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JustDial IPO: The Safety Net Clinches It

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Just Dial promoters will sell shares in an Initial Public Offer from 20th to 22nd May. They will sell 1.75 crore (17.5 million) shares at a price band of 470 to 543. The IPO size is Rs. 822 cr. to Rs. 950 cr. 

Retail investors get a discount of Rs. 47 from the discovered price. This means investors putting in less than Rs. 200,000.

Let me cut through the bullshit. I’ll get to the points of importance.

The Company Gets None of The Money

IPOs are generally used to raise money for a company’s growth. (read: Of Shares, IPOs and Stocks Markets) Not this time. All the money raised in the IPO will go to pay existing shareholders, who will exit to the extent of 25% of the company’s shares.

That means the company gets no money – only exiting shareholders do.

The Red Herring Prospectus tells you that the shareholders selling at Sequoia, Tiger Global and some part the promoters themselves. You can get the details from Economic Times about how much etc., but most of them are wrong. SAIF for instance, in a complicated arrangement has paid over 68 cr. for its shares, but it’s mentioned as 9 cr. Undoubtedly they are making profits and that is good for them.

(Disclosure: I was a silly idiot when Naukri’s IPO came about a few years back about how promoters had sold their shares to a fund at a lower price. This, I realize, was my immaturity – the outrage was misplaced. One learns and improves, so past non-performance doesn’t guarantee future results!)

I won’t concentrate on things like “Sequioa 3 and Saif made 800% profit” etc. They took the risk and they deserve whatever profit they make, even if it is on part of their holding. For the record, Sequoia invested Rs. 250 cr in the company about a year back, and then bought some 50 cr. more from promoters at Rs. 488 per share. This falls within the price band, which means they would have made no real money in the year on that investment.

Also we shouldn’t worry about profits that other investors make, just that the company should do better going forward.

The company has 475 cr. of cash

With the company getting no cash from this IPO, the fear is that the company won’t be able to expand. But it has around R.s 475 cr. of cash, with 22 cr. in their current account and over Rs. 450 cr. in fixed income mutual funds. It raised Rs. 250 cr. last year that it has not really been able to use, so that’s gone straight into funds.

If they account for this right, they will make around Rs. 40 cr. in “other income”, and given it’s in funds, the taxability of these funds is low. This is huge considering their net profit is likely to be about Rs. 63 cr. in the whole year, and they’ve not recorded any intermediate gain in their books.

They seem to generate about 100 cr. from operations every year. Bad news: The cash generation hasn’t substantially increased from 2012 (95 cr.), which means we have some potential stagnation.

The US version of “Just Dial” is owned by promoters, not by Just Dial India

This is really zany. The promoters and principal shareholders own shares in a company called JD Global, which has licensed the Just Dial brand from Just Dial India, the company that’s going public. Which means all the growth outside India won’t reflect in the Indian entity, which will get just a license fee and nothing more.

Eventually I expect that they will attempt to “merge” the foreign company and pay a HUGE valuation for it, so that the promoters and principal shareholders can get either cash compensation, an equity percentage or both. Promoters routinely attempt to do this in India, and with 75% control of the Indian entity, it is unlikely the Just Dial promoters and principal shareholders can be stopped.

The P/E is High But So What?

At Rs. 470 per share, the company, which is likely to earn Rs. 9.6 per share (9m data annualized), is valued at a P/E of 49 at the lower end of the pricing band.

This may sound ridiculous. But we have seen worse. Naukri (Info Edge) continues to trade at a P/E of above 40, despite actually making lower profits in 2013 (102 cr.) versus 2012 (122 cr.) MakeMyTrip listed in the US and trades at a 117 P/E.

But a note of warning: Naukri has been flat on the markets since 2011, between 300 and 400. (And it has a significantly larger chunk of cash!) MMYT actually trades near it’s all time low, down 47% from 2010. Their EPS growth too has suffered in the last few years.

EPS and Profit Growth Slowing

It’s terribly difficult to compare current earnings with the past. They have demerged their US operations into JD Global. They sold their testing operations to JD Global. But they have restated their earnings commensurately so hopefully this comparison is accurate.

In 2013, they are likely to make a revenue of 350 cr. or so, extrapolating the nine months of the year they have produced data for. This is 36% higher than the 259 cr. in FY 2012. However, net profit by the same extrapolation is 63 cr., only 25% higher than the 51 cr. in 2012. At a P/E of more than 40, this is a tad high.

Also, this seems to be one of the lowest growing years in the past few. It makes sense as the listings business moves slowly online, where the niche players like Zomato and Magicbricks are phenomenal competition. Additionally, most small and medium businesses are setting themselves us online directly, so the listing benefits of Justdial are slowly getting overweighed by the advantage of directly interacting with customers – or better, getting an order directly (justdial has a two step process).

But they are the largest player in the business, and with cash of Rs. 450 cr. cannot be ignored. If they use the cash properly they could really change the nature of the game.

Why Not Invest: You Get A Safety Net

Retail investors that apply for less than 200,000 rupees worth shares get a safety net; the three promoter brothers of Mani, Ramani and Krishnan will guarantee the retail decided price for six months. Remember that retail gets a discount of Rs. 47 from the price decided.

After 180 days, if the volume weighted average price (VWAP) for the previous 60 days is less than the retail issue price, the promoter brothers will buy the shares from you and return your money if you want. (See my video explaining VWAP) In fact, the money they get from the IPO when they sell their shares will be placed into an escrow account for this purpose.

My conclusion

Valuation is high but the internet has seen higher. There aren’t many great companies out there – JustDial is a good and well known player. They have cash, so they might be able to disrupt the market. There is potential and all investors are keeping some stake in the company for the future, which is a good sign.

The safety net clinches it for me. If you buy, you can get at least your purchase price for six months. Within six months we will have at least two more quarter results, Q4
2013 and Q1 2014, and likely also Q2 2014. This is enough time to evaluate progress and if the price has fallen, to redeem your price. Given ASBA and the fact that the money needn’t even leave your bank account, I think I might just apply in the retail quota.

I know too many recommendations are to not buy. I haven’t invested in an IPO since forever. But this one might just be the player to change that, and I hope they do well.

  • Harish Nagpal says:

    Your thoughts on Crisil Rating of Stock …….?

  • Raghavendra Shenoy says:

    Deepak,
    Safety net or no safety net, i believe Just Dial is an AVOID
    a. The valuation is clearly over the roof, and the company has no moats. Clearly, entry barriers are low, and there are a lot of firms in the segment with better/equivalent traffic but unlisted – zomato, burrp, ask laila, sulekha etc
    b. Is there a compelling reason for investors to provide an exit route for angel investors? I think it is good to look at the listing and current price of Nitesh Estates, which provided an exit route to investors ( Bennett Coleman being one of them, through their firm, Brand Capital). There are multiple stories of this kind across industries, not just real estate. Bharti Infratel is a recent example
    c. The safety net argument – what is the fun in getting back the money i invested after 180 days? I’d rather spot some good opportunities in the secondary market and make some additional bucks.
    d. The ‘story banao aur becho’ funda is being used very well these days by the BRLM’s and other bankers, but it pays to look through and take a holistic view.

    • I don’t know about growth – generally, when faced with a quarter on quarter challenge public companies will get aggressive. However, you may be right that the competition is stiff and there is not much of a moat.
      I wouldnt care about why investors are exiting. Yes, it’s a high price, but like I said a Rs. 5 EPS is pretty much guaranteed as their fixed income holdings mature. They’ll make Rs. 10 from business which means a trailing P/E of 35, which isn’t too bad. Investor exits are a good thing in general, I’m not sure why that is a problem. Yes, some IPOs crash but this one gives a safety net, no?
      The secondary market has risks to the downside. Here there is full upside potential and no downside risk for the first six months; that is a significant game changer.
      At this point I would have been happier if they sold at a lower price. If I was an institution I wouldn’t buy this stock, because it doesn’t have the safety net. I think the price could fall if they don’t capitalize on their brand and position immediately. Their revenues need to show serious growth, and since they’ve cut their feet off from thinking outside India, they are going to have serious challenges. Let’s see how it goes.

  • Adheer Pai says:

    @ Raghavendra,
    Regarding (c), with the safety net, the worst you would lose is equivalent of 6 months of risk-free returns (180 days FD?).
    However, the safety net clause brings up interesting issues. Say, I am allotted 500 shares in the IPO.
    1) Is the safety net applicable only to IPO investors or the holder of the shares at the end of the safety net period of 6 months – ( Similar to dividend / bonus / split date) ?
    2) If I sell 300 shares within 6 months (at profit), is the safety net applicable for the rest 200 shares ?
    3) How would they verify that I was holding these shares for a period of 6 months ?
    4) What happens if I buy another 300 shares. Now my holding is 800 shares, and then sell those 300 shares. For the tax purpose it is FIFO. Will the safety net criteria be still applicable ? If yes, is it for 500 shares, or 200 shares ? Or something else ?

    • 1) It’s only for the shares received at the IPO.
      2) If you sell 300, yes it is applicable for the remaining 200. In fact if you buy 1000 more, and then sell 1000, you will still get the guarantee of the 500. It is basically on the lowest share quantity you own at any point from IPO onwards, and only for those that received shares in the IPO.
      3) See the prospectus 🙂 Thy have given examples.
      4) In this case, the net is on 500,w hich is your lowest holding quantity since IPO. If you had sold 300 first and then bought back 300, the applicable guaranteed qty would be 200 shares.

  • Raghavendra Shenoy says:

    Deepak,
    The exit route argument was specifically to highlight that the company isn’t seeking any funds be it for expansion or whatever. Consequently, not a single rupee will flow back to the balance sheet. Isn’t it weird that though the company wouldn’t get any money, they’re being responsible and accountable for the downside risk by suit clad, power point armed investors who are out to achieve their IRR numbers? What if the price doesn’t hold and the promoters aren’t able to arrange the funds required? Even if they do, it will be out of the existing bank balance, meaning that this clause will clearly affect the survival of the firm, if triggered.
    Our incapable regulators seem to have a flair for copy pasting regulations and implementing them with scant regard for specifics of the issue, funding structures and existing regulations.
    Imagine this – existing investors will run away with the money from the IPO, but the sword will hang on the necks of the promoters – only because the suited booted bankers are singularly focused on their IRR’s and consequently bonuses. The real bakra is the retail investor in this cocktail of ill thought, copy pasted regulations, investment bankers who will value each share at INR 10k if guaranteed higher cut, and a multiple regulator environment that is aimed at increasing confusion. Basically – Story Banao, aur Becho.
    It is the exiting investors that should provide the safety net in this case, not the promoters, in my view. Irrespective of what the safety net regulation says, this whole angle stinks. This is like saying,” I’ve invested INR 100 and i want INR 500 in 5 years, irrespective of what the business grows to, what is the cash position etc. And i will take that INR 500 and run away, you be damned”
    PS – I am in no way connected with the firm in question, bankers, brokers or anybody else. Its extremely irritating to see firms being forced to go for a listing owing to compulsions and fancies of an elite few, rather than for real need of capital .What is worse is to see the people who matter sitting on the fence and screaming ‘FRAUD’ after the event happens. Look at what is happening in the Sahara case. The esteemed folks at SEBI and the respective RoC’s napped and provided Sahara to the group when the OFCD issue was being proposed, and are crying foul now. The police and the regulators always arrive late in this country, by design ( looks like).

    • Raghavendra – There’s no weirdness. The money that promoters make by selling their shares is being held in an escrow account, with a charge to the BRLMs who will execute the safety net if it does trigger. Read page 373 of the red herring prospectus. Is the money going to be enough? Remember that only 10% of the issue is for retail investors, who are the only ones covered. THe promoters are selling shares enough to cover that much.
      Btw, this was a SEBI demand, not one by the company or the bankers.
      Let the investors make money, I don’t see why they should be blamed for whatever they say. What would you rather have, that companies like JustDial don’t get funding, because now investors have to provide a safety net? I think such a safety net is awesome to generate confidence. JustDial isn’t being “forced to go for a listing”, the investors have rights to demand a listing as apart of their funding arrangement and the promoters weren’t stupid to have agreed to it. It was well known that this is how it would go, and everyone accepted it.
      There is no question of this affecting the firm. The amount involved is between 80 and 90 crore, which is coming from an escrow of the promoter sale proceeds.

  • Raghavendra Shenoy says:

    @ Adheer
    1. Not 100% sure, but i believe this is for primary market purchases
    2. Should be, pl check the Just Dial DRHP for details – it might have the details
    3. The RTA would provide this data to the compliance department of the firm
    4. Assuming the clause is applicable only to issuances in the primary markets (aka IPO), you’d be covered only for 200 shares, as per your example

  • Dilip Davda says:

    All the best for your investment. Only cash rich clause is not enough for such companies. Higher valuation is the prime concern and they are likely to witness large competitions going ahead taking hit on their top and bottomlines.
    I am not convienced with the way of their working which aims at SMEs who are still not finding a light of the day despite lilsting platforms offered to them.
    In comparision, Just Dial does not provide the search engine as google or yahoo or rediff.
    So, you like it, go for it, but then do not repent for your wrong decision as buy back will trigger only when stock falls below 20% of offer price and as known, the concerned players will keep in mind this loop hole to prevent safety net trigger.

    • There is no “20% below offer price” mate. The safety net is like this:
      “The Safety Net shall be triggered, on the completion of the Safety Net Period, if the Safety Net Trigger Price (as
      defined below) is lower than the price at which the Equity Shares were Allotted to the Retail Individual Allottees
      (“Retail Offer Price”) in the Offer (the “Safety Net Trigger”).”

      “The “Safety Net Trigger Price” shall mean the volume-weighted average market price of the Equity Shares during
      the 60 trading days preceding the Relevant Date, where the “Relevant Date” shall be the last day of the Safety Net
      Period.”
      Page 373, DRHP.
      You get to give your shares back the minute the VWAP of 60 days goes to below 20% of offer price.
      You are of course not being forced to make any investment, and I do not even offer investment advice, so I’m not even recommending that you invest! I’m just saying what I’ll do with my money 🙂

  • Raghavendra Shenoy says:

    Deepak,
    a. Does the money from IPO proceeds flow to the promoters ( either direct or into escrow) accounts or does it go to the existing investors other than promoters? I think its the latter
    b. I understand that the safety net demand is by the SEBI, but it doesn’t make sense to have one camp go away with the money raised and to hold another set of people responsible for the (possible) decline in price. Clearly, a higher valuation is in the interest of the exiting investors and not the promoters, because if the price tanks then it is the promoter whose reputation is at risk. Don’t you see a clear conflict of interest/basic principles here??
    c. I am not saying that firms like Just Dial should not get funding when required, through PE/VC or other channels. What i am only saying is that the regulations ought to be appropriate and consistent with the objectives of each primary issue, the impact on the company (in this case only change of holding pattern, since no cash will flow into the firm or the promoters) and the set of beneficiaries thereof.
    d. Additional points to ponder include
    – Issuance of equity shares to some parties at a discount to the current offer price, a year ago
    – Peer comparison of valuations with the likes of Facebook, Google and Makemytrip is laughable, to put it in a dignified manner.
    – The company does not own the corp. office it occupies and pays rent to the promoters towards the same. Clearly a case of cash transfer to the promoters pocket, thru’ a perfectly legal route of course 🙂
    – Promoters have spun off the entity that provides similar services in the US and Canada markets and have full control, indicating a conflict of interest. This is similar to the case where Bloomberg UTV (before UTV divested its stake) was not a part of UTV Software Comm, but was housed in a separate entity. Again, perfectly legal; but a spin off prior to the IPO stinks.
    There aren’t any listed peers in this segment, but the fate of Infoedge is well known and so is the fate of the bouquet of websites from the Network 18 stable ( only moneycontrol.com is profitable). Lastly, this ain’t a compelling proposition like Facebook, where users created profiles, uploaded photos, tagged friends and provided fodder to firms willing to place ads, games, apps etc. Nor is the portal focused like zomato or burrp or for that matter bookmyshow or redbus. The accuracy of the listing rests not with the company, but with the creator himself. A glance at the quality of English language in many listings will give a fair idea of what i am talking about.
    Safety net or not, this is clearly an avoid for me given the biz model and the flags i see.

    • A) Proceeds of the promoter share sales (of the three guys giving the guarantee) goes into escrow. That’s enough to cover the guarantee.
      b) It is illogical to first get a guarantee and then demand who gives it. If one of them is giving it, then retail shareholders are covered period. We shouldn’t really care whether it was some investors or others. It’s none of our business. The investors who are “exiting” are not exactly exiting, all of them have substantial holdings still retained in the company.
      c) Regulations are regulations – this safety net is not a regulation but it was a request from SEBI since previous issues haven’t worked out. It is fair that the company has accepted it. There are no regulations talking about who should give a safety net and in my opinion, as long as we get one, we should be fine.
      d) One year ago, parties got shares at Rs. 488. That’s not a big discount for a one year change (at 10% discounting that would be equivalent to Rs. 530 which is the higher end of the band)
      – Peer comparison, they can give what they want. Ours to choose or laugh at 🙂
      – Rent to promoters is common, legal and perfectly ok. Paying Rs. 4.8 lakhs per month for a 6500 sq ft office in that area is a very good deal. And deposit is tiny right now.
      – Promoter spinning off the Global entity sucks. I don’t like it one bit. I also mentioned that’s a way to pilfer cash later by doing a merger.
      I think it’s for each person to decide whether they want to enter or not. I’m only getting in because of the safety net – otherwise the issue isn’t too exciting 🙂

  • Raghav says:

    The IPO don’t look any attractive.
    Atleast after reading various articles.
    Although I was thinking of subscribing this but saw an article by HDFC security, ABMoney and Articles2Read. Better to avoid 🙂
    http://articles2read.com/why-it-is-better-to-miss-the-call-on-justdial-ipo/
    http://articles.economictimes.indiatimes.com/2013-05-17/news/39336386_1_jdl-hdfc-securities-equity-shares

  • sneha says:

    Believe Justdial needs to be given the credit for planning Safety net, strongly believe this is going to be the next IPO standards, plus the industry Justdial is majorly into new-media, they have been the pioneers of voice search and killed its competition TATA, Getit which were leading the directional media space since 80s, Going for this IPO or not for me depends on the industry the company is in and its position in the industry, and here Internet is the industry and Justdial is amongst the leaders in the local search. But thanks for your expert openion, they give a detailed insight.

  • Shantanu says:

    Not much downside , but not much upside too
    Pros :
    1. Brand recall. THIS IS HUGE . Have you ever compared google with bing , no one does that . Just dial is also a habit and hence its a huge moat .
    This is the sole reason to buy it , imo . This protects the downside along with the safety net .
    Cons:
    1. Unlike google they are not a technology company .
    2. Very expensive , if naukri is at 40 PE , with innovations like zomato etc , why on earth should I pay to Just Dial
    3. This is most important – why revenue has stagnated . Why are they not looking to invest in India and expanding overseas . Clearly they do not see much growth happening in India.
    Now , talking about safety net – I read somewhere that if you have to sell a dog to someone who is going to poop all over your place , you have to take him for evening walks and clean him etc etc just tell the customer to try it once and return back if you don’t like it . Once he takes it he forgets all the hardwork but remembers the companion ship the dog provides .
    So , I am not buying this dog .