Just Dial - Q3FY14 Result Update - Operating matrices disappoint - Centrum

Rating: Hold; Target Price: Rs1,130; CMP: Rs1,290; Downside: 13%

We maintain Hold rating on Just Dial and believe the company could face pressure on the back of slower growth in paid campaigns coupled with low usage & search request impacting pricing as in Q3FY14 results. High A&P spends of Rs0.6-1bn for transaction led businesses will impact near term profitability, affecting valuations. While strong revenues for transaction led businesses in FY15 could act as a positive trigger, we believe it is too early to gauge its success and hence see low visibility for earnings upgrade.

Q3FY14 results below expectations: The company posted 25.9% YoY growth in sales to Rs1199mn (est .Rs1211mn). Operating profit was up 40.6% YoY to Rs333mn (9% below expectation) with strong operating leverage expanding margins by 291bps to Rs27.8% despite 27.4% YoY increase in employee cost led by higher headcount in sales force. Sequentially, admin & other expenses increased 36.7% on higher A&P spend (Rs50mn) in the quarter. Adj PAT was up by 86% YoY to Rs298mn, 2.4% above expectations driven by high other income (up 214% YoY) on the back of Rs6bn in cash and investments and lower tax rate of 25.9% against 31% in Q3FY13.

Operating matrices disappoint: During the quarter, the company stopped zero down payment scheme for campaigns to take quality signups which impacted paid campaigns for the quarter to 249K (up 27.9% YoY and 4.6% QoQ). Both usage (115.6mn) and search (274.9mn) data were down on a sequential basis by 5.7% on the back of seasonality and design change in the website. Revenue/usage was up 0.3%YoY while revenue/paid campaign was down 1.6% YoY. The company has hiked prices across paid clients during the quarter which will help increase realizations.

Focus on vendors for Search-Plus: Management believes the early adaptation of 10 services under Search Plus has been encouraging with focus on consumer experience and expanding the depth and breadth of the service. The company is currently looking at vendor communication and empanelment and will later look at their monetization. Management believes this could have an advertising budget of Rs0.6-1bn in FY15. We do not anticipate significant revenues from these businesses by FY15E and have not factored in higher A&P spends currently.

Maintain Hold: We have lowered our revenue estimates for FY14/FY15 on the back of slowdown in usage and paid campaigns while increasing our operating margins on high fixed cost business model. We maintain Hold with a revised target price of Rs1130 (40x Dec 2015). We believe higher A&P spends for transaction led business could impact near term profitability while lower growth in paid campaigns and pressure on pricing could act as a key risk. Upside could be strong revenues from transaction-led business in FY15 leading to margin expansion.

Source : Equity Bulls

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