Just Dial's margins to remain capped

Investments in new products and international foray to keep margins in check; growth prospects are strong

Just Dial, a local services search provider (offline and online), announced a good set of numbers for the September quarter, adjusted for one-offs. Revenues grew 30.8 per cent to Rs 147 crore, driven by a strong 24.1 per cent rise in paid campaigns and 5.5 per cent increase in revenue per campaign (after a recent price rise), over the year-ago quarter. Listings increased 44 per cent, year-on-year (y-o-y), to 14.5 million.

However, a one-time cost of Rs 3 crore towards employee stock options (Esops) led to the earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin and net profit coming slightly short of expectations. Reported Ebitda margins fell 237 basis points y-o-y to 29 per cent, excluding the Esops charge, and remained flat at 31 per cent. Likewise, reported net profit stood at Rs 32 crore (up 9.9 per cent y-o-y), while adjusted profit at Rs 34 crore was up 17.5 per cent.

Given robust listing additions, aggressive plans to scale up Search Plus (combines searches with off-line transactions), potential entry in the UK, the US, Canada and other markets, the company’s prospects remain strong. Just Dial’s management remains confident of posting 25-30 per cent annual revenue growth and stable margins. The confidence stems from existing products as well as new launches such as Search Plus, which offers 20 live services currently and has not been monetised so far. The firm plans to launch many new products such as ‘Just Dial Cash’, On-line cab booking, ‘Just Dial Guaranteed’, amongst others, which will start contributing to revenues from FY16.

However, analysts believe the reported Ebitda margins will remain capped (at around 30 per cent) in the medium term on account of higher ad spends towards Search Plus (Emkay pegs campaign cost at Rs 25-40 crore), continuous investments in new growth avenues and amortisation of Esops costs of Rs 100 crore over 24 quarters. Also, even after considering the expected surge in FY16 earnings, the stock’s valuations are rich. Not surprisingly, over three sessions after the results, the stock has fallen four per cent.

“Just Dial stock trades at 55 times FY16 estimated earnings and we expect it to clock in 31 per cent earnings CAGR (compounded annual growth rate) over FY14-16. We find valuations rich and maintain our ‘hold’ rating on the stock as the upside from the current levels is limited, growth in paid campaigns is tapering, and increased capital/operating expenditure would be required to enter new geographies,” says Jay Gandhi of Antique Stock Broking. He believes growth in business listings continues to outpace growth in paid campaigns, signalling conversions are increasingly hard to come by.

While the company plans to raise up to Rs 1,000 crore for organic/inorganic opportunities, which might come up  and fuel growth, the near-term impact will be an equity dilution of 10 per cent. Analysts, thus, believe investors should wait for a further decline before considering an entry.

While Just Dial’s leadership position in the local search business on the voice medium is a positive, success of its online initiatives hinges largely on Search Plus growth and monetisation, is a key monitorable.