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  1. Just Dial operational results better than expected, stock rated ‘Buy’ by Nomura

Just Dial operational results better than expected, stock rated ‘Buy’ by Nomura

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).

By: | Published: January 29, 2018 3:10 AM
just dial rating, just dial rating by nomura, nomura just dial rating, nomura stock rating, stock rating of nomura 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.

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.

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