Just Dial IPO: Expensive dial-in

Strong brand recall amongst both advertisers and consumers and first mover advantage in its voice business are the key strengths of Just Dial, India's largest local search database provider. The company's competitive advantage lies in its strong relationships with advertisers, accurate database (9.1 million business listings) and easy recall of its phone-in numbers recall. It also provides consumers access to user reviews/ ratings which aids them in informed decisions. Going ahead, the company plans to offer specialised services such as dedicated category portals to drive future growth and expand its network of paid advertisers.

Though the company's financials are strong (robust revenue growth, cash flows) and it does not have debt on its books, the price it is asking at 30-34 times FY14 earnings is on the higher side. More, higher competition in the internet which gets the maximum information requests and where it is a smaller player, could impact its overall pricing power and profitability.

Low bargaining power
Unlike the dial-in space which it dominates, Just Dial does not enjoy a similar and strong brand recall in internet search business where it competes with a host of search engines such as Sulekha, Zomato, burrp!, asklaila, askme, 99acres, amongst others. Most of its online traffic is via Google and the consumer is not actively looking to enter the JustDial website. Google remains a potential threat and currently uses Infomedia 18's Yellow Pages database for its online search business and if it does get aggressive in the Indian local business search segment it could impact Just Dial's business.

Considering the increasing searches on internet/mobile internet platforms (61 per cent of total searches in the nine months ending December), Just Dial's ability to differentiate and build a strong brand on these platforms will be the key to its future growth. While the entry barriers to this business are already low, company also sells its databases; which will only dilute its competitiveness.

Rich valuations
Just Dial gets most of its revenues from paid advertisers which is the small and medium enterprises listed on its search platforms. Paid advertisers form two per cent of its total database. The subscribers buy different packages to get priority ranking in the search results. Given that Just Dial collects all its membership fees in advance, it enjoys negative working capital cycle. Its debt-free balance sheet and asset light business model are strong positives for the company. Thanks to the high cash generating business, Just Dial has a cash kitty of Rs 500 crore and investors will keenly watch for effective utilisation of the same. Just Dial's revenues have grown at a compounded annual rate of 39 per cent over FY08-12. The company's ability to raise the proportion of paid advertisers will be the key revenue driver. Further, given that it plans to enter new cities and intensify competition, it could face difficulty in sustaining these metrics.

"At proposed valuation of Rs 3,300-3,800 crore, the Just Dial IPO is priced at 30-34.7 times FY14 estimated earnings. We see Just Dial's value receding as SME customers become comfortable with maintaining their own web presence. This makes shares look pricey at the offered range," says Ankur Rudra, IT analyst at Ambit Capital. While Just Dial does not have any listed peer in India, global majors such as Google and Yelp are its key listed peers.