Kotak maintains ‘reduce’ on Just Dial shares with target price of Rs 700

Just Dial’s core business momentum remains weak, with slow pace of campaign additions and traffic growth.

just Dial
Just Dial is looking to add ~2,000 employees in FY2017 in a bid to boost campaign addition.

Just Dial’s core business momentum remains weak, with slow pace of campaign additions and traffic growth. In the results conference call, management mentioned: (i) an additional ~2,000 employees would be added in FY2017, and (ii) Omni is targeting ~20,000-25,000 merchants by end-FY2016. We believe business metrics may take longer to recover, and maintain Reduce with a target price of R700 (R710 earlier). FY2017 EPS estimates go up due to lower ad spend assumption.

Core business: Further employee addition to boost campaign addition: Just Dial is looking to add ~2,000 employees in FY2017 in a bid to boost campaign addition. Most of these employees would be added to the sales force, though the company has not yet decided on a specialist sales force for Omni. The company envisages that the recent employee addition (~1,000 employees in Q4FY16) would contribute to revenue growth Q2FY17 onwards.

Advertising to be scaled up in a bid to regain traffic: Just Dial’s unique visitors count moderated from a run-rate of 75-76m in Q1-Q2FY16 to 71.5m in Q4FY16, and was flat q-o-q. Just Dial intends to get more traffic by increasing its advertising spend, and has guided for a spend of R100 crore over FY2017-18e. This spend is critical to increase traffic on the platform and also drives adoption of Search Plus. The company will take a final view on total spend after assessing the impact of spending in the first phase. We now assume a lower and more phased spend of R80 crore over FY2017-18e.

Omni: Merchant base of ~25,000 targeted by end-FY2017: Post the launch in Feb 2016, Omni garnered ~2,500 customers by Mar 2016 (1,800 of whom paid the upfront fee of R20,000 as well), and Just Dial is targeting ~20,000-25,000 Omni customers by year-end (some of whom could be core search customers as well, and may be offered a bundled package). The company is confident of booking the entire set-up fee of R20,000 upfront under IndAS, though final discussions with auditors are still underway.



Maintain Reduce: Business momentum may take time to pick up: We retain our cautious view on Just Dial as (i) key metrics such as campaign growth, realisations and traffic are still to improve, and (ii) FY2017 margins will be depressed due to higher employee and advertising expenses. Our revenue estimates for FY2017 and FY2018 factor in 14-18% growth in the core business and contribution of R80 crore and R110 crore respectively from the new businesses (primarily Omni). We adjust our FY2017 EPS estimates upwards by 29% primarily on lower ad spend assumption, though FY2018 estimates remain largely unchanged. Maintain Reduce with a TP of R700.

Takeaways from Q4FY16 conference call

n Management mentioned that the core business slowdown would reverse, as the company is adding new employees. Just Dial added ~1,000 employees in Q4FY16 primarily to its sales force, and will add ~2,000 additional employees in FY2017. The addition of new employees would lead to increased sign-ups, and hence boost revenue growth.

n Revenue growth momentum may pick up after Q1FY17, as the impact of new employee addition kicks in. Margins may be weak in H1FY17 due to higher employee expense as well as higher advertising expenses. Advertising will commence in the current quarter, and the management would take a call on final investment in advertising only after seeing the results of the first phase of advertising.

n The company managed to onboard ~2,500 merchants for Omni by March 2016, and is targeting to reach a merchant base of 20,000-25,000 merchants by the end of FY2017. It has also custom-created Omni for each of its existing client, making it easier to pitch Omni to prospective clients.

n The company is seeing a good mix of customers who avail the monthly payment package (70%) and the one-time purchase package (30%). Most customers availing the package either have multiple businesses, or want to better track customers and inventory. Client stickiness would be much higher for Omni than the core search business.

n Management mentioned that Omni has received good feedback from merchants, primarily due to the integrated nature of the offering (billing, inventory management, auto purchase ordering, customer-specific campaigns, customer data management, etc.). Just Dial has also introduced an online package for faster onboarding of merchants to Omni.

n Company believes that Omni is superior to other similar offerings in the market due to its integrated nature, ease of use, and quick onboarding. Market potential is immense, and key competition is not from other software, but from informal ways of accounting used by SMBs currently. Management believes that Omni could potentially become as large as the core advertising business.

n Search Plus monetisation may not happen immediately as current focus is on creation of a robust platform, with higher merchant base (with Omni) and higher customer base (advertising as well as addition of new features on the app, such as the ‘social’ feature could help)


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First published on: 30-05-2016 at 07:08 IST