Just Dial: Buyback offer attractive

Analysts believe Rs 1,550 is a good exit price; small offer size points to a low acceptance ratio

The Street’s lukewarm response to internet and voice-based search company Just Dial’s share buyback plan is not surprising, even as it is at about 40 per cent premium to Friday’s closing price of Rs 1,111.70.

Typically, when a company announces a share buyback at a hefty premium to the market price, the stock rallies to levels close to the buyback price.

While the management believes buyback is a more effective way to reward investors and utilise the Rs 200 crore worth of cash the company generates annually compared to dividends, in Just Dial’s case, there are reasons for the Street’s lacklustre reaction.

The company plans to buy back 1.2 million shares at a maximum price of Rs 1,550 each. It has set aside Rs 170 crore for the buyback, and its strong cash kitty worth Rs 850 crore provides comfort regarding availability.

However, the buyback offer size is only 2.2 per cent of Just Dial’s market capitalisation of Rs 7,645 crore. In terms of number of shares, too, at Rs 1,100 levels, the company would be able to buy back 1.5 million shares. Even after excluding 33 per cent stake owned by promoters, the offer is small, considering the remaining 47.25 million shares.

Thanks to the smaller size of the buyback, which is through the tender route, the proportion of shares the company would accept is also likely to be lower, unless very few shareholders offer theirs. This also indicates negligible arbitrage opportunity available to investors looking to buy the stock in the spot market and tendering shares in the buyback for a profit.

Analysts add the postponement of fund-raising plans (Rs 1,000 crore announced in October 2014 to fund inorganic initiatives), along with delay in launch of Just Dial’s Search Plus offering, are other key reasons for the Street’s muted response and the stock’s decline in the past eight-nine months. The launch of the company’s master app, Search Plus, was earlier planned in the second quarter of FY15, was postponed to the March 2015 quarter. Operationally, Just Dial's core search business is doing well, with searches up 35 per cent in FY15 and net profit growing at 15 per cent to Rs 1,389 crore.

Though most analysts polled by Bloomberg in June are positive on Just Dial, their average target price stands at Rs 1,532 a share. While this also suggests the offer is attractive, a bigger size would have benefited shareholders.