Just Dial Ltd. - What an amazing Sell Call it was!! Is it time to be Contra now?

I had written a report on Just Dial Ltd about 10 months ago titled "

Just Dial Ltd. - Crazy e-commerce valuations!! Nothing else!!", where I had explained my simple logic on why Just Dial's financial performance does not deserve such high valuations, unless it shows some strong signs of much better growth. Click Here to read that report. The growth rates posted by Just Dial Ltd over the last 4 quarterly results seem to have been even more disappointing because of which the stock has dropped more than 50% over the last 10 months & is now available at a price even lower than it's Listing Price.

Let's do a performance check to see if Just Dial's financial performance over the recent 4 quarters was really that bad to warrant such a sharp drop in market capitalisation and it's corresponding valuations. Have a look at the T-T-M charts below, which will give us some idea:

As we can see from the T-T-M charts above, Just Dial's Total Income has been growing at a steady pace. At a Y-o-Y growth of just under 24%, this can only be said to be decent, though Not great. The company did show some handsome growth in EBITDA & Net Profit for the periods ending Mar'15, Jun'15 and Sept'15, but has reported a small Q-o-Q dip during Dec'15. The dip in EBITDA & Net Profit during the Dec'15 quarter can be attributed to the increased costs towards pushing it's recently launched 'Search Plus' platform of services. The company is heavily banking on this new platform to bring in some handsome growth for the company in the coming quarters & years.

The 'Search Plus' platform is quite interesting & does have potential to ring in some decent revenues for the company going forward. But I think it might take some time for the concept to be widely accepted by the hundreds of Merchants & Vendors that the company is marketing it to. One point which goes against Just Dial's efforts to push Search Plus is the presence of several more e-commerce options in the market today, many of which are even dedicated to just certain specific fields. Many of these e-commerce services are currently well funded by various VC funds and hence are aggressively marketing their services. At the same time the Indian consumer is still pretty new to transacting online, though the percentage of population trying their hand at it is increasing with every passing month. There is no doubt that the market size is huge & many of these e-commerce players can develop their business models to become successful. But it will take a year or two more for things to mature & by then we could even see some players windup their businesses, especially the ones who are burning cash at a fast pace and not generating enough revenues to sustain themselves.

What goes in Just Dial's favour is that it is a Profit making company & is generating decent amount of Cash every quarter. Not many portals or e-commerce related companies can claim to be profitable currently in India. Just Dial also has a decent amount of Brand recognition in the market. Since Just Dial is not getting into directly selling any goods on it's own, it doesn't have to invest in any kind of inventory or warehousing. Under the Search Plus business model, it will be creating an e-commerce front end for many of it's Registered Merchants/Vendors, something like a 'Shop on the Internet', and Just Dial will be earning Fee Income based on the number of transactions or Visibility that the Merchant gets (Display Ads). These things will take some time to pick up and till then revenues from this new platform may not add much to the company's Topline.

Valuations: At a share price of around Rs.570/-, Just Dial Ltd. is currently valued at about Rs.4000 crores, sharply lower than the Rs.9000+ crores valuation the last time I had written about it 10 months ago. At this valuation it trades at about 26 times it's T-T-M Net Profit of Rs.154 crores and about 22 times it's T-T-M Cash Profit of about Rs.182 crores. These valuations now do not sound expensive for the 22-23% Y-o-Y growth it has reported on T-T-M numbers, despite a negative growth in Profit in Dec'15 quarter alone. At a Market Cap of Rs.4000 crores, Just Dial is no more over-valued. In fact, for those who currently don't have any exposure to Just Dial, it makes sense to add Just Dial to their portfolio. Though I won't recommend a big exposure as there are still good amount of risks involved in this business. Just Dial though gives you an opportunity to try & be a part of the e-commerce bandwagon and is surprisingly now available at a reasonable valuation. Any further correction from current levels will only make it more attractive. But remember that one might need to wait for some time for the 'Search Plus' platform to start building momentum, which in turn could drive Just Dial's share price in the future. The current positives are: Just Dial is a Debt-free company with a decent amount of Cash Reserve. And the business continues to generate decent amount of Free Cash every quarter. There is also the possibility of Just Dial using a part of it's Cash to do a Buy-Back of it's shares in the near future, which could help drive the valuations higher in the near term.

Just Dial Ltd. - Crazy e-commerce valuations!! Nothing else!!

India has seen a flurry of Private Equity Investments happening in the e-commerce space over the last 2-3 years. Flipkart has been the poster boy of all this, attracting Investments of a few Billions of Dollars in the recent years. But there have been huge list of e-commerce companies which have seen foreign investors queuing up for a stake in their online ventures from varying fields. Some of the prominent names that has seen Foreign Investments are: Snapdeal, OlaCabs, Jabong, Myntra, Shopclues, Paytm, RedBus, Cleartrip, MakeMyTrip, etc. The list could be including a few dozen companies and many more could join the list soon. India is at the cusp of an Internet boom with millions of Indians joining the Internet bandwagon every quarter. And many of these Indians have started experiencing the convenience of doing online shopping, ticket purchases, etc. in-short e-commerce is booming in India. The transaction volumes are growing at a rapid pace month-on-month.

The huge surge in online transactions is what is leading to foreign investments being directed to many of these e-ventures, which has enabled them to scale up their systems & operations at a very rapid pace. But the kind of valuations that many of these online ventures are commanding during every round of fund-raising is mind-boggling to say the least. Take the case of Flipkart. During the latest round of fund raising in December'14, Flipkart is estimated to have been valued at around $11 billion, i.e. close to Rs.70,000 crores!!! I find this to be Crazy. Flipkart's 12-months sales currently are between Rs.7000 to 9000 crores and the company is still burning cash, i.e. it's still making substantial operating losses. Many people (including me) think that companies like Flipkart & Snapdeal, are using part of the funds raised to subsidize the products they sell in order to gain more & more share of Indian shopper's wallet and attention. Till when can this strategy work. The Investors pouring money will expect some returns on their Investments, sooner or later. Then these ventures will have to stop subsidizing their sales & look for profits. Just for comparison sake, look at Reliance Industries' Retail business. On 12-months basis, Reliance Retail's Sales have crossed the Rs.16,500 crores mark, i.e. about double of what Flipkart currently does. Not just that, Reliance Retail is posting some Profit before Interest & Tax (EBIT). It's EBIT stood at Rs.337 crores at the end of December'2014 & margins are improving with increasing scale. Reliance Retail has well over 2000 stores in different formats spread across several large cities in the country. And nothing stops the company from launching it's own online shopping site in the coming months. I think this combination of Online Shopping + large Physical Stores presence is a lot more potent combination than pure Online facility.

Coming to Just Dial, it's business model is that of providing an Information Bank facility, online or on-call. In simple terms, it was initially an Online-Classifieds service, which has grown big in scale and reach. A caller can get instant information about any service provider in his area, right from things like carpenter, plumber, driver, or even things like hospitals, day-care centres, food outlets, malls, kirana stores, service centres, etc. Just Dial hosts one of the largest such Information Banks and covers hundreds of cities across the country. The caller is not charged for the Information he gets. Just Dial offers Free & Paid listing to businesses & service providers. And that is where they generate most of their revenues. A few years ago, when Just Dial started, the competition was very very limited in India. But today there is competition to exactly the service that Just Dial offers. The increased competition is already showing impact on the growth rates that Just Dial enjoyed. The growth is clearly showing in the recent quarters.

Trailing-Twelve-Month numbers

( Click Here for a link to Just Dial's Results Summary page )

At the end of Dec'14, Just Dial had posted a Y-o-Y growth of 27% in T-T-M Total Income. At best this rate of growth can be called moderate, considering the fact that there were high growth rate expectations from the company at the time of IPO or before that. Now look at the EBITDA & EPS charts. They have been plateauing in the last few quarters!! There is hardly any growth on the profitability front. The increased competition in the Indian market is clearly rubbing off Just Dial's profit margins. Just Dial's stock got listed at around the Rs.600 levels in June'2013. At that point the T-T-M EPS stood at Rs.11.40, translating into a P/E rating of over 50. The stock rallied to levels of over Rs.1600 within 6-7 months of listing and since then the stock has moved within a range of Rs.1200 to 1800 for over a year now. At the current share price of over Rs.1300/- and an EPS of under Rs.18/-, the P/E rating stands at a whopping 74. This is lower than what it was a year ago, but much higher than what it was at listing time. But the slowing growth could make some long-term investors nervous and the valuations look super-exorbitant.

At the current price of little over Rs.1300/- per share, Just Dial is valued at over Rs.9100 crores. Just Dial's T-T-M Total Income is Rs.596 crores (Y-o-Y Growth of 27%) and Net Profit is Rs.126 crores (Y-o-Y Growth of just 17%). Just for comparison sake, there is company called Dewan Housing Finance Ltd (DHFL), which also currently trades at a Market Cap of about Rs.8900 crores. In comparison, DHFL's T-T-M Total Income stood at close to Rs.5900 crores and Net Profit of just over Rs.600 crores (both growing at 20% Y-o-Y). I know these are completely different business sectors and shouldn't be compared. But look at their comparative growth rates and valuations. Why should a company posting slower growth rates, just about one-fifth of the size in terms of Net Profit, be valued at a same or higher level?? Higher valuation is justified only when the company is in a business, which has huge potential growth, has competitive advantage, and is expected to post superior growth rates. Here Just Dial is already struggling to maintain some decent growth rates within 2 years of listing on the stock exchanges.

My view is clear. It doesn't make sense to be invested in such companies at such high valuations unless the company is clearly on a path to superior growth rates.

Happy Investing!!!