Just Dial - Nirmal Bang

Please refer to the disclaimer towards the end of the document.

Institutional Equities

IPO

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e

Just Dial

De Facto Search Engine For Local Business With the first-mover advantage and strong brand recall, Just Dial (JDL) has taken top position in voice-based search and also likely to strengthen its muscle in Internet-based search in India. JDL has increased its search requests by 58.9% CAGR over FY09-FY13E and the number of listings by 26.5% CAGR at 9.1mn over FY10-FY13E. By offering its existing membership packages from only 11 states to major cities across various states in India, adding more business categories and creating specialised membership packages, JDL is likely to maintain healthy and profitable growth in the long run. Healthy margins, asset-light business model and strong cash flow generation provide enough muscle to tackle competition. At the lower end of the IPO price band, JDL stock is valued at 20.1x/14.1x EV/EBITDA and 5.7x/4.0x FY14E/FY15E EV/S, respectively, lower than global peer Yelp, which trades at 38x/6.3x CY14E EV/EBTIDA and EV/S. The likely strong revenue/PAT CAGR of 36.1%/43.1%, respectively, healthy free cash flow of Rs1.5bn over FY13E-FY15E and cash/share of Rs93 should command a premium valuation.

Weekly payment to support healthy growth in campaign: JDL has changed its payment policy from three-four months’ advance payment to weekly/monthly payment for advertisers under its normal packages. Weekly payments to JDL, starting from as low as Rs299/week, provide better comfort to advertisers’ cash flow, improve return on investment and provides better visibility on advertisement spending and revenue generation. We expect reduction in the churn in existing advertisers and also higher number of new advertisers. Paid campaigns showed a 49.7% CAGR over FY09-FY13E and we expect JDL to post a 29% campaign CAGR over FY13E-FY15E, leading to healthy 36.1% net sales CAGR over the same period.

Strong brand recall backed by first-mover advantage: Currently, JDL is the most preferred brand in the local search engine space, primarily on account of: 1) Long- standing presence in local search market, 2) Strength and quality of its database, 3) Fast response to search queries, and 4) Consistent delivery of quality user experience. Dominance of JDL is visible from the fact that total searches on its facilities showed a 45.7% CAGR over FY09-FY12 at 254.3mn and by 40.1% at 356.3mn in FY13E (annualised 9MFY13). JDL’s competitors Getit/Sulekha/Asklaila/Askme are present since 1986/1998/2007/2011, respectively, but despite that JDL posted a healthy and profitable 38.4% CAGR in its existing business over FY08-FY12. We believe the biggest strength of JDL is maintenance of its database through feet-on-street, and direct and personal relationship with SMEs (small and medium enterprises) coupled with its strong voice-based search option which is difficult to be replicated by competitors.

Fast pace growth in Internet-based search: JDL is the leader in voice-based search because of a high quality database with fast response to search. As regards brand recall on voice-based search, JDL reported a healthy 58.9% CAGR in Internet-based search and as a result its share increased from 34.0% in FY09 to 49.9% in FY13E, while the share of voice-based search declined from 63.5% in FY09 to 39.2% in FY13E. As per Crisil Research, Internet advertising is expected to grow much faster at a CAGR of 34% over 2010-2014, at Rs28bn in 2014. Search engines, being the largest contributor to Internet advertising, are likely to benefit from this growth. JDL is in the process of improving its Internet-based search experience through various means like developing Master App for mobile phone, developing dedicated category portals to attract SMEs, increasing ratings and improving the quality of ratings, and launching enabling transactions like taxi booking/hotel reservation etc. All this would help JDL to grow its Internet-based search service at a healthy pace.

Healthy cash flow generation: JDL operates an asset-light business model with negative working capital cycle. Following healthy revenue/PAT CAGRs of 36.1%/43.1%, respectively, over FY13E-FY15E, we expect JDL to generate healthy free cash flow of Rs1.5bn over the same period, leading to cash/share of Rs93.

SUBSCRIBE

Jignesh Kamani, CFA [email protected] +91-22-3926 8239 Saiprasad Prabhu [email protected] +91-22-3926 8172

Issue Details:

Sector: Advertising

Price Band: Rs470-Rs543 (10% discount for retail investors)

Face Value: Rs10

Issue Size (No. of shares): 17.5mn

Issue Proceeds: Rs8.2bn-Rs9.5bn

Issue Opens: 20 May 2013

Issue Closes: 22 May 2013

Promoter Holding (Pre-issue): 37.1%

Promoter Holding (Post-issue): 33.1%

20 May 2013


2 Just Dial

Exhibit 1: Financial summary

Y/E March (Rsmn) FY11 FY12 FY13E FY14E FY15E

Revenue 1,839 2,621 3,527 4,785 6,531

YoY (%) 40.5 42.5 34.6 35.7 36.5

EBITDA 454 672 980 1,351 1,857

EBITDA margin (%) 24.7 25.7 27.8 28.2 28.4

Adj. PAT 288 504 643 964 1,317

YoY (%) 49.2 74.9 27.6 49.9 36.6

FDEPS (Rs) 4.7 8.9 9.3 13.9 19.0

RoE (%) 35.8 49.8 24.4 20.5 22.6

RoCE (%) 35.7 49.7 24.4 20.5 22.6

P/E (x) 99.5 52.8 50.7 33.8 24.8

EV/EBITDA (x) 50.7 33.6 28.3 20.1 14.1

EV/Sales (x) 12.5 8.6 7.9 5.7 4.0

Source: Company, Nirmal Bang Institution Equities Research

Weekly payment system to support healthy growth in campaigns

Businesses may prefer to pay for their listings to be featured on a priority basis in JDL search results, which is known as campaign. JDL has increased campaign by paid advertisers by a robust 61.6% CAGR over FY09-FY12, at 171,000. It increased the campaign to 195,100 in the 9MFY13 period from 171,000 in FY12. As per the management, 75% of JDL’s revenue comes from repeat advertisers of the year-ago period, which indicate stickiness of advertisers and a better quality of service offered by the company to its advertisers. JDL tried to convert as many advertisers as paid advertisers, which appears from the fact that campaign as a percentage of the number of listings increased from 1.4% in FY10 to 2.0%/2.4% in FY11/FY12, respectively.

Earlier, JDL was taking advance payment of around three-four months from its advertisers for normal packages and one-year advance payment for Platinum/Diamond/Gold membership. Higher advance payment exerts pressure on the returns to its advertisers, as most of its advertisers are SMEs. JDL has changed its policy and now advertisers can pay on weekly/monthly basis without making any advance payment to JDL for its normal packages. A normal package starts from as low as Rs299/week (Rs14,352 per year). As the payment is through ECS (electronic clearing service) on weekly/monthly basis, it would be hassle-free for advertisers. Weekly payments to JDL provide better comfort to the cash flow of advertisers and also improve their return on investment. It also provides better visibility on advertisement expenditure and revenue generation. We expect this to reduce the churn in existing advertisers and result in a higher number of new advertisers. We also expect the number of campaigns to show a 29% CAGR over FY13E-FY15E.

As per our interactions with various sales executives as prospective advertisers, sales executives stated that JDL was having two types of paid listings - premium Platinum, Diamond and Gold memberships and normal packages ranging from Rs299-Rs999 per week. Premium memberships accounted for 21.7% of total memberships as of end December 2012.

When any person conducts a search for a particular category of service though phone call, generally a list of seven service providers in that category is sent through SMS (short message service). Out of that list of seven service providers, three names remain fixed i.e. of platinum, diamond and gold members while the other four names change on rotation basis, depending upon the number of paid advertisers in that category and the type of package. A similar methodology applies to the search on JDL’s website. As per a sales executive, in order to accommodate higher paid members JDL removed the Gold membership so that only two members remain fixed on every search, while five others change on rotation basis. The executive also stated that there are chances of Diamond membership being removed, resulting in only Platinum membership and other normal packages. Depending upon the location and category, a Platinum membership costs ~Rs60,000-~Rs85,000 per year while a Diamond membership costs 10% lower than a Platinum membership. Due to higher focus on increasing memberships, revenue per campaign declined by 5.8% CAGR over FY09-FY12 at Rs15,169 in FY12 from Rs18,158 in FY09. Generally, an advertiser starts with a lower package and gradually scales up advertisements with JDL as the business grows. As JDL is reducing the share of Platinum/Diamond memberships, revenue per campaign may grow at lower pace over FY13E-FY15E.


3 Just Dial

Following healthy growth in its campaigns, which more than compensate lower growth in revenue per campaign, we expect net sales to show 36.1% CAGR over FY13E-FY15E. We expect other drivers like: 1) Increased usage of JDL’s platform, and 2) The rise in spending by existing advertisers to also provide support to the revenue growth momentum.

Exhibit 2: Healthy growth in campaigns Exhibit 3: Moderation in revenue per campaign

Source: RHP, Nirmal Bang Institutional Equities Research Source: RHP, Nirmal Bang Institutional Equities Research

Improved monetisation of listings

JDL increased the number of listings by 26.5% CAGR over FY10-FY13E at 9.1mn in FY13E from 4.5mn in FY10. According to the Ministry of Micro, Small and Medium Enterprises (MSME), there are an estimated 31.2mn SMEs in India. Currently, JDL operates in only 11 cities in India i.e. Ahmedabad, Bengaluru, Chandigarh, Chennai, Coimbatore, Delhi, Hyderabad, Jaipur, Kolkata, Mumbai and Pune.

JDL intends to offer its existing membership packages for more listing areas in India and to more categories of businesses and also create additional specialised membership package for SME categories which witness high user interest. Consequently, we expect the healthy growth in market penetration to continue. The management expects the number of listings to grow at a healthy pace - from 9.1mn in FY13 to 14mn in two-three years. For faster expansion in new cities at a lower cost, JDL has appointed resellers to build databases and increase search usage by brand building.

As part of the paid listing, JDL provides a virtual showroom to its advertiser where an advertiser can post up to 50 photos, 5-minute videos and a JD verified stamp on its website in addition to the generation of leads for its business. With a lower cost of advertisement through JDL and higher returns on investment, the share of paid listing as a percentage of total listings increased from 1.4% in FY10 to 2.4% in FY12. We expect the better weekly payment option, starting at as low as Rs299, to lead to higher share of paid listings in future.

Exhibit 4: Healthy growth in listings Exhibit 5: Rising share of paid listings


41 62 120 171 203 260 338

51.9

95.4

42.3

18.8

28.0 30.0

0

20

40

60

80

100

120

0

50

100

150

200

250

300

350

400

FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Campaigns Growth (%)

(%)('000 No)

18,158 18,872 14,942 15,169 17,352 18,393 19,313

3.9

(20.8)

1.5

14.4

6.0 5.0

(25)

(20)

(15)

(10)

(5)

0

5

10

15

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


Campaigns Growth (%)

(%)(Rs)

4.5 6.0 7.2 9.1

51.9

95.4

42.3

0

20

40

60

80

100

120

0

1

2

3

4

5

6

7

8

9

10

FY10 FY11 FY12 FY13Number of listings Growth (%)

(%)(mn no)

1.4 2.0 2.4 0.0

0.5

1.0

1.5

2.0

2.5

FY10 FY11 FY12

Campaigns as % of listing

(%)


4 Just Dial

Strong brand recall backed by first-mover advantage

JDL launched the first phone-based search engine in India. Beginning with just two cities, Mumbai and Delhi, currently JDL’s services are available across India and it has become the de facto search engine for local businesses. JDL successfully migrated from only phone-based search operations to Internet, mobile Internet, and SMS. Currently, JDL is the most preferred brand in the local search engine space, primarily due to highly satisfactory user experience. Contact numbers for its voice search 88888 88888 and 6999 9999 have a strong recall. The dominance of JDL is visible from that fact that total searches showed a 45.7% CAGR over FY09-FY12 at 254.3mn and by 40.1% at 356.3mn in FY13E (annualised 9MFY13).

Strong brand recognition of JDL is on account of: 1) Long standing presence in local search market, 2) Strength and quality of database, 3) Fast response to search queries, and 4) Consistent delivery of quality user experience. JDL is known to offer free, fast, relevant, reliable and enhanced search results to its users through various modes of communications.

JDS’s competitor Getit, has been present since 1986 and Sulekha.com has been in existence since 1998. In between, multiple players like Yellow page services, Google, Asklaila (in 2007), Askme (in 2011) etc made entry into the local search engine space. JDL has the first-mover advantage as it started its services in 1996 and was able to report healthy growth despite competition. We believe the biggest strength of JDL is maintenance of its database through feet-on-street, and also direct and personal relationship with SMEs coupled with its strong voice-based search option, which is difficult to be replicated by competitors.

In addition, JDL is developing new products/services like enabling transactions, car listing, quick quotes etc. In enabling transactions, JDL is collaborating with service providers and vendors so that users complete a number of booking and purchases which are integrated in search results, including reservation at restaurants, home delivery of food items, taxi booking etc. JDL is in the process of developing a car-listing website through which users can buy and sell cars. Under Quick Quotes, prospective buyers receive price quote from multiple vendors and also receive real-time update on the revised quotes. Launch of new products/services would take JDL ahead of competitors and help it to grow at a healthy pace in the long run.

To increase awareness of the JDL brand with SMEs, the company has created a team of 372 marketing executives called Just Dial Ambassadors whose principal objective is to educate SMEs about its services. JDL also signed up leading celebrity Mr.Amitabh Bachchan as its brand ambassador for a period of three years from December 2010.

Exhibit 6: Growth in search requests Exhibit 7: Break-up of search requests


Exhibit 8: JDL way above its competitors in India

Just Dial Getit Sulekha Asklaila Askme

Year of inception 1196 1986 1998 2007 2011

Platform Voice, online, SMS, mobile Internet Voice, online, print Online Online, SMS Voice, online, print

Listing (mn) 9.1 NA ~2 NA ~3

Database coverage (clients/tows) ~1,800 ~35 ~60 ~1,700 ~525

Rank among Indian websites 40 883 51 161 784

Time spent on website (minute) 5.5 2.4 3.2 2.3 2.4

Page view per user 5.0 2.7 3.2 2.8 2.7

Source: Industry, Alexa

27.9 57.1 77.2 124.3 177.9 249.0 348.6 52.1

71.5 93.9

115.9

139.7

167.7

201.2

82.2 133.2

180.7

254.3

356.3

493.5

702.6 62.0

35.7 40.7 40.1 38.5

42.4

0

10

20

30

40

50

60

70

0

100

200

300

400

500

600

700

800


Internet-based searches Mobile internet-based visits Voice-based searches

SMS-based searches Growth (%)

(%)(No mn)

34.0 42.8 42.7

48.9 49.9 50.5 49.6

2.4

3.5 5.3 5.3

10.6 15.2 21.4

63.5 53.6 52.0 45.6

39.2 34.0 28.6

0.2 0.3 0.3 0.3

0

10

20

30

40

50

60

70

80

90

100


Internet-based searches Mobile internet-based visitsVoice-based searches SMS-based searches

(%)


5 Just Dial

Fast pace of growth in search requests due to Internet search facility

Currently, a person can conduct search through JDL through various options like: 1) Voice-based search through phone call, 2) Internet-based search on JDL website, 3) Mobile-based Internet search, and 4) SMS-based search. Total 267.2mn search requests were made through JDL’s facilities in the 9MFY13 period and of that 49.9% was through Internet-based search followed by 39.2% through voice-based search. Mobile Internet visits and SMS-based search accounted for 10.6% and 0.3%, respectively, of the total searches in the 9MFY13 period. JDL is the leader in voice-based search with a high quality database and fast response to search. As a result, its voice-based searches grew 37.2%/31.3% in FY10/FY11, respectively. With the focus on Internet, search through this medium grew 61.0%/43.1% in FY12/FY13E, respectively. With a healthy 58.9% CAGR in Internet-based search, its share increased from 34.0% in FY09 to 49.9% in FY13E, while the share of voice-based search declined from 63.5% in FY09 to 39.2% in the same period.

JDL also intends to further develop a dedicated category of portals to attract SMEs. As per Crisil Research, Internet-based advertising is expected to grow much faster at a CAGR of 34% over 2010-14, at Rs28bn in 2014. Search engines, being the largest contributor to Internet advertising, are likely to benefit from this growth.

JDL developed its application Master App for Android mobile phones and iPhones in April 2013, and is in the process of developing it as an application for Blackberry and Windows Phone 7.

Employee costs accounted for 48.8% of JDL’s sales in the 9MFY13 period. On account of the shift in search mode - from voice-based search to Internet-based search - employee costs as a percentage of sales declined from 60.8% in FY08 to 48.8% in the 9MFY13 period. With the rise in the share of Internet-based search, we expect further reduction in employee costs, thereby improving the operating margin.

Exhibit 9: Healthy growth in Internet-based search Exhibit 10: Declining employee costs


Healthy cash flow generation

Following healthy growth in campaigns which more than compensate lower growth in revenue per campaign, we expect net sales to post a 36.1% CAGR over FY13E-FY15E. We expect other drivers like: 1) Increased usage of JDL platform, and 2) Increased spending by existing advertisers to also provide support to revenue growth momentum.

Employee costs accounted for 48.8% of sales in the 9MFY13 period. On account of the shift in search mode - from voice-based to Internet-based, employee costs as a percentage of sales declined from 60.8% in FY08 to 48.8% in the 9MFY13 period. With the increase in the share of Internet-based search, we expect further reduction in employee costs, which would improve operating margin by 44bps/20bps in FY14E/FY15E, respectively. With lower capex and healthy cash flow, JDL is expected to report healthy other income in FY14/FY15, following which net profit would post a 43.1% CAGR over FY13E-FY15E.

JDL operates an asset-light business model with a negative working capital cycle. We expect JDL to incur capex of Rs366mn/Rs371mn in FY14E/FY15E against operating cash flow of Rs935mn/Rs1,318mn, respectively. Following healthy operating profit and lower capex, we expect JDL to report free cash flow of Rs1.5bn over same period, leading to cash/share of Rs93.

104.7

35.2

61.0

43.1 40.0 40.0

135.0

104.3

41.7

176.5

100.0

100.0

37.2 31.3 23.4 20.6 20.0

20.0

0

20

40

60

80

100

120

140

160

180

200

FY10 FY11 FY12 FY13E FY14E FY15EInternet-based searches Mobile internet-based visits Voice-based searches

(%)

421 523 669 947 1,308 1,720 2,334 3,192

60.4 60.8

51.1 51.5 49.9 48.8 48.8 48.9

24.3 27.9

41.6 38.1

31.5 35.7 36.8

23.5

52.4

40.5 42.5

34.6 35.7 36.5

20

25

30

35

40

45

50

55

60

65

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Employee costs Employee costs as % of salesGrowth in employee costs (%) Sales growth (%)

(%)(Rsmn)


6 Just Dial

Exhibit 11: Quantum jump in cash flow Exhibit 12: Healthy free cash flow and cash generation


Exhibit 13: Healthy growth in revenue from existing business Exhibit 14: Profitability trend

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Key risks

(1) JDL demerged its US operations in 2QFY12 under Just Dial Global Pvt Ltd (JD Global), which is owned by the promoter of JDL and Sequoia Capital. Currently, its operations are very small with revenue of US$2.62mn in FY12. As per the agreement with JDL, JD Global will pay a royalty of 1% to JDL for using its brand. If JD Global takes away significant management bandwidth, then it would affect JDL’s operations.

(2) JDL used to take advance payment for three-four months from its advertisers and as a result its working capital cycle was negative and free cash flow generation healthy. In order to increase paid advertisers, JDL changed its payment policy - from three-four months’ advance payment to zero advance payment and weekly/monthly payment for normal packages. We expect it to reduce JDL’s other current liability from 176/188 days in FY11/FY12 to 110/73 days in FY14E/FY15E and its ex-cash working capital to increase from negative 38.4%/42.1% in FY11/FY12 to negative 22.6%/12.4% in FY14E/FY15E, respectively, thus exerting pressure on operating cash flow. We expect the weekly payment system without advance payment to increase the number of paid advertisers and hence revenue growth would compensate for increase in the working capital requirement.

(3) Revenue per campaign declined by 5.8% CAGR over FY09-FY12 at Rs15,169. With a higher share of normal package over premium membership, we expect revenue per campaign to grow at a lower pace of 5.5% CAGR over FY13E-FY15E. Any further pressure on revenue per campaign would exert pressure on margins and revenue growth rate.

(4) Share of Internet-based search increased from 34.0% in FY09 to 49.9% in FY13E, while the share of voice-based search declined from 63.5% to 39.2% over the same period. JDL has leadership position in voice-based search. In Internet-based search, 22.4% inflow to JDL was derived from search engine and it faces stiff competition from players like Sulekha/Asklaila/Askme which derived 21.9%/25.1%/23.3% inflow, respectively, from their search engine. Till now, JDL was able to grow at a healthy pace of 58.9% CAGR over FY09-FY13E and any moderation in Internet-based search due to rising competition may

16

1

96

39

3

63

0

1,0

05

1,0

29

93

5

1,3

18

(56

)

(59

)

(11

3)

(17

1)

(16

4)

(39

3)

(36

6)

(37

1)

(61

)

(77

)

(22

9)

(38

9)

(80

1)

(27

5)

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

800

1,000

1,200

1,400


CFO CFI CFF

(Rsmn)

105 36 280 460 841 636 568 947

558 620 922

1,378 1,805

4,921

5,489

6,436

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

100

200

300

400

500

600

700

800

900

1,000


Free cash flow Cash plus liquid investment (RHS)

(Rsmn) (Rsmn)

510 735 1,161 1,796 2,594 3,525 4,783 6,528

44.1

57.8 54.7

44.4

35.9 35.7 36.5

0

10

20

30

40

50

60

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15ERevenue from existing business Growth (%)

(%)(Rsmn)

37

79

30

4

45

4

67

2

98

0

1,3

51

1,8

57

21

75

19

3

28

8

50

4

64

3

96

4

1,3

17

3.0

8.8

14.8

15.7

19.2 18.2 20.2 20.2

5.3 9.2

23.2

24.7 25.7

27.8 28.2 28.4

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15EEBITDA PAT PAT (%) EBITDA (%)

(%)(Rsmn)


7 Just Dial

impact overall growth rate of the company. JDL launched its mobile Internet-based search service in March 2007 and developed its application Master App for Android mobile phone and iPhones in April 2013, and it is now in the process of developing it as an application for use with Blackberry and Windows Phone 7. In addition, JDL plans to widen its offerings and provide more interactive services that would improve the quality of its Internet-based search service. Also, JDL can increase its reach and maintain the share of voice-based search, if needed.

(5) JDL had Rs4,759mn cash and liquid investments on its book as of end 9MFY13, and we expect it to generate free cash flow of Rs1,516mn over FY13E-FY15E, thereby increasing cash and liquid investment to Rs7,615mn by FY15E. Effective utilisation of cash and liquid investments would be the key to its performance.

(6) JDL has not yet paid Rs30.2mn pertaining to its employees to the ESIC (Employees State Insurance Corporation) for the period April 2005 to March 2010. However, the company maintained a provision of Rs30.2mn as of end-December 2012.

(7) Employee costs accounted for 48.8% of sales in FY13E. However, as its employee costs are the lowest compared to other KPO (knowledge process outsourcing) players, maintaining lower costs would remain a challenge. We expect improvement in JDL’s Internet-based search service and search quality to reduce employee costs as a percentage of sales, although it may rise in absolute terms.

Exhibit 15: Increase in costs per employee Exhibit 16: Number of employees


Outlook and valuation

JDL operates an asset-light business model with negative working capital cycle. Following healthy revenue/PAT CAGRs of 36.1%/43.1%, respectively, over FY13E-FY15E, we expect JDL to report healthy free cash flow of Rs1.5bn over the same period, thereby resulting in cash/share of Rs93.

By offering its existing membership packages for listing from only 11 states to major cities across various states in India, adding more business categories and creating specialised membership packages, JDL is likely to provide healthy and profitable growth in the long run.

At the lower band of its IPO price band, JDL stock is valued at 20.1x/14.1x EV/EBITDA and 5.7x/4.0x EV/S for FY14E/FY15E respectively, lower than global peer Yelp which trades at 38x/6.3x CY14E EV/EBTIDA and EV/S. Following likely healthy margin at 28.4% in FY15E compared to 15.8% in case of Yelp in CY14E and a healthy growth rate, JDL deserves a premium multiple.

170,952 177,736 194,571 210,993 234,319 262,438 296,555

4.0

9.5 8.4

11.1 12.0

13.0

0

2

4

6

8

10

12

14

0

50,000

100,000

150,000

200,000

250,000

300,000


Cost/employee Growth (%)

(%)(Rs)

3,058 3,763 4,868 6,201 7,342 8,893 10,764

23.1

29.4 27.4

18.4

21.1 21.0

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000


Number of employees Growth (%)

(%)(No)


8 Just Dial

Exhibit 17: Comparative valuation

Mkt Cap

CMP Net sales

(Rsbn) EBITDA

(%) CAGR (%)

FY13E-FY15E EV//sales

(x) P/E (x)

EV/EBITDA (x)

RoE (%)

Comparison (Rsmn) (Rs) FY13E FY14E FY15E FY13E FY14E FY15E Sales EBITDA PAT FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E

Domestic (Rs)

Just Dial 32,639 470 3.5 4.8 6.5 27.8 28.2 28.4 36.1 37.6 43.1 7.9 5.7 4.0 50.7 33.8 24.8 28.3 20.1 14.1 24.4 20.5 22.6

Global (US$)

YELP Inc. 1,957 30.4 136.9 218.3 308.9 3.1 10.3 15.8 50.2 95.3 95.3 14.3 9.0 6.3 (434.7) 298.3 77.2 433.2 82.5 38.0 (6.7) 1.6 12.6

Angie's List Inc. 1,421 25 155.6 246.6 339.5 (31.8) (5.5) 8.9 47.7 - - 9.1 5.8 4.2 (25.8) (71.9) 73.2 - - 45.2 (1,083.0) 146.1 (508.8)

Bazaar Voice Inc. 558 7.7 102.8 159.3 192.1 (17.7) (12.5) (6.2) 36.7 - - 5.4 3.5 2.9 (14.4) (23.5) (29.8) - - - (63.0) (22.2) (9.0)

Marchex Inc. 215 5.7 137.6 146.7 166.0 12.9 9.7 13.4 - - 249.0 1.6 1.5 1.3 25.4 30.1 18.4 11.2 14.0 8.9 (4.6) (1.4) 1.5

Valueclick Inc. 2,021 26.5 661.2 741.8 834.8 32.4 33.9 34.3 12.4 13.7 13.7 3.1 2.7 2.4 16.5 14.3 12.8 9.2 7.9 6.9 18.0 16.1 15.5

Note: Bloomberg estimates for companies other than Just Dial. # All global companies’ financials are for CY12,CY13E, CY14E

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Comparison of JDL with global peers

Globally, there are local search engines which provide services like JDL, and also across voice, Internet and mobile Internet platforms, especially in the US.

Yelp Inc

Yelp Inc. operates Yelp.com, an online urban city guide that helps people find the place to eat, shop, drink, relax, and play based on informed opinions of a community of locals in the know. Yelp offers information relating to restaurants, shopping, food, nightlife, arts and entertainment, local flavour, public services and government, active life, event planning and services, hotels and travel, beauty and spas, education, health and medical, local services, home services, religious organisations, professional services, mass media, automotive, pets, financial services, and real estate. The company serves customers in the US, UK, Canada Ireland, France, Germany, Austria, the Netherlands, Spain, Italy, Switzerland, Finland, and Belgium. Yelp Inc. was founded in 2004 and is headquartered in San Francisco, California. The company’s product portfolio offers a pure play on the rapidly expanding local online advertising market, over personal computer, tablet and mobile platforms. Yelp had 71.4mn unique visitors in CY11 which grew 65.7% CAGR over CY08-CY11. Its local business locations increased from 25,000 in CY08 to 889,000 in the 9MCY12 period. Active local business grew from 4,000 in CY08 to 35,000 in the 9MCY12 period, accounting for 3.9% of local business

Angie’s List Inc

Angie's List is patronised by more than 2mn households nationwide in the US to find the best local service providers like roofers, plumbers, handymen, mechanics, doctors and dentists. In addition, it collects ratings and reviews on more than 720 different services. Angie's List’s members submit more than 60,000 reviews every month about the companies they hire. They include incredible details about how the project went (including costs), and grade the company's response time, price, professionalism and quality of work -- good or bad -- on an A to F scale. As Angie's List relies on its members' experiences, reviews aren't submitted anonymously. Companies can respond to reviews, helping make sure that members get all the information they need to make a hiring decision.

Bazaar Voice Inc

Bazaarvoice helps hundreds of millions of shoppers around the world to make more informed and confident purchase decisions by creating a place where they can share their opinions, questions and experiences about the products they buy. Bazaarvoice is the leading provider of solutions that allow retailers and brands to obtain and use this content in their businesses to increase sales, build customer loyalty and increase profits. Software as a Service (SaaS) solution allows a customer to leverage the voice of his client by creating online social communities that encourage authentic conversations directly on the website.

Marchex Inc

Marchex is a leading mobile and online advertising company that drives millions of consumers to connect with businesses over the phone, delivers the most quality phone calls in the industry and provides in-depth analysis of those phone calls. Through different platforms, the company offers three critical components for businesses looking to acquire new customers through phone calls. Marchex Call Analytics offers advertising campaign measurement and intelligence and digital call marketplace, and local lead solutions are designed for advertisers focused on new customer acquisition. The Marchex platform drives measures and monetises


9 Just Dial

millions of mobile and online connections through the phone to advertisers each month. It has exclusive and preferred relationships with leading mobile carriers and mobile application developers -- such as AT&T, Verizon, and Sprint -- with the analytics technology to constantly measure and optimise advertising campaign results. Its advertiser relationships number more than 100,000 and comprise leading national brands and local businesses that have seen more live connections and higher customer conversions from the Marchex technology platform

Valueclick Inc

ValueClick provides online advertising campaigns and programmes for advertisers and advertising agency customers in the US and other countries. The company’s customers include direct marketers, brand advertisers, advertising agencies, and traffic distribution partners. Through a unique combination of data, technology and services, ValueClick increases brand awareness and drives customer acquisition at scale for the world's largest advertisers, and maximises advertising revenue for tens of thousands of online and mobile publishers. The company is based in Westlake Village, California, and has offices in major advertising markets worldwide

Exhibit 18: Historical growth rates and margins of global players

Mkt. cap. (US$mn)

CY08 CY09 CY10 CY11 CY12 CAGR

(%) EV/S - CY12

Yelp Inc. 1,930 12 26 48 83 138 62.5 14.3

Angie's List Inc. 1,449 34 46 59 90 156 35.7 9.1

Bazaar Voice Inc. 547 10 22 39 64 106 59.9 5.4

Marchex Inc. 213 146 93 98 147 138 (1.1) 1.6

Valueclick Inc. 2,065 455 423 431 529 661 7.7 3.1

Revenue growth (%)

YELP Inc. - - 112.6 84.9 74.5 65.2 - -

Angie's List Inc. - - 34.7 29.5 52.5 73.0 - -

Bazaar Voice Inc. - - 121.2 72.0 66.8 64.6 - -

Marchex Inc. - - (36.3) 4.6 50.4 (5.7) - -

Valueclick Inc. - - (7.2) 1.9 22.7 25.0 - -

EBITDA (US$)

Yelp Inc. - (5.7) (1.1) (7.2) (11.9) (10.3) - -

Angie's List Inc. - (15.0) (7.1) (21.7) (42.5) (48.3) - -

Bazaar Voice Inc - (2.3) (4.5) (6.5) (17.4) (19.6) - -

Marchex Inc. - 20.8 8.9 (2.9) 8.0 1.5 - -

Valueclick Inc. - 77.1 116.1 117.3 152.5 198.2 - -

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Company background

JDL is one of the leading local search engines in India which provides users with information and user reviews from its database of local businesses, products and services across the country. Founded in 1996, JDL has built a strong database of SMEs, relationships with SME businesses, and powerful unaided brand recall as a voice accessible directory service through its call centres. The search service is available to users through multiple platforms: Internet, mobile Internet, telephone (voice) and text (SMS). In 2012, the company addressed ~254.3mn search requests across different platforms. Listing on the search service provides businesses with exposure to the users at a time when the users are making a purchase decision. Businesses may choose to pay for a listing to be featured on a priority basis in the search results, which is called a campaign.

JDL maintains an extensive database of local businesses (9.1mn as of 31 December 2012) and had ~195,000 advertising campaigns as on the same date. This large number of users will, in turn, prompt more businesses to pay for listings and become paid advertisers in order to be featured in the search results on a priority basis. Paid advertisers have the flexibility to choose different levels of priority in the search results for different geographic areas and products and services. JDL has the first-mover advantage in India and also has strong brand recall.

In countries like the US, similar voice-based services are provided by telecommunications operators and the charges are levied on consumers. Given the high cost of voice-based local search in developed countries like the US, Internet-based listings dominate the local search market. Firms offering such services include online


10 Just Dial

version of traditional listing directories such as yellowpages.com, Internet search engines such as Google, review sites such as Yelp, and social media sites such as Facebook. Domestically, it faces competition over alternate delivery options (Internet and mobile) from Sulekha, Asklaila, Zomato, etc.

Exhibit 19: Key milestones

Year Event

1993 A&M Communications Pvt. Ltd was incorporated.

1996 Commencement of local search services in Mumbai with the telephone number - 888 8888.

1997 The brand ‘Just Dial’ was registered.

2000 Secondary sale of 50% stake by the promoters to Indiainfo.com Pvt. Ltd.

2006 Investment of Rs546.9mn by SAIF II Mauritius Company Ltd (SAIF).

2006 Change of the company’s name from A&M Communications Pvt. Ltd to Just Dial Pvt. Ltd.

2007 Launch of the company’s website http://www.justdial.com.

2007 Investment of Rs165.3mn by Tiger Global Four Holdings and Tiger Global Principals and the second round of investment of Rs40.1mn by SAIF.

2007 Launch of mobile Internet and SMS-based search services.

2009 Investment of Rs383.5mn by Sequoia Capital India Investments III (Sequoia Capital), Rs308.8mn by Tiger group and Rs95.9mn by SAIF.

2011 Investment of Rs166.9mn by SAPV (Mauritius) and Rs166.9mn by EGCS Investment Holdings.

2012 Investment of Rs3,269.5mn by Sequoia Capital India Growth Investment Holdings I, SCI Growth Investments II and second round of investment by SAPV (Mauritius).

Source: RHP, Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 20: Shareholding pattern (%) Particulars (CY13E/FY14E) Pre-IPO Post-IPO

Promoter 37.1 33.1

PE Inventors/Venture capital 60.5 39.5

SAIF 19.7 11.2

Tiger Global 19.9 13.4

Sequoia 18.4 13.8

SAP Ventures 1.6 1.1

EGCS 0.9 0.0

Employees 2.3 2.3

Public 0.0 25.0

Total 100.0 100.0

Source: RHP, Bloomberg, Nirmal Bang Institutional Equities Research

Fast pace of growth in online advertisement market

The Indian advertising market is expected to grow 9.6% at Rs369.5bn by 2015 from Rs255.9bn in 2011, as per Netscribes. Advertising through television and print medium represented the largest share at 46.0% and 40.4%, respectively, in 2011. Currently, the share of Internet advertising is lower at 3.4%, but is the fastest growing segment in the Indian advertisement market. Internet advertisement market was expected to grow 51% at Rs13.1bn in 2012E from Rs8.7bn in 2011. Faster growth in Internet advertising is on account of: 1) Growing penetration of Internet usage among individuals, 2) Rising Internet usage on mobile phones, and 3) The emergence of fast technology-oriented online mediums that are driving the interest of end consumers.


11 Just Dial

Exhibit 21: Indian advertisement market 2011 (Rs255.9bn) Exhibit 22: Indian advertisement market 2012E (Rs280.2bn)


The online medium promotes various metric systems of cost models, allowing the advertisers to optimise their return on investment. Online advertising is cost effective and low-priced as compared to television, radio or print. In addition, online advertising is an efficient and effective sales medium that enables advertisers to provide intricate details, features and specifications that allow them to strategically target a set of desired consumers. The number of responses can be measured, which allows the advertiser to measure the return on investment and strategise better for future campaigns. Among all media modes, online medium has the easiest reach for targeting a global audience. It also has the flexibility in terms of inventory volume, advertisement type and unparalleled targeted advertising options. Online advertising also allows the advertisers to directly engage with current and potential customers for real-time engagement, awareness, feedback and lead generation.

Exhibit 23: Internet advertising to report highest growth

Source: RHP, Nirmal Bang Institutional Equities Research

Local search market

Local search market generally comprises offline and online search services. Offline local search services primarily include print directory and phone-based searches, where the chief source of revenue is advertisement fees paid by business entities. Online local search involves the use of localised portals that allow users to search for geographically constrained results from a database of local listings. Major players have multi-channel access including phone, web and mobile portals, and advertising is the main source of revenue.

The local search market has evolved from word-of-mouth and print directories as a mode of getting local information to professional phone, web-based and voiced-based and mobile phone-based search services. For online search services, listing may be free or sponsored. Sponsored results get greater visibility as they are highlighted and are given preference over other listings. Other revenue sources include database sharing or syndication by sourcing for listing or powering search results, partnering with global search engines or selling contact details of users to businesses for marketing activities. For offline search services, players come out with printed copies of local directories or operate phone-based services to respond to queries over the phone. The major source of revenue is the advertisement fee paid by the advertisers.

TV, 117.7 , 46.0%

Press, 103.4 , 40.4%

Outdoor, 15.1 , 5.9%

Radio, 10.0 , 3.9%

Internet, 8.7 , 3.4%

Cinema, 1.0 , 0.4%

TV, 129.5 , 46.2%

Press, 110.0 , 39.3%

Outdoor, 15.9 , 5.7%

Radio, 10.5 , 3.7%

Internet, 13.1 , 4.7%

Cinema, 1.2 , 0.4%

10.0 6.4 5.3 5.0

50.6

20.0

9.5

0

5

10

15

20

25

30

35

40

45

50

55

TV Press Outdoor Radio Internet Cinema Total

(%)


12 Just Dial

Due to consumers becoming more receptive towards phone-based searches, the offline search services market has expanded. With the proliferation of technology and advancement in the current market scenario, consumers are driven more towards saving time and effort. Most leading players have call centres which provide instant response to consumer queries. The key driver for online search services is the proliferation of Internet, including mobile-based Internet, and the growing number of users in India. Consumers find it convenient to conduct search on the Internet for any service or product required, especially with the reduction in the prices of access devices, launch of 3G network and innovative data plans that facilitate the use of Internet on mobile phones. Local online search services help provide better visibility to small and local business owners by providing a medium to market and publicise their products and services and to reach a larger audience in a cost-effective manner compared to traditional advertising mediums like television and newspapers.

However, local offline search services face challenges such as lower acceptance in a corporate set-up and the global drive towards a paperless environment. Local online search services are limited by generic search engines, the lack of awareness, low English literacy rate and language barriers and insufficient information and the lack of comprehensive databases.

The players in the local search services market include Justdial, Asklaila, Burrp, Getit, Infomedia18, Metromela, Onyomo, Sulekha and Timescity. Most these players provide offline and online local search services and local offline and online classified advertisements.

According to Netscribes, classifieds is a distinct type of advertising medium with both offline and online modes that usually comprises text with no graphics and short statements about the requirements of the buyer or the seller. It is becoming an increasingly popular mode of advertising. In 2011, the market segment for offline and online classifieds stood at 58.9% and 41.1%, respectively. With growing Internet usage, the online classifieds segment is growing rapidly. It is estimated that the offline and online segments will report 53.1% and 46.9% ,market share, respectively, by 2016.

It is expected that the classifieds market in India will be driven by the growth in services sector, favourable demographics and growth in the advertising industry. The size of the classifieds market has grown from Rs30.6bn in 2011 and is expected to touch Rs84.3bn in 2016.

Offline classifieds comprise print media, while online classifieds comprise horizontal or general/multipurpose classifieds website or vertical sites in jobs, real estate and matrimonial websites. Both the offline and online markets are growing on account of increasing penetration of print media and the Internet.

Exhibit 24: Internet advertising may report highest growth Exhibit 25: Classifieds market size and growth

Source: RHP, Netscribes, Nirmal Bang Institutional Equities Research Source: RHP, Netscribes, Nirmal Bang Institutional Equities Research

58.9 57.7 56.6 55.5 54.3 53.1

41.1 42.3 43.4 44.5 45.7 46.9

0

10

20

30

40

50

60

70

80

90

100

2011 2012E 2013E 2014E 2015E 2016E

Offline share Online share

(%)

30.6 37.4 45.8 56.1 68.8 84.30

10

20

30

40

50

60

70

80

90

2011 2012E 2013E 2014E 2015E 2016E

Classified market size

(Rsbn)


13 Just Dial

Financials (standalone)

Exhibit 26: Income statement


Net sales 1,839 2,621 3,527 4,785 6,531

Growth (%) 40.5 42.5 34.6 35.7 36.5

Staff costs 947 1,308 1,720 2,334 3,192

Other costs 438 640 826 1,100 1,482

Total expenditure 1,385 1,948 2,546 3,434 4,674

EBITDA 454 672 980 1,351 1,857

Growth (%) 49.4 48.1 45.8 37.8 37.5

EBITDA margin (%) 24.7 25.7 27.8 28.2 28.4

Other income 37 132 95 287 359

Extraordinary - 2 (15) - -

Interest costs 0 0 0 - -

Gross profit 491 806 1,060 1,638 2,216

Growth (%) 43.4 64.2 31.5 54.6 35.3

Depreciation 68 90 136 192 242

Profit before tax 423 716 924 1,446 1,974

Growth (%) 44.7 69.2 29.1 56.5 36.6

Tax 135 210 291 481 657

Effective tax rate (%) 31.9 29.3 31.5 33.3 33.3

Net profit 288 506 633 964 1,317

Growth (%) 49.2 75.5 25.1 52.4 36.6

Extraordinary items - 2 (10) - -

Adjusted PAT 288 504 643 964 1,317

Growth (%) 49.2 74.9 27.6 49.9 36.6


Exhibit 28: Balance sheet


Equity 519 519 694 694 694

Preference shares/warrants 2 20 11 11 11

Reserves 433 533 3,505 4,470 5,786

Net worth 954 1,072 4,211 5,175 6,492

Short-term loans - - - - -

Long-term loans 1 - - - -

Total loans 1 - - - -

Deferred tax liability (12) (9) 2 25 57

Liabilities 943 1,063 4,213 5,200 6,548

Gross block 452 619 1,012 1,374 1,741

Depreciation 180 271 407 599 841

Net block 272 348 606 775 900

Capital work-in-progress - 12 12 16 21

Long-term Investments 1,182 1,568 4,501 4,501 4,501

Inventories - - - - -

Debtors 1 - 4 - -

Cash 196 237 420 988 1,936

Other current assets 251 303 353 479 654

Total current assets 448 540 777 1,467 2,589

Creditors 49 44 64 86 104

Other current liabilities 909 1,361 1,619 1,474 1,358

Total current liabilities 959 1,405 1,683 1,560 1,462

Net current assets (511) (865) (906) (92) 1,127

Total assets 943 1,063 4,213 5,200 6,548


Exhibit 27: Cash flow


EBIT 392 668 844 1,159 1,615

Non-cash adjustments 21 6 - - -

Restated EBIT 413 674 844 1,159 1,615

(Inc.)/dec. in working capital 255 444 223 (245) (272)

Cash flow from operations 668 1,118 1,068 914 1,343

Other income 28 6 95 287 359

Depreciation 68 90 136 192 242

Deferred liabilities - - 11 23 32

Interest paid (-) (0) (0) (0) - -

Tax paid (-) (133) (209) (291) (481) (657)

Dividend paid (-) - - - - -

Extraordinary items - - 10 - -

Net cash from operations 630 1,005 1,029 935 1,318

Capital expenditure (-) (171) (164) (393) (366) (371)

Net cash after capex 460 841 636 568 947

Inc./(dec.) in short-term borrowing - - - - -

Inc./(dec.) in long-term borrowing (2) (2) - - -

Inc./(dec.) in preference capital - 334 (9) - -

Inc./(dec.) in borrowings (2) 332 (9) - -

(Inc.)/dec. in investments (388) (1,092) (2,888) - -

Equity issue/(buyback) 1 (41) 2,623 - -

Cash from financial activities (389) (801) (275) - -

Others (133) - -

Opening cash 104 175 237 420 988

Closing cash 175 215 420 988 1,936

Change in cash 71 40 183 568 947


Exhibit 29: Key ratios

Y/E March FY11 FY12 FY13E FY14E FY15E

Per share (Rs)

EPS 4.7 8.9 9.3 13.9 19.0

Book value 18 21 61 75 93

Valuation (x)

P/E 99.5 52.8 50.7 33.8 24.8

P/sales 13.3 9.3 9.3 6.8 5.0

P/BV 25.6 22.7 7.8 6.3 5.0

EV/EBITDA 50.7 33.6 28.3 20.1 14.1

EV/sales 12.5 8.6 7.9 5.7 4.0

Return ratios (%)

RoCE 35.7 49.7 24.4 20.5 22.6

RoE 35.8 49.8 24.4 20.5 22.6

Margins (%)

EBITDA margin 24.7 25.7 27.8 28.2 28.4

PBIT margin 21.0 22.2 23.9 24.2 24.7

PBT margin 23.0 27.3 26.2 30.2 30.2

PAT margin 15.7 19.2 18.2 20.2 20.2

Turnover ratio

Asset turnover ratio (x) 2.0 2.5 0.8 0.9 1.0

Avg. inventory period (days) - - - - -

Avg. collection period (days) - - - - -

Avg. payment period (days) 13 8 9 9 8

Growth (%)

Sales 40.5 42.5 34.6 35.7 36.5

EBITDA 49.4 48.1 45.8 37.8 37.5

PAT 49.2 74.9 27.6 49.9 36.6



14 Just Dial

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

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