Investors can avoid the initial public offering of shares by Just Dial, a search service provider with a large database of listings across a wide range of categories. Although the business model of the company is quite strong, the steep valuation that the offer demands, intense competition among local search engines, and the growing local presence of global players are key concerns.

Just Dial is dependent on digital advertising (on computers and smartphones) in a relatively smaller market as India is. So, even if scalability is managed on the database front, the company may find it challenging to translate it into advertising revenues.

Also, this issue is entirely an offer-for-sale with private equity players and the promoters partly reducing their holdings in the company. So, no part of the funds raised would be used towards business development.

At the upper end of the price band (Rs 470-543), the offer demands a price-to-earnings multiple of 60 times its annualised earnings for the nine-month period ending December 2012. Even at the lower end, the valuation multiple is 52 times.

This is way too expensive compared with broader markets and internet-based businesses such as Info Edge (40 times FY13 earnings) and even mammoth global firms such as Google and Facebook.

For the nine months of FY13, Just Dial recorded revenues of Rs 271.6 crore and net profits of Rs 47 crore.

Between FY-08 and FY-12, the company’s revenues and profits grew at a compounded annual rate of 40 per cent and 121.5 per cent respectively. A small base makes profit growth seem extremely fast paced. But in the last couple of years, the growth has moderated . Annualising the latest nine month period numbers, profit growth in FY13 would be 22.6 per cent.

The US based Yelp! has a similar business model, though it is making losses at the net level. But Yelp! is much larger compared with Just Dial, recording revenues of $137.6 million (Rs 750 crore) in CY12 and has guided for $210 million (Rs 1144 crore) in CY13. Just Dial has no listed peers. Prominent unlisted peers include Sulekha, Asklaila and Askme.

Investors can consider investing in Just Dial later in the secondary markets, if the stock corrects by at least 25-30 per cent on dips related to the broader market.

Getting the clicks

Just Dial provides users information through classified listings on a host of categories such as restaurants, malls, hospitals, ATMs, and movie halls.

Customers reach the company either by calling or through its portal. It was the first mover in this space in India and has been able to build a stable model. If a business or an SME wishes to be given priority in listing or prominence ahead of others, Just Dial charges a fee which is the source of revenues for the company.

As of December 2012, Just Dial has a database of 91 lakh listings, which has rising rapidly over the past three-four years. Of this, 1.95 lakh were paid campaigns. The conversion has been to the extent of only a little over 2 per cent.

Nearly 61 per cent of the search requests coming to Just Dial is from the Internet (including mobile internet), the rest from voice. The proportion of traffic is likely to tend towards the internet in light of the increasing penetration of smartphones and also rising broadband coverage. The Internet, being a wide-ranging platform for a host of businesses to launch services, poses formidable competition to Just Dial from the likes of Sulekha, Asklaila and Askme. Its peers operate with similar models and are backed by strong venture capitalists and private equity players.

Intense Competition

Data from Crisil suggest that these players still have only a third to a fourth of the listings that Just Dial has. But they would still be competing for advertisements.

Also, Google is increasing its India presence at a rapid pace with its superior technology access enabling it to map businesses especially in the metros.

It is likely to take away a large share of advertising on the internet from many other players.

A recent report by FICCI-KPMG indicates that digital advertising would grow at 32.1 per cent annually from Rs 2,830 crore in 2013 to Rs 8,720 crore in 2017. The market itself is not too large as compared with developed economies, there are many other unrelated websites and portals vying for the pie.

Clearly, the rate of growth is not scorching enough and even if Just Dial, being the market leader grows at a faster pace, valuations would be compelling only if the stock corrects significantly.

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