Powering Local Search Engine
With a first-mover advantage and strong brand recall, Just Dial (JDL) has taken the
top position in voice-based search and is also likely to strengthen its muscle in
Internet-based search in India. By offering its existing membership packages from
only 11 states to major cities across various states in India, adding more business
categories and creating specialised membership packages, JDL is likely to maintain a
healthy and profitable growth in the long run. With control over employee costs,
operating margin can improve significantly in the long run, while increased product
offerings can provide non-linear revenue growth. JDL stock trades at 30.6x/21.8x
EV/EBITDA and 48.6x/35.6x PE for FY14E/FY15E, respectively, lower than global peer
Yelp Inc, which trades at 37.4x/75.8x CY14E EV/EBTIDA and P/E, respectively. The
likely strong revenue/PAT CAGRs of 36.1%/43.1%, respectively, healthy free cash flow
of Rs1.5bn over FY13E-FY15E and cash/share of Rs93 should command a premium
valuation. We have assigned a Buy rating to JDL with a target price of Rs800, valuing
it at FY15E 42.2x/26.5x/7.5x P/E and EV/EBITDA, EV/S, respectively.
Ability to offer non-linear growth: Currently, JDL’s advertisement revenue is from paid
campaigns. The company is in the process of improving its offerings like launching enabling
transactions such as taxi booking/hotel reservation etc, car listing, quick quotes, and user
ratings. JDL has also developed a master application for Android operating system-based
mobile phones and is in process of developing such an application for Blackberry phones.
We believe these new offerings would open up new sources of revenue, thereby providing
non-linear revenue growth in the long run.
Assured growth with annuity income: JDL has changed its payment policy from three-four
months’ advance payment to weekly/monthly payment for the advertisers under its normal
packages, which start from as low as Rs299/week. We expect it to reduce the churn rate and
book in clients for the long term, thereby reducing the impact of competition apart from
providing better comfort to advertisers’ cash flow by improving the return on investment. We
expect JDL to post a 29% campaign CAGR over FY13E-FY15E, leading to healthy 36.1%
net sales CAGR over the same period.
Lower employee costs to improve margins: A significant portion of sales executive costs
is linked to advertisement revenue, very much similar to the compensation of an insurance
agent. An employee gets annuity income from JDL as long as the advertisers secured by
him continue their association with JDL. If an employee leaves JDL, he loses future annuity
income from JDL in respect of existing advertisers, and therefore it becomes challenging for
competitors to attract the talent from JDL. As a result, costs per employee increased by a
mere 8.2% CAGR over FY09-FY13E. Employee costs formed 48.8% of revenue in FY13.
With the rising share of Internet-based search, lower costs per employee and better
utilisation of its call centre employees, employee costs can reduce significantly in the long
run, thereby improving the margins. We have factored in a moderate 60bps improvement in
margins over FY13-FY15E as against the management’s guidance of 200bps-250bps
improvement annually. JDL aims to achieve operating margin of 30.0%-40.0% compared to
27.8% currently.
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With a first-mover advantage and strong brand recall, Just Dial (JDL) has taken the
top position in voice-based search and is also likely to strengthen its muscle in
Internet-based search in India. By offering its existing membership packages from
only 11 states to major cities across various states in India, adding more business
categories and creating specialised membership packages, JDL is likely to maintain a
healthy and profitable growth in the long run. With control over employee costs,
operating margin can improve significantly in the long run, while increased product
offerings can provide non-linear revenue growth. JDL stock trades at 30.6x/21.8x
EV/EBITDA and 48.6x/35.6x PE for FY14E/FY15E, respectively, lower than global peer
Yelp Inc, which trades at 37.4x/75.8x CY14E EV/EBTIDA and P/E, respectively. The
likely strong revenue/PAT CAGRs of 36.1%/43.1%, respectively, healthy free cash flow
of Rs1.5bn over FY13E-FY15E and cash/share of Rs93 should command a premium
valuation. We have assigned a Buy rating to JDL with a target price of Rs800, valuing
it at FY15E 42.2x/26.5x/7.5x P/E and EV/EBITDA, EV/S, respectively.
Ability to offer non-linear growth: Currently, JDL’s advertisement revenue is from paid
campaigns. The company is in the process of improving its offerings like launching enabling
transactions such as taxi booking/hotel reservation etc, car listing, quick quotes, and user
ratings. JDL has also developed a master application for Android operating system-based
mobile phones and is in process of developing such an application for Blackberry phones.
We believe these new offerings would open up new sources of revenue, thereby providing
non-linear revenue growth in the long run.
Assured growth with annuity income: JDL has changed its payment policy from three-four
months’ advance payment to weekly/monthly payment for the advertisers under its normal
packages, which start from as low as Rs299/week. We expect it to reduce the churn rate and
book in clients for the long term, thereby reducing the impact of competition apart from
providing better comfort to advertisers’ cash flow by improving the return on investment. We
expect JDL to post a 29% campaign CAGR over FY13E-FY15E, leading to healthy 36.1%
net sales CAGR over the same period.
Lower employee costs to improve margins: A significant portion of sales executive costs
is linked to advertisement revenue, very much similar to the compensation of an insurance
agent. An employee gets annuity income from JDL as long as the advertisers secured by
him continue their association with JDL. If an employee leaves JDL, he loses future annuity
income from JDL in respect of existing advertisers, and therefore it becomes challenging for
competitors to attract the talent from JDL. As a result, costs per employee increased by a
mere 8.2% CAGR over FY09-FY13E. Employee costs formed 48.8% of revenue in FY13.
With the rising share of Internet-based search, lower costs per employee and better
utilisation of its call centre employees, employee costs can reduce significantly in the long
run, thereby improving the margins. We have factored in a moderate 60bps improvement in
margins over FY13-FY15E as against the management’s guidance of 200bps-250bps
improvement annually. JDL aims to achieve operating margin of 30.0%-40.0% compared to
27.8% currently.
Valuation
Globally, there are players which have a business model similar to that of JDL. Also, the markets in which these
companies are present are more mature in terms of usage. JDL has the potential to scale the heights at which
these companies are at currently, as and when the domestic market matures.
Yelp, an US-based search engine for local business, trades at EV/S of 8.4x/5.9x CY13E/CY14E earnings,
respectively, and EV/EBITDA of 37.4x CY14E earnings. Another such company is Angie’s List, also an USbased
search engine, which trades at EV/S/EV/EBITDA of 4.1x/46.0x, respectively, based on CY14E earnings.
Following JDL’s likely healthy margin of 28.4% in FY15E compared to 15.8% in the case of Yelp for CY14E and
a healthy growth rate, JDL deserves a premium multiple.
JDL operates an asset-light business model with a negative working capital cycle. Following healthy
revenue/PAT CAGRs of 36.1%/43.1%, respectively, over FY13E-FY15E, we expect JDL to report free cash flow
of Rs1.5bn over the same period, thereby resulting in cash/share of Rs93.
By offering its existing membership packages for listing from only 11 states to major cities across various states
in India, adding more business categories and creating specialised membership packages, JDL is likely to
provide healthy and profitable growth in the long run.
JDL stock trades at 30.6x/21.8x EV/EBITDA and 48.6x/35.6x P/E based on FY14E/FY15E financials,
respectively, lower than its global peer Yelp, which trades at 37.4x/75.8x CY14E EV/EBITDA and P/E,
respectively.
We have valued JDL at 26.5x FY15E EV/EBITDA, at a 30% discount to Yelp. We have assigned a Buy rating to
JDL with a target price of Rs800, translating into FY15E 42.2x/26.5x/7.5x P/E and EV/EBITDA and EV/S,
respectively.
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