just dial ipo_note

BMA Wealth Creators Equity Research

EQUITY RESEARCH

IPO NOTE JUST DIAL LTD.

[email protected] 033 40000163

17th May, 2013

DETAILS OF THE ISSUE

THE OFFER

Just Dial intends to raise Rs 822-950 crore through the Initial Public Offer which comprises a fresh equity issue of 1.75 crore shares. At the lower band of Rs 470/share the company intends to raise Rs 822 crore while at the upper band of Rs 543/share it is estimated to raise Rs 950 crore. Retail investors will be provided with a 10% discount on the floor price. The promoters of the company provide to buy back shares under the safety net arrangement for retail shareholders in case the price of the stock goes below the safety net trigger price, within the period stipulated by SEBI.

IPO GRADING

The Offer has been graded by CRISIL, a SEBI registered credit rating agency. The credit rating agency has assigned a grade of 5/5, indicating that the fundamentals of the issue are strong relative to other listed equity securities in India. RECOMMENDATION At the upper end the total issue size is Rs. 950 crore whereas the price band for the issue is Rs. 470 to Rs.543. retail investors will be given a discount on 10% to the resulting issue price and will further be given a safety net mechanism. This means that if the market price (based on last 2 months vwap price). Six months post listing is less than the issue price, retail investors will be refunded money at the issue price. The valuation of the issue leaves little room for appreciation. However, with the above mentioned advantages for retail investors we recommend retail investors to subscribe with a return expectation of 9% to 12%.

OBJECTIVES

The Company proposes to utilize the Net Issue proceeds for the following objects:

To achieve the benefits of listing the Equity Shares on the stock

exchanges;

To enhance the brand name; and

To provide liquidity to existing shareholders.

Issue Size (Rs Cr) 882-950

Face Value 10.00

Issue Opens 20/05/13

Issue Closes 22/05/13

Price Band (Rs) 470-543

Bid Lot (no. of shares) 25

Morgan Stanley India Citigroup Global Markets India

Pre-Issue% Post-Issue%

Promoters 37.15 33.13

Public - 25.04

Others* 62.85 41.83

Note*: Others include SAIF Mauritius Company, Sequoia, Tiger Global and SAPV

Total Issue Size (No. of shares) 17497458

Issue Break Up Percentage

QIB 75

Non-Institutional 15

Retail 10

Issue Details

Lead Managers

Shareholding Pattern %

Book Building Pattern

Just Dial Limited


Just Dial provides search services across two main genera: company search – related to any specific or any business need; category search - products or services based on a given classification, location or key words. Having started with live operator-assisted phone (voice) search service, it later launched internet, mobile-internet and SMS-based services. The search service is free for users. The company generates revenues from paid advertisers who subscribe to its fee-based campaign packages. The advertisers will be given priority ranking at the time when users are searching for their required results. Just Dial was incorporated on December 20th 1993 as A&M Communications Pvt. Ltd by Mr V.S.S. Mani, in New Delhi as a private limited company under the Companies Act. The name of the company was changed from A&M Communications Private Limited to Just Dial Private Limited on December 26, 2006. The company was converted into a public limited company on July 22, 2011 and consequently, the name was changed to Just Dial Limited. Over the years, Just Dial has expanded its operations across India with a strong presence in top 11 large cities to become India’s leading local search services player. In FY12, the Company has addressed over 25.43 crore search requests across its platforms. The Company has a database of approximately 9.1 million business listings (primarily SMEs) across various cities and towns in India. As of Dec 2012, Just Dial Limited has conducted approximately 195100 campaigns for its paid advertisers.

COMPANY OVERVIEW

FUTURE STRATEGIES

Invest in strengthening the brand: Investment in brand building campaign will help Just Dial further strengthen the

brand, lead to greater search volume from their users and greater number of paid advertisers as well. Increasing

awareness through online and offline direct marketing efforts are their future brand building strategies.

Enhance the users’ experience: The Company intends to continue to invest in technology to develop search algorithms

that would be more efficient and adaptable to users. To enhance the user experience and handle user traffic, the

company is continuously upgrading the hardware used, and developing new software from time to time.

Expand and enhance the SME relationships: The Company plans to offer the existing membership packages for listing

to more areas in India and to more categories of businesses. These plans also involve the provision of special

membership packages to SME categories (witness high user interest). Moreover, the company intends to leverage on

their direct relationships with SME’s to educate and explain to them the benefits of advertising with Just Dial.

Development of new products and services: The Company intends to create mobile applications for searches for mobile

phones using WAP in keeping with the technological advancements. It is exploring areas for users to offer to sell, as well

as buy, goods and services through their website, starting with cars. The company is in the process of developing ‘Quick

Quotes’ to prospective buyers with a price quote from multiple vendors.

Broaden and deepen the footprint in India and expansion into new geographic markets: The Company approximately

had 9.1 million listings as of 31st March, 2013. It intends to exploit further opportunities that come its way, beyond 11

cities in which it operates, to broaden and deepen its presence in India. Just Dial also plans to implement its multi-

platform local services model in other geographic markets like it is doing in the U.S and Canada.

Just Dial Limited


INDUSTRY OVERVIEW

Over the last few years, India has shown strong economic growth. According to the McKinsey Report, the country’s income pyramid is expected to change, with India’s middle class expected to grow by over ten times by 2025. Small and medium enterprises have contributed greatly to the economic development of India. Such SME’s need to advertise to grow for which they need local service search providers, which provide both offline services (print directory and phone based searches) and online services (localized portals providing a database). Just Dial falls under the local service search industry in which advertising is the main source of revenue. The local search market has evolved from word of mouth. Internet advertising is expected to grow at 34% over 2010-14. CRISIL Research expects expenditure in advertising to grow by 12% in 2013 subject to a revival in the economy. Growth is expected to pick up momentum in the following years and overall ad revenues are expected to grow at 13% CAGR over the next four years to touch Rs 553 billion by 2016. Internet advertising is expected to grow much faster at a CAGR of 34% to Rs 28 billion in 2014. Search engines, being the largest contributor to internet advertising, are likely to benefit from this growth. The players in the local search services market include Justdial, Asklaila, Burrp, Getit, Infomedia18, Sulekha etc. Just Dial ranks 40 among Indian websites, i.e. best ranked in comparison to its competitors in the industry, with Sulekha holding the next best rank at 51. Just Dial’s ability to grow its online search services is visible from the strong growth (three-year CAGR of 64% to 124.3 million in FY12) and mobile internet searches (three-year CAGR of 127% to 23.8 million in FY12).

KEY STRENGTHS

First mover advantage in the Indian local search market: Just dial is one of the first companies to provide local search

services in India, since as early as 1996. Moreover, such a large database of local business listings, took several years to be

developed, and required a significant amount of time and effort, which serves as a barrier to entry to other firms. It also has

an advantage as it is a debt free company and follows an asset light model, as it has always taken 100% advance for paid

campaigns, which has enabled the company to operate with negative working capital.

Strong brand recognition: Just Dial’s long standing presence, quality of database, fast response to search queries and consistent delivery of quality user experience has caused it to evidence 254.3 million searches. The brand development however, has occurred mostly through word of mouth by its users.

Attractive value proposition offered to SME’s: Most of the business listings on just dials database are SME’s as they get a

cost effective platform, personalized service and access to relevant customers.

Experience and expertise in local Indian markets: Having operated in the Indian market for 16 years, Just Dials experience,

knowledge, management expertise and infrastructure has enabled them to establish relationships with SMEs, which is out of

the scope of most generic search engines.

Multiple platform service on a large scale: Search results may be obtained through a number of communication media i.e.

internet, mobile internet, voice and SMS providing easy accessibility to its users. Moreover, Just Dial also has a large

collection of reviews and ratings by users of the businesses. These are beneficial to the potential users to enhance their

search experience and enable them to make informed choices.

Advanced and scalable technology platform: Just Dials award winning technology is the key that efficiently consolidates its

huge database on various media to provide services to its users.

Ability to monetize growth in searches: Searches by users are potential business leads for listings. The company has

successfully managed to convert free listings into paid campaigns/listings, along with growing the number of searches. Thus,

a strong uptick in paid campaigns is brought about.

Just Dial Limited


Failure to manage growth and scalability or adapt to technological developments or industry trends: This could affect

the performance and features of the company’s products and services and reduce its attractiveness to users and paid

advertisers. The business of the company depends significantly on the users and paid advertisers. If the company fails to

maintain or enhance its technology and infrastructure, then the company's business, financial condition, results of

operations and future prospects may be adversely affected.

Proper functioning of the website and avoiding interruption or breakdown of telecommunications, information

technology systems and networks: The Company extensively depends on the provision of local search services through

technology-driven media, hence relying upon information technology and telecommunication systems, networks and

related infrastructure, to function efficiently with uninterrupted operations. Provision of a reliable, available and easily

accessible website is also a key concern for the company.

Intense and increasing competition for users and advertisers and brand recognition: There is local as well as

international competition for provision of search and advertising services. Increased competition could be a grave

concern. Negative publicity or inability to attract users will adversely affect the brand recognition.

Ability to expand business outside India may be limited: Due to its international expansion in the US and Canada there

may not be benefits from future growth in the USA and Canada as their subsidiaries there cease to exist. Currently, Just

Dial’s promoters, Mr. Mani and Mr. V. Krishnan, play an important role in the strategic planning and operations of Just

Dial. The company needs to ramp-up its senior and second line management because if JD Global provides services

globally, as Just Dial does in India, the global operations will take away significant management bandwidth, impacting

the company’s core operations in India.

Registered office is not owned: The registered office of the company in Mumbai, Maharashtra and other premises from

which it operates are not owned, but rented. This may prove to be a major concern in future.

Exposure to infringement claims by third parties: In the past there have been intellectual property claims against the

company which may occur in the future as well.

Distribution of third party data may lead to legal claims: The essence of Just Dials business model lays in the

distribution of third party data, which may lead to legal claims like breach of privacy, defamation etc.

Google poses a key threat: Google, the world’s largest search engine has been operating in India and providing search

services for many years. A comparison of Google India and Just Dial’s financials for FY12 showed that Just Dials revenues

were 22% of Google India’s revenues. Moreover, the fact that Google is a successful global player, poses a threat and

cause for concern for just dial. Globally, Google’s search services are based on technology while the search market in

India requires collection and maintenance of database through feet-on-street and voice-based search option. Thus, if

Google India enters into the same field as Just Dial, it will provide tough competition and pose a threat to the business of

Just Dial.

KEY CONCERNS

Just Dial Limited


Rs in Crore

FINANCIALS

2009 2010 2011 2012

9 months ended Dec-

2012

Income

Revenue from Operations

Sale of search and other related services 73.54 116.06 179.60 259.4 264.36

Yellow pages publication services 12.38 14.84 - - -

Other operating revenue (revenue from reseller)

- - 4.33 2.66 0.13

Other revenue 5.89 3.86 3.73 13.15 7.12

Total Income 91.81 134.76 187.66 275.21 271.61

Expenditure

Employee benefits expense 52.28 66.88 94.72 130.84 129.03

Depreciation and amortization expense 3.84 5.00 6.79 9.02 10.20

Finance cost 0.005 0.004 0.029 0.017 0.005

Other expenses 25.71 33.66 43.83 63.99 61.95

Total Expenditure 81.83 105.54 145.36 203.87 201.18

Restated profit before tax and exceptional items from continuing operations

9.98 29.22 42.29 71.34 70.43

Exceptional items - - - - (1.52)

Restated profit before tax from continuing operations

9.98 29.22 42.29 71.34 68.91

Tax expense/(income)

Current tax 3.52 - 11.92 20.60 20.74

Deferred tax charge / (credit) (1.36) 9.89 1.55 0.32 1.09

Fringe benefit tax 0.28 - - - -

Total tax expense 2.44 9.89 13.47 20.92 21.83

Restated profit after tax from continuing operations (A)

7.54 19.32 28.82 50.42 47.08

Discontinuing operations

Profit before tax from discontinuing operations - - - 0.23 -

Tax expense of discounting operations - - - 0.07 -

Restated profit after tax from discontinuing operations(B)

- - - 0.16 -

Restated profit for the year (A+B) 7.54 19.32 28.82 50.58 47.08

EPS 1.09 2.78 4.15 7.29 9.05*

Note: *FY13E EPS computed on an annualized basis

Just Dial Limited


EXTRACT FROM GRADING RATIONALE BY CRISIL

The assigned grade takes into account Just Dial’s huge local search database (9.0 million products and service providers), the largest in India, and a business model which has been difficult to replicate. Its search volume has grown multi-fold courtesy quick service, relevant search results, updated database and technology, leading to a strong brand image. It has successfully grown its paid campaigns by more than four times over FY09-12 to 171,000 in end-FY12 (195,100 in 9MFY13) and enjoys 100% advance payments from its clients, who are mostly micro, small and medium enterprises (MSMEs). The grade takes cognizance of Just Dial’s experienced and proactive management personnel, who have enabled the company to meet users’ expectations on two fronts: technology and search content. Having started with only phone based search, the management has moved with the times to embrace the new-era media of mobile phones (SMS), internet and mobile internet. Further, the company has indigenously developed its technology platform and search algorithm, which enable it to provide search results that are relevant to users’ requirements. The number of search requests across all search platforms was 254.3 million in FY12 (267.2 million in 9MFY13), up from 82.2 million in FY09. While Just Dial has consistently innovated itself and stayed ahead of competitors, any aggressive move by larger players such as Google India is a key monitorable. As the company grows, maintaining management bandwidth to oversee the growth will be a challenge, particularly in the backdrop of expansion in the US and Canada through a different promoter entity. Also, Just Dial has to keep itself abreast of new technologies and new applications to stay ahead of the pack.”

Just Dial Limited


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