Monday, May 20, 2013

Justdial IPO - 10 Reasons to Invest

The bad thing about stock market is that good stocks never come cheap. Justdial’s IPO which has opened today, might just prove this painful yet fruitful truth once more. At the demanded price-earnings multiple of 52X to 60X, nobody disagrees that Justdial IPO is expensive. But as good stocks have often proven in the past, ‘expensive’ stocks have later appeared as ’was reasonable’ or even as ’was cheap’, in hindsight. So, here are 10 reasons why Justdial IPO is investment-grade despite a stiff-price on first looks.

1. High Return-on-Equity:
While most listed large-caps in the country are struggling to mark even a double-digit RoE, and while many mid-caps to small-caps are working hard to maintain a Return-on-Equity of over 20% or even 15%, Justdial’s performance in this crucial metric is nothing short of a surprise - 53.6%. Calling themselves as ’India’s No.1 Local Search Engine’, this voice and data based operation also has an impressive Return on Capital Employed (RoCE) of 59.3%. And both values have been steadily growing during the last 4-to-5 years. Such metrics and performance are found only in the best of the blue-chip stocks among India.

2. Zero Debt:
Again, while the debt contagion is spreading among India Inc., Justdial has managed to steer clear of the lure of easy money that proves to be costly later. Net Debt at the local search major of India is zero, and the debt/equity ratio has been zero, at least for the last five years. In fact, the high asking price of Justdial IPO is partly due to this zero-debt compliance.

3. Reasonable Margins:
Justdial’s core profitability margins have been steadily increasing since the past five years. So much so that, from an originally unattractive state, it has steadily crossed over to reasonable or even attractive territory for investors. EBITDA margins are at 25.7%, while Net Profit Margin is at 20%. The steadily improving margins signal that Justdial enjoys a leadership position in their segment, and that they are not facing any troublesome pricing pressure.

4. High Growth Rate:
Justdial has achieved rising profitability margins and high RoE, despite zero debt, by not compromising on their topline growth. Sales growth has been steady and impressive, with revenue growing by 3.8X times during the past five years. The high valuations of Justdial’s IPO is also a reflection on this growth pace. In fact, if the current growth momentum persists, analysts think that the offer is priced at 30 P/E on FY’14 estimates.

5. Fully an Offer for Sale:

Justdial is not issuing any new shares through this IPO. The full IPO consists of an Offer for Sale (OFS) by promoters and some existing investors. Some analysts have pointed out that this is a weak point of the IPO, as the entire IPO proceeds would go to the promoters and these early investors, and that nothing would come to the company. Though partly true, this argument is not without its flaws. Firstly, a full OFS issue avoids equity dilution which is a good thing for all shareholders - old and new. Secondly, it signals an aversion to the serial-dilution culture that has become the bane of many stocks in the Indian market. And lastly, as Founder and Managing Director VSS Mani says, “The company has enough money for its growth.”

6. Attractive Cash Conversion Cycle:

Even profitable companies might encounter serious issues with cash flows. And in the listed segment of India Inc, there are numerous examples with seemingly insurmountable free cash flow challenges. But Justdial has almost always generated significant free cash flows during its existence. The secret behind that is 100 percent pre-payment by advertisers as well as the low capex intensive nature of their business. Justdial’s FCF/EBITDA stands at a high 92%.

7. Early Investors’ Profile:

Some of the world’s most discerning long-term investors had found value in Justdial’s value proposition, as well as performance, years before the run-up to this IPO. SAIF became an investor in 2006, and became a repeat investor in 2007. That year also saw Tiger Global entering Justdial. 2009 was witness to the entry of none other than Sequoia (of Google-Apple-Yahoo fame), and second and third investments by Tiger Global and SAIF respectively. 2011 saw entry of SAPV and EGCS Investment Holdings, while 2012 was witness to repeat investments by Sequoia and SAPV.

8. High QIB Demand:

Justdial’s IPO is unique in that 75% of the total issue is reserved for Qualified Institutional Buyers (QIBs). That shows anticipation of strong institutional demand, which has been quite unlike in many earlier IPOs. While another 15% is reserved for High Networth Individuals (HNIs), only 10% has been reserved for Retail Investors. Still, Retail Investors will get the benefit of a 10% discount on price to others. Already the pre-IPO anchor-investor segment of Justdial’s issue got strong response with institutional investors like Goldman Sachs, HSBC, Deutsche Securities, DSP Blackrock, & Birla Sunlife subscribing for shares worth Rs. 208 crore at Rs. 530 a share.

9. CRISIL’s 5/5 Rating:

Though rating agencies are not immune to mistakes or inflated projections, CRISIL, a unit of S&P, is regarded as the most conservative among rating agencies in India. Also India’s largest rating agency, it is not common that CRISIL assigns even a 4/5 rating to an IPO. But Justdial IPO has obtained the highest 5/5 rating from CRISIL. Though CRISIL makes it clear that the rating is not a comment on the issue price, it does show that the fundamentals of the company are now strong.

10. Safety Net:

Justdial IPO is unique in that it is using SEBI’s new mechanism of providing a ’Safety Net’ for IPO investors. SEBI’s safety net is a scheme where the company’s promoters assure that they will buy back shares from the retail applicants at the IPO price, if its stock falls sharply during the first six months after listing. The buy back under safety net will trigger if volume-weighted average price of the share for the previous 60 days on completion of the safety net period of six months is below the allotment price for retail applicants. Though SEBI had not made it mandatory, Justdial has went for it voluntarily, showing confidence in their offer price.

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