due to the fall in EBITDA margins. We expect EPS will fall to Rs.18.2 in comparing to previous year on the back of fall in PAT and the same is expected to recover to Rs.25.7 in. JD is maintaining capex at 5-7% levels on revenue from FY14 and FY15, expecting the same levels will continue further. In FY15, JD has invested Rs.375 Mn in lease hold land, hence FY15 recorded high capex figure. JD is generating efficient cash flows from operation at 32.2% CAGR (FY11-15), we expect the cash flow will further grow at 3.7% CAGR (FY15-). Exhibit 12: Karvy vs Consensus Revenues (Rs. Mn) Karvy Consensus Divergence (%) Comments We expect the launch of new Search plus with more added services backed by aggressive sales and marketing teams, spreading their network in Tier-II and Tier-III cities will drive the topline growth. EBITDA (Rs. Mn) (8.7) We expect the substantial increase in the Search plus promotional expenses in (8.) will hit the EBITDA margins. EPS (Rs.) (14.6) EPS will fall to Rs.18.2 in due to the fall in PAT and the same will recover to Rs.25.7 in (19.5). Source: Bloomberg, Karvy Research 5

6 Exhibit 13: EBITDA Margin % 3.8% 27.% 4% 28.1% 24.% FY13 FY14 FY15 3% 2% 1% % EBITDA (Rs. Mn) EBITDA Margin (%) During FY11-FY15, EBITDA grew at 38% CAGR, we expect the substantial promotional expenses in would hit the EBITDA margin down to 24.%. Coming to, we expect margins would recover to 27.%, as management also highlighted that Rs.1 Mn advertising spend only in coincide with the launch of Search plus. Exhibit 14: PAT Margins 2 4% 26.1% % 23.5% 17.% FY13 FY14 FY15 3% 2% 18.5% 1% % PAT (Rs. Mn) PAT Margin (%) We expect PAT margins would slightly fall in & comparing to previous years due to the drop in EBITDA margins on the back of significant increase in promotional expenses. Just dial has posted consistent PAT growth at 48% CAGR during FY In FY15, it has recorded PAT margin 23.5%, low comparing to 26.1% in FY14, due to increase in the employee benefit expenses. JD issued ESOPs worth Rs.153 Mn and gratuity of Rs. 43 Mn (Management confirmed gratuity is onetime expense which they had spent in FY14). These expenses pushed the PAT margins down in FY15 compared to FY14. Exhibit 15: RoE, RoA and RoCE (%) 3.% 25.7% 25.1% 23.% 23.1% 2.% 2.1% 18.6% 23.2% 2.9% 17.6% 2.8% 1.% 15.8% 14.4% 11.3% 11.2% 12.8%.% FY13 FY14 FY15 RoE (%) RoA (%) RoCE (%) Over the years, Just dial has been generating healthy returns on investments. Due to the slight fall in the PAT margins, returns RoE, RoCE & RoA are expected to fall to 17.6% & 18.6% & 11.2% in and the same would recover in to 2.8%, 23.1% & 12.8%. Exhibit 16: EPS (Rs.) & Growth (%) 28 66% 7% % % 3% % 15% -8% % -1% FY13 FY14 FY15 EPS Trend (Rs.) Growth (%) Exhibit 17: CFO & Free Cash Flow (Rs. Mn) FY13 FY14 FY15 CFO Free cash flow 6

7 Exhibit 18: Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 7

8 Valuation & Outlook JD has a strong balance sheet with no debt and significant free cash flows. JD s topline grew at a CAGR of 17% during FY13-15 while its EBITDA margin and RoE averaged to 28.9% and 24.6% during the same period. We believe Just Dial to grow at a CAGR of 29.% during FY15-17E and also to incur substantial promotional expenses during leading to reduction in EBITDA margin to 24.% and the same is expected to recover to 27.% by while RoE stands reduced to 17.6% by and is expected to recover to 2.8% by. Just Dial is enjoying the first mover s advantage in local search market, over 18 years of presence, a strong user data base and the market share, which have created the strong barriers for the new entrants in local search market. Just Dial has the strong presence in the 11 large cities (Ahmedabad, Bengaluru, Chandigarh, Chennai, Coimbatore, Delhi, Hyderabad, Jaipur, Kolkata, Mumbai and Pune) which are contributing 9% of revenue and 7% of paid listings. Just dial is actively entering into about 25-3 Tier-II and Tier-III cities with the new Search plus service and the consistent low price model having different packages, like premium packages (Top 3 positions) and non-premium packages which determine priority of placement in search results, more payment options available for the paid advertisers like fixed monthly/weekly or annual fees to run search led advertising campaigns, expecting all these factors will attract more listings and increase the top line growth in the coming years. Expecting Search plus will take 2-3 years to show the full effect of change in the top line numbers. Given the market conditions, we chose to value Just Dial on a P/E basis. Since listing, Just Dial has traded in the range of 52-62x with P/E averaging to 68.3x of earnings which we believe is unsustainable given the forward earnings and return ratios. We initiate coverage on Just Dial with a BUY rating for a price target of Rs.1316 representing an upside potential of 23% based on 51.2x (25% discount to mean P/E of 68.3x) of EPS of Rs.25.7 for a period of 9-12 months. Exhibit 19: PE Band Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 P/E Mean + 1SD -1SD Source: Prowess, Karvy Research Key Risks ycompetition risk, strong vertical players in the online search market. 8

9 Financials Exhibit 2: Income Statement YE Mar (Rs. Mn) FY13 FY14 FY15 Revenues Growth (%) Operating Expenses EBITDA Growth (%) Depreciation & Amortization Other Income EBIT Interest Expenses PBT Tax Adjusted PAT Growth (%) (7.5) 41. Exhibit 21: Balance Sheet YE Mar (Rs. Mn) FY13 FY14 FY15 Cash & Cash Equivalents Sundry Debtors Loans & Advances Investments Gross Block Net Block Miscellaneous Total Assets Current Liabilities & Provisions Debt Other Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

10 Exhibit 22: Cash Flow Statement YE Mar (Rs. Mn) FY13 FY14 FY15 PBT Depreciation Tax Paid (3) (442) (517) (722) (119) Inc/dec in Net WC Other Income (136) (399) (489) (538) (618) Other non cash items Cash flow from operating activities Inc/dec in capital expenditure (361) (29) (681) (559) (785) Inc/dec in investments (8249) (7883) (5891) (15) (2) Others Cash flow from investing activities (3535) (1287) (1585) (259) (2785) Issuance of equity Dividend paid (14) (141) (14) Others (39) (24) (29) (28) Cash flow from financing activities (141) (17) (168) Net change in cash () Exhibit 23: Key Ratios YE Mar FY13 FY14 FY15 EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) Dividend Payout ratio (%) Debt/Equity..... RoE (%) RoCE (%) Exhibit 24: Valuation Parameters YE Mar FY13 FY14 FY15 EPS (Rs.) DPS (Rs.) BV (Rs.) PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY13, FY14 & FY15 are based on historic market price 1

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