Just Dial Limited is tapping the capital markets with its offer for sale of 174.97 lac shares in a price band of Rs 470-543. The issue opens on Monday the 20th of May and closes on Wednesday the 22nd of May. The company is offering a discount of Rs 47 to retail investors and also extending a safety net to them. The anchor allocation was made at a price of Rs 530. The issue would raise Rs 822 crs at the lower end of the band to Rs 950 crs at the upper end

Business

Just Dial believes that they are one of the leading local search engines in India. They provide users of “Just Dial” search service with information and user reviews from the database of local businesses, products and services across India. The search service is available to users through multiple platforms: Internet, mobile Internet, telephone (voice) and text (SMS). In fiscal 2012, Just Dial addressed over 254.3 million search requests across our platforms. As of December 31, 2012, they were conducting approximately 195,100 campaigns for our paid advertisers.

As one of the first companies to offer local search services in India, they believe that they have a first mover advantage among consumers seeking information on local businesses. They aim to provide fast, free, reliable and comprehensive information to our users, which we believe will create a network effect to attract more search queries. They also believe that we have established Just Dial as a well-known Indian brand on the Internet. In addition, through our easy to remember phone numbers and user friendly mobile phone interface, we believe that we have been able to attain significant mind-share with users for their local search needs.

Listing on our search service provides businesses with exposure to users at a time when the users are making apurchase decision. Businesses may choose to pay for a listing to be featured on a priority basis in our search results, which we call a ‘campaign’. We call businesses that pay for this service ‘paid advertisers’. Many of our paid advertisers conduct multiple campaigns at any given time. Paid advertisers have the flexibility to choose different levels of priority in the search results for different geographic areas and products and services. The number of campaigns increased from approximately 40,500 as of March 31, 2009 to approximately 195,100 as of December 31, 2012.

We have a large database of approximately 9.1 million listings as of March 31, 2013. We believe that by providing fast and free access to our database, we provide a compelling user experience that will create a network effect and attract a large number of users who search for information to Just Dial. This large number of users will, in turn, prompt more businesses to pay for listings and become paid advertisers in order to be featured in our search results on a priority basis.

Just Dial has the First Mover advantage and a strong brand recognition which it uses to focus on the SME segment. Almost all the paid campaigns conducted by the company were for companies within the SME segment. The company offers the SME a cost effective platform, reaches out to the right target audience, and offers a personalised service to each advertiser.

Objects of the Offer

The objects of the offer are to achieve the benefits of listing of the equity shares on the Stock Exchange and to carry out the sale of the shares. Listing would provide a public market for the equity shares and allow a benchmark for the remaining shareholders of the company.

Financials

The total revenue of the company has more than doubled in the three year period from March 2010 to March 2012. Revenues have grown from Rs 1347 million in March 2010 to Rs 2752 million in March 2012. In the nine month period ended December 2012, they have further grown to Rs 2716 million. Net margins in the same period have grown from 14.34% to 18.32% in March 2012. In the nine month period ending December 2012 the net margin is marginally lower at 17.33%. The net profit for the year ended March 2010 was at Rs 193.25 million which grew to Rs 505.81 million in March 2012 and is at Rs 470.78 million in the nine month period ending December 2012.

Comparisons

There are no listed players in the line of activity that Just Dial is engaged in and hence there are no comparisons made with any other company. However if we are to increase the scope of comparison there is a listed entity in Info Edge which has a popular website “Naukri” and “Jeevansathi”. The company Info Edge reported revenues of Rs 4699.5 million for the year ended March 2013 and a net profit of Rs 915.94 million. The EPS of the company is Rs 8.39 and the PE 44.7 times based on March 2013 numbers. The revenues for Info Edge have grown by 20% over the previous year’s figure of Rs 3903.04 million. The company has made a provision for diminution in value of investments to the extent of Rs 236.92 million which has had an impact on the net profits.The net profits have fallen from Rs 1033.29 million in the previous year to Rs 915.94 million and without this exceptional item would have actually risen by about 10%.

I believe this company is a fair comparison with Just Dial and on the face of it looks steeply priced.

Concerns and Drivers

The key drivers would be the large middle class population; the opportunity would be the low internet penetration and the biggest threat would be the competition from the large global players like Yahoo and Google. The entry barrier for companies is virtually non-existent with the introduction of the internet and the World Wide Web as it is known as and realising the potential that India offers, global companies have stepped up their efforts to woo the Indian customer. Google advertises and offers to make a website for a business and also advises on how to promote the same. The geographical advantage of being in India is negated with the advent of technology.

Track Record of Merchant Bankers

There are two merchant bankers to the offer for sale from Just Dial. They are Citibank and Morgan Stanley.

Citigroup Global Markets India Private Limited

They have handled 2 issues each in 2010-11 and 2011-12 and this is the first issue in the year 2013-14. Of the four issues handled all four were at a premium on listing day, three were at a premium on the 30th calendar day after listing and 2 are trading at a premium as of the closing price on Friday the 17th of May. Their biggest disaster has been the over hyped issue of SKS Microfinance which after being issued at a price of Rs 985 rose to Rs 1490.70 and then fell to a low of Rs 54.40 before recovering to trade at Rs 119.45.

Morgan Stanley India Company Private Limited

The merchant banker has handled 4 issues in 2010-11 and 1 issue in 2011-12. Of the 5 issues handled, 4 were trading at a premium on listing day and also on the 30th calendar day from listing. Currently just 1 of the 5 issues is trading at a premium.

Incentives to Retail Investors

The company is offering a discount of Rs 47 or 10% to the floor price and 8.65% to the ceiling price as a discount to retail investors. There is also a safety net for retail investors which would kick in sixty trading days preceding the relevant date which is 180 days from the commencement of trading on the stock exchanges. The safety net is being provided by the promoters of the company and the amount required for the fulfilment of the safety net would be deposited in an escrow account and converted into interest bearing term deposits.

The safety net would be triggered if the volume weighted average traded price on the exchange in the last sixty traded days (roughly three calendar months as there are on an average 20-21 trading days a month) falls below the net price at which retail investors have been allotted shares. Assuming shares are allotted at the same price as anchor investors at Rs 530, the net price to retail investors would be Rs 483 and if the volume weighted average price was below Rs 483, the promoters would buy back the shares at Rs 483.

The incentive is attractive but the question is why the safety net. It is believed that the regulator was not happy with the asking price and therefore insisted on the safety net being provided by the promoter even though he is not raising fresh capital. The issue is an offer for sale and even then he would be depositing the money upfront to provide the safety net.

Valuations

The offer for sale in a price band of Rs 470-543 is steeply valued and offers little scope for making money in the medium or long term. The EPS for the year ended March 2012 is Rs 7.24 while on an annualised basis it is Rs 8.98 based on nine months ended December 2012. The PE at the lower band is 52.32 while at the upper end of the price band it is 60.44, certainly steep.

Retail Opportunity

The retail bucket is 10% of the issue size or 17,49,745 equity shares. At the minimum lot of 25 shares it means that there would be 69,990 successful applicants assuming that the retail portion is fully subscribed. The QIB is likely to be well received considering the anchor book where there are 15 entities who have been allotted shares. It may make sense for retail investors to punt the issue by investing the minimum amount of Rs 12,400 for 25 shares on the last day of the offer provided the QIB book is oversubscribed 2 times or more. There is every possibility that in that case the issue when listed would allow returns for investors in the short run.

Conclusion

The issue is steeply priced considering the valuations and business. There is impending threat from competitors and things could get tough in the near term. There is a trading opportunity for retail investors provided the QIB book is oversubscribed as explained above. Until and unless you want to take this limited risk where you would book profits in the marketplace or surrender by offering shares in the safety net, the issue may be avoided.

SEBI Disclaimer :- I intend to subscribe in the retail category provided the QIB portion is well received.