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JustDial IPO: The Safety Net Clinches It



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.


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