Avoid Justdial IPO on valuation basis - Aditya Birla Money

Company Background

Justdial, is a prominent "local" search engine company in India, incorporated in 1993 as A&M communications by Mr. V.S.S Mani. Justdial provides search service with information & user reviews of local businesses, products & services across India through multiple platforms such as Internet, Mobile internet (App), Telephone (Voice) and text (SMS). The search service is provided free to users, whereas it generates revenue from paid advertisers who subscribe to fee-based campaign packages to list their business (predominately, SMEs) on priority basis on search results.

JDL has successfully transformed itself from mere voice based local search service providers to other emerging & under penetrated platforms like internet & mobileinternet. Currently, JDL's internet platform generates ~50% of the search requests, followed by traditional voice (~39% in 9M13 vs ~64% in FY09) and mobile internet (~10% in 9M13 vs ~2% in FY09). Increasing smart phone penetration (~7% of total mobile phone shipments in CY12, grew by 36% over CY11) & under penetrated internet market (11.4% vs Asia 27.5% & World average 34.3%) provide enormous opportunity for JDL with strong mindshare with users.

Outlook and Valuation

At the lower price band of Rs. 470, JDL is valued at post-IPO issue market cap of Rs. 37.9bn, which translates into an annualised FY13E P/B & P/E valuation of 8.1x and 52.3x respectively. The company enjoys the first-mover advantage & strong mindshare among users in the local search space. In addition, it has shown resilience to the technological changes over the period and is planning to expand & deepen its presence into new territories & existing geographies respectively. On the financial front, JDL has a high cash conversion ratio (FCF/EBITDA - ~92% over FY10-12), due to 100% pre-payment by paid advertisers and the low capex intensive nature of the business. On the growth front, as the business model continues to move more towards non-linearity through increased penetration in the high growth internet and mobile internet platform (Mobile Internet & Internet - ~60% of the total traffic now vs ~35% in FY09), JDL should see expansion of operating margins and strong growth in earnings.

The net proceeds of the IPO would not come into the company, as it is an exit opportunity for the existing investors (16% of the OFS by promoters and the remaining 84% by PE investors). We accept that the business model is efficient and has good growth prospects; however, the valuation premium JDL is demanding is very steep (P/E of 60x on upper band and 52x on lower band on FY13E), considering Google (US) trades at 27x. We believe that the steep pricing of the IPO factors in the medium term growth expansion. In addition, entering into low-entry barrier business model (Google India & Nokia City lens app biggest threat) - demands rigorous monitoring and also has the risk of technological obsolescence. Moreover, ~ 16% of the issue size is an offer of sale by the existing promoters - a move not likely to inspire confidence among investors. We, thus, recommend an Avoid rating to Justdial IPO on valuation basis.

Source : Equity Bulls

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