Just Dial IPO: Asking For Too Much

Just Dial, India the local search provider, is hitting the capital markets with an IPO which will be open from May 20-22, 2013. Under this issue, the company is putting on offer 1.75 crore equity shares of face value of Rs 10 each.

The company has priced the IPO in a price band of Rs 470 and Rs 543 a share. Just Dial would raise Rs 950 crore at the upper end of the price band and Rs 822.5 crore in the lower band. Following the offer, the public will hold 25.04 per cent of the post issue equity of Rs 69.87 crore or 6.99 crore equity shares. Retail investors are offered a discount of 10 per cent on the issue price.

The entire funds raised through this issue is an offer for sale with promoter V S S Mani and its existing investors, including SAIF Partners, Tiger Global, Sequoia Capital and SAP Ventures selling a part of their holdings.

About The Company

Just Dial is a local search engine with a massive database of local businesses, products and services across the country. The company provides users a search service with locality-wise, citywise information and user reviews free of cost. The users can access this service via multiple platforms like PCs, mobile internet, telephone (voice) and text (SMS). In fiscal year 2012, the company addressed over 254.3 million search queries across all platforms. The company has a definite first mover advantage, being one of the first to offer local search services in India.

Financials & Valuations

Just Dial has posted a topline of Rs 264.36 crore for 9MFY13 as against that of Rs 259.40 crore seen in FY12. On the operating front, the company has posted a profit of Rs 63.19 crore for 9MFY13 as against Rs 55.53 crore for FY12. In fact, the operating margins showed a consistent improvement until FY12. Its net profits for 9MFY13 stood at Rs 47.08 crore as against Rs 50.58 crore for FY12. In the 2008-12 period, the topline and bottomline witnessed a CAGR of 50 per cent and 136 per cent respectively, which is tremendous but does not look sustainable over a longer period.

Considering the price bands of Rs 470-543, the expected market capitalisation is likely to be in the range of Rs 3281-3818 crore. At the post issue capital and on an annualised profit of Rs 63 crore, the stock is likely to trade at a PE of 52.35x and 60.93x for the respective price bands. The only listed player in this space so far in the Indian context is Info Edge (India), which is trading at a trailing 12-month PE of around 39x.

Even in the global context, Google Inc. is trading at a price-to-earnings multiple of 25x. Even looking at the market cap-to-sales, the issue seems to be expensive. Info Edge (India) is trading at a market cap-to-sales ratio of 8.4x its FY13E sales, whereas Just Dial (at its lower price band) is coming in at a ratio of 9.3 its FY13E sales. Although the company has grown at a breathtaking pace in the past due to lower base, the growth would moderate in the future. This is visible in the annualised 9MFY13 sales and profit growth, which has grown at a slower clip of 36 per cent and 20.7 per cent respectively on a yearly basis.

As has been mentioned already, this is an offer for sale providing an exit route to the investors. The offer has already seen issues related with valuation, and hence the company has lowered the same. However, it does not justify a price-to- earnings ratio of 50x. There is no doubt that the valuation of the company is still looking steep.

The investors as well as two of the promoters are making an exit, booking partial profits from this venture. As this is an offer for sale, it has to be backed by institutions, and thus 75 per cent of the issue has been reserved for QIBs.

We believe that there is very little for retail investors in this issue at this juncture. In the last six months, we have seen a total of four issues with a size of over Rs 100 crore. Of these, three are trading below their respective offer price, indicating that valuations are of prime importance for the market. Bharti Infratel, the biggest IPO in the last two years, debuted on the stock exchange at a nine per cent discount despite being oversubscribed. Internet stocks need uniqueness in their business model, but Just Dial’s model is pretty similar to that of other search providers like Askme.com. Considering these factors, we suggest that the retail investors stay away from the issue.