Just Dial: Should investors buy the fall?

Even after factoring a 20-30% cut in analysts' target price, the upside potential is still healthy given their average target price of Rs 1,117

The Just Dial scrip has tanked 17 per cent from the closing price on October 28 to Rs 800 levels on November 2 on the back of weak operating performance in the September 2015 quarter. What is worrying the Street and should investors buy now?

Just Dial’s revenues grew a mere 1.6 per cent sequentially to Rs 171 crore in the quarter and fell short of Bloomberg consensus estimate of Rs 182 crore. The year-on-year (y-o-y) revenue growth, too, came in at 20 per cent (excluding deferred revenue in base quarter) which is Just Dial's lowest in the past few quarters. The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, too, came off 560 basis points (bps) sequentially and 150 bps y-o-y to 27.4 per cent. This contraction has come after excluding the impact of charges on employee stock options.

While the net profit growth appears robust at 47 per cent y-o-y and 39.5 per cent sequentially to Rs 46 crore, the quality of earnings is weak. This is because half of the net profit was contributed by other income, which jumped three times both sequentially and y-o-y to Rs 26 crore. Notably, other income is non-core, unsustainable income and hence would add volatility to overall earnings. Lower tax rates, too, aided bottom-line in the quarter.

What's worse, the business side performance was weak. According to the management, excessive focus on the Search Plus app impacted new customer additions in this quarter. The company recruited lower number of sales personnel in the quarter, which led to the miss on the revenues. Paid listings grew a mere 0.8 per cent sequentially versus analysts' expectations of a six per cent growth, impacting top line. While the management remains confident of improving revenue growth in the next few quarters, analysts have their doubts.

“We reduce our FY16-17 estimated EPS (earnings per share) by 17-31 per cent as we tone down core revenue growth expectations to 18-25 per cent y-o-y from 27-29 per cent y-o-y earlier, assume slower ramp-up of revenues from Search Plus, and assume higher employee costs,” write analysts at Kotak Institutional Equities in a note on the company.

From a two-three years perspective, Just Dial is relying on the success of its Search Plus app - the commercial launch being postponed yet again to CY15 end. However, the management indicated the number of downloads has improved significantly in the quarter with 8.6 million downloads of the app. While the app enjoys critical mass, monetisation remains key. The company might also face margin pressure on account of weaker pricing, higher employee costs and intensifying competition. Analysts on an average are factoring in Ebitda margin contraction of 685 basis points to 21.3 per cent this financial year with some recovery in FY17 when this metric is pegged at 25.9 per cent.

Most analysts continue to be positive on the Just Dial scrip. Even after factoring a 20-30 per cent cut in analysts’ target price, the upside potential is still healthy given their average target price of Rs 1,117. “We maintain positive stance on Just Dial given increasing internet penetration and leadership position in services business”, says Sandip Agarwal, analyst at Edelweiss Securities.

However, given the near-term issues especially the slowing top line growth and delayed Search Plus launch, expect the stock to remain under pressure.