Revenue estimates cut to 10% CAGR over FY17-19F; TP up to Rs 635 from Rs 590
Over the past two years, JUST has disappointed on: (i) revenue growth slowing to 8% y-o-y from 25% y-o-y on deceleration in paid listings and pricing pressure in premium listings; (ii) a pullback in JD Omni and transaction capabilities (Search Plus), which could impact longer-term sustainability; and (iii) lost focus on Core Search in an attempt to target offerings like SearchPlus/Omni, leading to a 30%+ fall in price. However, the company has now renewed focus on its Core Search business, and we are enthused by: (i) improvement in user traffic (grew 30%+ y-o-y in Q1/2Q18), a lead indicator for possible paid listings growth improvement; (ii) the arresting of declines in realisations; and (iii) a focus on running the business much more efficiently with ~800bp Ebitda margin improvement to 20.4% over the past year. While competition from Google or vertical players is an issue, Justdial still remains the most cost-effective SME advertising platform in India, with scope for coverage expansion in tier 2/3 cities. We reiterate our Buy rating.
Catalyst: Key to watch: (i) translation of traffic growth into paid listings growth, alongside stability in realisations; (ii) competition from Google; and (iii) any strategic investor coming in. Moderate revenues, raise TP to Rs 635: We moderate our revenue estimates to 10% CAGR over FY17-19F to factor in no contribution from SearchPlus/JD Omni and the recent growth slowdown. We raise our margin estimates for FY18 on sustainability of the recent productivity improvements, while lowering estimates for FY19. We look for an EPS CAGR of 19% over FY17-20F. We raise our target price to Rs 635 (vs Rs 590 earlier), based on 22.5x 1-year fwd EPS to Dec-18 of Rs 28.2 (vs 25x earlier to account for slower growth) and implying 25% potential upside.