The Q3 results still did not indicate revenue acceleration, but the key positives are: (i) Traffic growth still strong at 34% y-o-y despite some pullback in ads; (ii) Realisations showing upward trajectory on entry level price hikes, staying away from discounts and selling bundled products; (iii) Ops still tightly managed, resulting in a nine-quarter-high Ebitda margin at 23.7% (up 940bps y-o-y). While competition from Google or vertical players is an issue, we like the renewed focus on search and productive growth, with likely margin stability at 22% Ebitda levels. In our view, JUST is the most cost-effective SME advertising platform, with scope for coverage expansion in Tier 2/3 cities. We retain our Buy with a revised TP of `730, implying 21% upside.
Catalyst: Translation of traffic growth to revenues could lead to re-rating
While traffic growth has been healthy, translation to revenue and paid listing growth is still awaited and could provide growth/margin upside to our estimates, which build only moderate revenue growth recovery. Steps by Google to move into Tier 2/3 cities and tweak their entry level pricing lower could be a threat. We believe any strategic investor would be taken positively.
Q3: operational results ahead of expectation
Revenue growth was in line at 9% y-o-y, driven by better realisations, though paid listing addition was tepid. Margins surprised, up 330 bps q-q to 23.7%. JUST indicated focus on productive growth & maintaining margins in 22-23% range. Traffic growth sustenance (30%+ y-o-y in last three quarters), normalisation of the macro, coupled with improved monetisation, could drive growth upside.
Revenue growth unchanged, margins surprise drives 4-5% EPS upgrade
We continue to build 10% revenue CAGR over FY18-20F, but raise margins by 150bps to 22% levels by FY20F, driven by Q3 beat and sustainability, leading to EPS CAGR of 20%. Our Rs 730 TP is based on a higher multiple of 24x (driven by comfort on margins/realisations) on FY20F EPS of Rs 30.4.
Key takeaways from management commentary
Paid listings addition: Weaker paid listings additions were due to: (i) challenging macro due to GST; (ii) product bundling; (iii) entry-level price hikes leading to attrition of less profitable campaigns. The company thinks the recovery from the GST impact will be gradual.
Improvement in realisation: Bundling of products and entry-level price hikes drove realisations higher, and the company retains its focus on improving revenue/sales employee and revenue/customer metrics, vs focusing on adding paid listings at the cost of declining realisations and lower productivity. This provides comfort on realisations.
Margins: Margins continue to surprise positively, driven by: (i) rationalisation of employee costs (rationalisation of low-performing sales employees, higher variable component and linking salaries to longevity for new employees); (ii) efficiency improvements (automation and process improvements); (iii) lower ad spend of Rs 140 mn vs Rs 186 mn in Q2FY18. The company indicated that they can maintain Ebitda margins in the 22-23% range even at current growth level. If growth improves, operating leverage could kick in, pushing margins higher.
Advertising spend: JUST plans to spend ~8-9% of its top-line on advertising expenses; however quarterly fluctuations will remain. For FY19, the company is targeting to spend close to Rs 800 mn on advertising.
Traffic growth: Traffic trends were healthy at 34% y-o-y growth. Of the overall traffic, 69% originates from mobile, 23% from web and 8% from voice. Of the mobile traffic, 90% originates from mobile site. Of the total traffic, 26-27% is direct traffic to Justdial.
Hiring plans: JUST plans to increase feet-on-street and JDA hiring; however the focus is to keep productivity levels intact.
App release: The company plans to release a revised version of the app in the next 1-2 months, which will include live chat and curated content to increase customer engagement with the platform.
Tier 2/3 cities: JUST generates 20% of the overall revenues from Tier 2/3 cities and 43% to paid campaigns.
Revenue growth unchanged; margin surprise drives EPS upgrades
We continue to build 10% revenue CAGR over FY18-20F, but raise Ebitda margins by 150bps to 22% levels by FY20F, driven by the Q3 beat and sustainability leading to an EPS CAGR of 20% over FY18-20F. We look for EPS of Rs 21.2/26.2/30.4 over FY18/19/20F. We raise our TP to Rs 730 (from Rs 635), driven by higher EPS estimates and a notched increase in target multiple to 24x (from 22.5x) on FY20F EPS of Rs 30.4. We increase our target multiple, driven by higher comfort on margins and realisations.