 "Just Dial : Should investors buy the fall?")
The Just Dial scrip tanked 11.4% on Thursday to Rs 854.75 levels on the back of weak operating performance in the September 2015 quarter. The counter has remained weak on Friday, falling another 6% to Rs 804. What is worrying the street and should investors' buy this fall?
Just Dial’s revenues grew a mere 1.6% sequentially to Rs 171 crore in the quarter and fell short of Bloomberg consensus estimate of Rs 182 crore. The year-on-year revenue growth too came in at 20% (excluding deferred revenue in base quarter) which is Just Dial's lowest in the past few quarters. The EBITDA margin too came off 560 basis points sequentially and 150 basis points year-on-year to 27.4%. Notably, this contraction has come after excluding the impact of ESOP charges and was due to wage hikes and higher other expenses.
While the net profit growth appears robust 47% year-on-year and 39.5% sequentially to Rs 46 crore, the quality of earnings is weak. This is because over half of the net profit was contributed by other income which jumped three times both sequentially and year-on-year to Rs 26 crore. Notably, other income is non-core, unsustainable income and hence would add volatility to overall earnings. Lower tax rate too aided bottom-line in the quarter.
What's worse, the business side performance was weak. As per management, excessive focus on Search Plus app impacted new customer additions in this quarter. Company recruited lower number of sales personnel in the quarter which led to the miss on the revenues. Paid listings grew a mere 0.8% sequentially versus analysts' expectations of 6% growth, impacting topline. While management remains confident of improving revenue growth in the next few quarters, analysts have their doubts.
“We reduce our FY16-17 estimated EPS by 17-31% as we tone down core revenue growth expectations to 18-25% year-on-year from 27-29% year-on-year earlier, assume slower ramp-up of revenues from Search Plus, and assume higher employee costs”, write analysts at Kotak Institutional Equities in a note on the company.
From a two-three years perspective, Just Dial is relying on success of its Search Plus app - the commercial launch being postponed yet again to CY15 end. However, management indicated that the number of downloads have improved significantly in the quarter with total 8.6 million downloads of the app. While the app enjoys critical mass, monetisation of the app remains key going forward. The company may also face margin pressure on account of weaker pricing, higher employee costs and intensifying competition. Thus, analysts on an average are factoring in EBITDA margin contraction of about 685 basis points to 21.3% this fiscal with some recovery in FY17 when this metric is pegged at 25.9%.
Most analysts continue to be positive on Just Dial scrip. Even after factoring the 20-30% cut in analysts’ target price, the upside potential is still healthy given their average target price of Rs 1,117. “We maintain positive stance on Just Dial given increasing internet penetration and leadership position in services business”, says Sandip Agarwal, analyst at Edelweiss Securities.
However, given the near-term issues especially the slowing topline growth and delayed Search Plus launch, expect the stock to remain under pressure.
