Just Dial IPO: Amitabh Bachchan Has Invested. What About You?

First, the compliments must fly out to the existing promoters V.S.S. Mani, Anita Mani, Ramani Iyer, V. Krishnan and the private equity investors SAIF, Sequoia and Tiger Global for raking in the multibagger profits out of the Just Dial IPO. These investors got in early, pumped in money into an unknown venture, took the risk and are now exiting with gigantic profits.

Surprisingly, Amitabh Bachchan, whose investing talent we admire, is a substantial early investor in Just Dial with 62,794 shares. He subscribed to these shares at just Rs. 10 and at the IPO price of Rs. 543 (high price band), these shares are worth Rs. 3.41 crores, giving him huge multibagger profits. Amitabh Bachchan is also the brand ambassador of Just Dial.

Now, lets understand Just Dial’s business model. Just Dial is basically a local search engine. It provide users of the “Just Dial” search service with information and user reviews from its’ database of local businesses, products and services across India. The search service is available to users through multiple platforms, such as the Internet, mobile Internet, over the telephone (voice) and text (SMS). In fiscal 2012, Just Dial addressed over 254.3 million search requests across our platforms. As of December 31, 2012, it was conducting approximately 195,100 campaigns for its’ paid advertisers. The advantage of listing on Just Dial’s search service is that small businesses get exposure to users at a time when the users are making a purchase decision. Just Dial charges a small fee for this service.

Now, the question is what is the size of the market for this sort of thing. According to McKinsey & Company, India’s middle class is expected to grow by over 10 times to approximately 583 million people by 2025. According to Internet World Stats, as of June 30, 2012, Internet penetration was at 11.4% in India, compared to over 78.1% in the United States. There were approximately 137 million Internet users in India, making it the third largest population of Internet users after China and the United States. According to TRAI, the number of mobile subscribers in India is expected to exceed 1,000 million by 2014.

If you look at Just Dial’s revenues, it has done quite well for itself. Its’ consolidated total revenue from continuing operations increased from Rs. 71 crores in fiscal 2008 to Rs. 277 crores in fiscal 2012, representing a CAGR of 40.2%. Just Dial’s consolidated total revenue from continuing operations increased in fiscal 2012 by 47.6% over fiscal 2011. The consolidated restated profits after tax from continuing operations increased from Rs. 1.71 crores million in fiscal 2008 to Rs. 52.28 crores in fiscal 2012, representing a CAGR of 135.1%. In the nine months period ended December 31, 2012, Just Dial’s unconsolidated total revenue was Rs. 271.61 crores million and its’ unconsolidated restated profits after tax from continuing operations was Rs. 47.08 crores.

Now, the all important question is about valuations. The consolidated diluted EPS for the year ended 31st March 2012 was Rs. 8.13. At that EPS, the PE at the lower price band of Rs. 470 is 57.81 while the PE at the upper price band of Rs. 543 is an eye-popping 66.79. If you take the weighted average consolidated diluted EPS, the respective PE figures are 77.69 and 89.75.

The PE is undoubtedly high but the question is whether it is justified. The weighted average ROE is quite high at 40.59%. The ROE has ranged from 28.88% to 51.09% over the past three years.

Just Dial claims that there are no listed companies in the same space as it but if you look at Google, the mother of all search engines, it is quoting at a PE of just 28. Even Infoedge, which runs the search portals Naukri.com and Jeevansathi.com is quoting at a PE of 37.5 times.

So, how does one justify the higher PE of 66 times for Just Dial?

Two things to remember is that Just Dial will not get any of the moolah from the IPO. Instead it goes to the promoters and the private equity shareholders. The other thing is that a lot of competitors like Askme, Asklaila, Getit, Sulekha and many others are hot on the heels of Just Dial. The so-called first mover advantage that Just Dial has may evaporate over a period of time if the competitors get their act in order.

Frankly, it takes nerves of steel to invest in the Just Dial IPO at such steep valuations. I just don’t have the nerve to do it. What about you?