Analysis: Just Dial Ltd

The current section of the “Analysis” series covers Just Dial Ltd, which primarily provides local search services where users can find out sellers of different products and providers of different services in their area. The company also provides digital onboarding services to small & medium enterprises (SMEs) like JD Omni.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

In order to benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Just Dial Ltd Research Report by Reader

Dear Dr Malik,

I was analysing the company Just Dial Ltd and attempted to analyze the same. It seems to me that it is a company with a decent business model/experience and available at good fair valuations.

I request your feedback on my analysis.

Thanks.

Kamal Kanugo

Introduction:

• Commenced operations in 1996 as a local search engine.
• 11 branches in major cities
• 4,072 telesales team
• 1,461 feet on the street marketing team
• 3,896 cold calling team

Financial analysis of Just Dial Ltd:

The company has been consistently growing its revenues from 86 Cr in March 2009 to 953 Cr in March 2020. The Revenues has been growing year on year. The company has healthy operating Margins. In the initial years, the OPM was 9%, which increased to 31% by 2014. The company faced a reduction in OPM% in 2015, 2016, and 2017 (went to 15%) and from March 18 onwards, again OPM% has improved from 21% to 29% in March 2020. We need to review why OPM% reduced from 2015 to 2017. The NPM has followed a similar trend.

The company is able to maintain healthy OPM and NPM. It means the company has a good moat and the company is able to have a pricing advantage.

Company has a consistent Tax payout ratio and looks inline.

Cumulative CFO for the last 10 years (1255cr) > Cumulative Net profit (980 cr) implies the company has been able to efficiently manage the working capital and convert profits into cash.

The company has FCF / CFO of 74%, which is very healthy.

Debt to Equity ratio is almost negligible

Just Dial is a cash flow positive company.

SSGR is healthy, which suggests that the company does not need to employ debt for growth. In fact, the company is sitting on 1500 Cash & investments (That the company has not reinvested this in growing their business, suggests that they may not expect much growth in the business going forward. In addition, the company has been buying back shares in the last 3 to 4 years, more than the market price. When the company is paying more for their shares in the buyback, it is advantageous to the outgoing shareholders, but not to the existing shareholders. Instead, a consistent Dividend policy for all shareholders will be better for all the shareholders)

Operation Efficiency: NFAT from 7.5 to 6.5 in the last 10 years.

Just dial Limited works on a Negative Working Capital cycle. They receive payments in advance from their customers.

This is not a very capital-intensive business Model.

Value creation by Just Dial Ltd for shareholders: For every 1 INR profits retained, Just dial has created a value for 2.55 INR.

Valuation Analysis of Just Dial Ltd:

P/E – 9 (10 Year Average PE of JD is 44) – Need to understand why is the market not valuing the company despite healthy performance.

Earnings Yield -14.5% (Profit before Tax / Market Cap).  Better than 10-year G-sec (6%)

Price to Sales Ratio – 2.5

Dividend Yield – The Company did not give Dividend to shareholders in the last 4 Years. However, they have been doing a share buyback for the last 3 to 4 year.

The company has cash and investments of almost 1500 cr. These are investments in different tax savings government Bonds. The company is earning interest on these investments, which is part of the other income.

The company has a market cap of 2420 Cr and the company is sitting on 1500 Cr of cash & investments. On the face of it, it looks the market has not valued and mispriced this company.

DCF Analysis based on the next 10 years: Assuming the Net cash grows 7 % for the next years and thereon on 5% for the next 5. In the final year, assuming the company can be sold for 5 times the cash.

My understanding is that the company is available at a very steep discount than its intrinsic value.

Business and Industry Analysis of Just Dial Ltd:

Just dial has a consistent growth in sales year on year, and the OPM, which once dropped in 2016, has again been regained back in 2018 / 2019. The main reason for lower OPM in 2016 was the strategy of Just Dial Ltd to increase market share in Tier 2 and Tier 3 markets where they had to offer lower pricing.

With the COVID 19 situation, and focus on the development of rural economy, I believe this can help the strategy for Just dial limited.

Info Edge India – has good sales growth but the OPM development has been very inconsistent. In addition, they have a very large other income portion, which I believe is their shareholding in other companies like Naukri etc.

The market has very high built-in expectations, which can be seen in the price.

India Mart was listed a couple of years back. Sales have been on an increasing trend. However, OPM growth has been inconsistent. The market has very high built-in expectations, which can be seen in the price.

Management analysis of Just Dial Ltd:

• S.S. MANI is the Founder and CEO.
• Ramani Iyer (Director)
• Krishnan (Director)
• Other Non-Executive Directors on the Board with diversified experience.

I could not find any negative reports on the management. However, a succession plan did not seem in place for now.

Dividend / Share Buyback by Just Dial Ltd:

The Company paid dividends in 2014 and 2015. However, after that, they have been buying back shares every year. The buyback price is more than the Market price, indicating that the management feels their CMP is undervalued. However, buying shares at higher prices than the market is good for investors exiting. However, for the existing shareholders, this is not a good proposition. The company should buy back shares at the prevalent market prices I believe.

Margin of Safety Analysis of Just Dial Ltd:

• Earnings Yield -14.5% (Profit before Tax / Market Cap). Better than 10-year G-sec (6%)
• Price to Sales Ratio – 2.5
• Healthy SSGR Ratio
• FCF / CFO – 74%
• Price to Earnings – 9
• DCF model also suggests that the current price is well below the intrinsic value indicating a good margin of safety.

I request your feedback on my analysis.

Thanks.

Kamal Kanugo

Dr Vijay Malik’s Response

Hi Kamal,

Thanks for sharing the analysis of Just Dial Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing the history of Just Dial Ltd., an investor notices that over time, it has created subsidiaries, then demerged them and then, later on, bought them back. In addition, the company has purchased the company from its promoters to make it a subsidiary.

Previously, Just Dial Ltd used to own subsidiaries, Just Dial Global Private Limited (JD Global) and Just Dial Inc., USA (JD USA). However, it demerged them in FY2012 and FY2011 respectively.

Draft red herring prospectus (DRHP) of Just Dial Ltd, 2013 (click here to download), page 20:

Our initial international expansion was in the U.S. and Canadian market, which we conducted through JD USA and JD Global before they ceased to be our subsidiaries in fiscal 2012 and fiscal 2011, respectively.

Therefore, until FY2012, Just Dial Ltd used to present consolidated financials, which it stopped from FY2013 as it had sold of its subsidiaries.

Later, in FY2015, Just Dial Ltd bought back Just Dial Inc., USA and it started reporting consolidated financials.

FY2015 annual report, page 54:

The Company has acquired entire shareholding of Just Dial Inc., Delaware, United States of America from Just Dial Global Private Limited for a consideration of ₹ 44,47,964/- with effect from October 1, 2014.

In FY2020, Just Dial Ltd acquired a company MYJD Private Ltd from its promoters.

FY2020 annual report, page 53:

During the year under review, the Company has acquired 100% shares of MYJD Private Limited, by way of purchasing the said equity shares from its existing shareholders Mr. V.S.S. Mani and Ms. Anita Mani…

Therefore, an investor notices that Just Dial Ltd reported consolidated financial until FY2012, and then it reported only standalone financials during FY2013 and FY2014. Thereafter, the company reported consolidated financials from FY2015 onwards until date.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire group. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the analysis of Just Dial Ltd, we have used consolidated financials for FY2011-FY2012, standalone financials for FY2013-FY2014 and consolidated financials from FY2015-onwards in the assessment.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of Just Dial Ltd:

While analyzing the financials of Just Dial Ltd, an investor notices that the sales of the company are consistently growing at a pace of about 20-25% year on year from ₹180 cr in FY2011 to ₹953 cr in FY2020. During the 12-months ending June 2020, the sales of the company have declined to ₹875 cr.

When an investor analyses the operating profit margin (OPM) of Just Dial Ltd, then she notices that OPM of the company has been highly fluctuating over the years. Initially, the OPM increased from 23% to 31% in FY2014, the year of the initial public offer (IPO) of the company. Thereafter, the OPM of the company started declining and it reduced to 15% in FY2017. Subsequently, the OPM of the company started increasing and it reached 29% in FY2020. The company reported an OPM of 28% during the 12-months ending June 2020.

Just Dial Ltd has provided annual reports from FY2013 on its website. In addition, the transcripts of the conference calls conducted by the company with analysts after its results and the draft red herring prospectus (DRHP) for its IPO are also available on its website. Therefore, these are good resources for any investor to read and to understand the reasons for changes in the OPM.

While reading the annual reports and other public documents, an investor gets to learn certain aspects about Just Dial Ltd, which are essential to understand its business dynamics.

i) Expansion in smaller cities leads to lowering of profit margins:

In FY2017, when the OPM of Just Dial Ltd was at its lowest level of 15%, the company highlighted that the key reason for the decline in the profit margins is its increased focus on smaller cities. The company had to charge a lower price to the advertisers in the tier-2 and tier-3 cities.

FY2017 annual report, page 9:

The decline in margins was primarily attributable to the fact that the Company is steadily increasing focus towards the Tier II and III cities where the average ticket size of campaigns is comparatively lower than that in top 11 Indian cities.

At the height of the profit margins in FY2014 (OPM: 31%), more than 90% of its revenue was from the top 11 cities.

FY2014 annual report, page 30:

Paid Advertisers primarily across 11 large Indian cities (Contribute to approximately 91% of the Company’s revenues)

In an attempt to diversify its revenue to more cities, Just Dial Ltd increased its focus on smaller cities. As per the company, the price of its premium packages in tier-2 and tier-3 cities is less than half of what it charges in top Indian cities.

Conference call, August 2020, page 5-6:

So the ticket size in Tier 2, Tier 3 is obviously much lower, almost 40-45% of what we have in Tier 1 cities.

Therefore, an investor would notice that as Just Dial Ltd would get more business from smaller cities, then its average revenue per paid listing would decline. As a result, its profit margins are also expected to decline.

When an investor analyses the trend of average revenue per paid listing earned by Just Dial Ltd over the years, then she notices that from FY2014 (highest OPM) to FY2017 (lowest OPM), the average revenue per paid listing witnessed a decline.

Please note that in the above table we have used the average of the number of paid listings at the start of the year and at the end of the year to calculate the average revenue per paid listing during the year.

From the above data, an investor may appreciate that in FY2017, when Just Dial Ltd reported its lowest OPM of 15%, then it had the lowest average revenue per paid listing.

After FY2017, Just Dial Ltd realized that it has to increase its efforts in order to recover its business performance. An investor would notice that from the next year, the company nearly doubled its advertising spending from ₹32 cr in FY2017 to ₹66 cr in FY2018.

In March 2017, the company launched renewed advertising efforts by signing up Mr. Amitabh Bachchan as their brand ambassador.

FY2018 annual report, page 12:

We launched our mass-media advertising campaign with our brand ambassador, Mr. Amitabh Bachchan, in March 2017.

FY2018 annual report, page 13:

During the year, we advertised on all leading news channels and in over 1,800 top multiplexes and standalone theatres across the country.

The advertising spend has stayed at the levels of ₹60-66 cr per year since then.

The higher advertising spending has seemed to work and the company could again increase its average revenue per paid listing from the low of ₹17,342 per paid listing per year in FY2017 to ₹18,515 per paid listing per year in FY2019. The average revenue per paid listing has declined to ₹17,530 per year in FY2020.

An investor would appreciate that one of the key reasons for the decline in average revenue per paid listing is the lower charges for its packages in the smaller cities. The company has attempted to compensate for it by increasing the advertising spending leading to a higher user base, which in turn acts as an incentive for the SMEs to advertise at Just Dial. With an increased user base, the SMEs/advertisers get more business leads/enquiries and in turn, generate a higher return on their investment (advertising fees paid to Just Dial Ltd).

Only when the SMEs/advertisers are able to get a good return from their subscription to Just Dial Ltd.’s packages, only then they would be willing to pay a higher charge for paid listings.

ii) Just Dial Ltd seems to have lost its market share over the years:

While analysing the development of the business of Just Dial Ltd since 2013, the year it was listed on the stock exchanges, an investor notices that the OPM of the company is almost directly related to the market share of internet users (an indirect proxy for searches).

Just Dial Ltd publishes data about unique visitors to its search platforms (website, app, phone calls, and SMS) in its annual reports. This data is available in the form of unique quarterly visitors from:

• FY2014-FY2018 in the FY2018 annual report, page 20 and for
• FY2019 and FY2020 in the FY2020 annual report, page 21.

We compared the data of average quarterly unique visitors of Just Dial Ltd with the data of all the internet users in India at different points of time. The data is taken from the following sources.

• For FY2014 from the annual report of Just Dial Ltd FY2014, page 28 and
• For FY2015-FY2020 from this study on statista.com

At any point of time, the total internet users can represent the total available market for Just Dial Ltd and its unique quarterly visitors can be assumed as the market penetrated or the market share owned by it.

When an investor compares the data of unique quarterly visitors of Just Dial Ltd with the total internet users in India over the years, then she notices that from FY2014 to FY2020, the number of visitors at Just Dial Ltd has increased at a compounded annual growth rate (CAGR) of 18%. Whereas the total number of internet users in India has increased at a CAGR of 28% during this period.

At Just Dial Ltd, primarily, the users search to enquire services e.g. doctors, restaurants, AC repair services, plumbers, electricians, beauty-parlour services at home or products like furniture, home appliances, home improvement, decoration etc.

An investor may assume that the number of people who wanted to avail these services by search about them on the internet would increase at the rate of increase of overall internet users in India because almost everyone needs these basic services.

While looking at the above data, an investor may extrapolate that if Just Dial Ltd had maintained its market share/mindshare of internet users, then the growth rate of its users would have been at a similar level as the increase in total internet subscribers in India.

The fact that during FY2014-FY2020, the users of Just Dial Ltd were growing at a lower rate of 18% whereas the overall internet users in India were growing at 28% may indicate that over FY2014-FY2020, Just Dial Ltd has lost its market share.

For measuring market share, we used a crude proxy of the ratio of unique quarterly visitors of Just Dial Ltd for the year and the overall internet users in India in that year.

Analysing this ratio tells us that the market share of Just Dial Ltd was at the peak in FY2014 (35%), the year of its IPO. It hit the lowest level in FY2017 (19%) when the company reported its lowest OPM of 15%.

Read: How to do Business & Industry Analysis of a Company

From the above discussion, an investor would remember that in FY2017, Just Dial Ltd realised that it needs to step up its efforts to regain its position in the market. In March 2017, it launched a renewed advertising campaign with Mr. Amitabh Bachchan and more than doubled its advertising spending from FY2018 onwards.

The higher advertising efforts seem to have played the part as the so-called market share (measured by our custom ratio described above) increased from the lowest level of 19% in FY2017 to 22% in FY2020.

An investor would appreciate that with the higher advertising spending, the market share of Just Dial Ltd as well as its operating profit margin increased from FY2017 to FY2020.

iii) Competition from Google seriously affecting Just Dial Ltd:

The management of Just Dial Ltd has always been upfront about the threat it faces from search engines especially Google.

When it approached the stock markets for its IPO, then in the draft red herring prospectus (DRHP), it has disclosed this threat as one of the risk factors.

DRHP, 2013, page 23:

We depend on various Internet search engines, who are also our competitors, to drive a substantial portion of our online traffic to our website.

Subsequently, in various annual reports, Just Dial Ltd highlighted this competition to the investors.

FY2015 annual report, page 36:

world’s largest search engine – Google – has been present in India for many years, providing search and navigation services. Any new offering in local search by Google will impact us.

The company highlighted to the investors that if Google entered the local search segment, then it would affect the business of Just Dial Ltd.

Over the years, Google has entered the local business search segment and is increasing its presence every year.

If currently, any person searches about local services or related products at Google, then in the result, at the top, she gets a Google map snapshot showing the location of the service providers with their contact details, business hours etc. It even provides the user ratings for these service providers.

The link of Just Dial Ltd is present after the results from Google containing direct contact details and ratings of three service providers. E.g. a snapshot of search for “ac service in andheri east”

An investor may note that in the above search results, Google has provided the following information for three AC service providers:

• “Location pin” on Google Maps
• User rating with the number of ratings
• Address details
• Phone number
• Link to the website of the service provider and
• “Directions” link that opens Google Maps to show the navigation path to the location of the service provider.

An investor may note that these are the same details about the AC service providers, which Just Dial Ltd also aims to provide to the users who visit its website.

After showing these details of three AC service providers, Google provides the next search result, which is a link to the “Top 100 AC Repair Services in Andheri East, Mumbai” at Just Dial Ltd website.

On the internet, a few guidelines play a major role in the user’s behaviour. The most important of them are:

• The probability of clicks on any link decreases substantially as we go down the search results page and
• The more the number of clicks needed to reach any page, the higher the probability of user leaving out/dropping off mid-way.

Let us see how these behaviours of internet users affect the business of Just Dial Ltd.

iii.a) Second position of Just Dial Ltd after direct results by Google affects it significantly:

Oh the search page, as a link goes down the position, the probability of any user clicking it goes down significantly.

As per this article at Search Engine Watch (click here) citing the data from online ad network Chitika, the links at any Google search page have the following share of clicks from users (called CTR: click through ratio) as per their position in the search results:

• The first link gets 32.5% share of clicks
• The second link gets 17.6% share of clicks
• The third link gets 11.4% share of clicks

Therefore, an investor would notice that the moment a link gets pushed from the first rank in the search results to the second rank; the probability of a user clicking it reduces from 32.5% to 17.6%. That is a reduction of 46% (= 1 – 17.6/32.5)

An investor may interpret this data from the following angle. When Google did not show its own results of AC service providers, then Just Dial Ltd would have got the first position in the search results for “ac service in andheri east” and for 1,000 such searches, it would have got about 325 users coming to Just Dial Ltd website.

However, now as Google is showing its own results first, and the link of Just Dial Ltd website comes at the second position, therefore, out of 1,000 such searches, now, only 176 will tend to visit the Just Dial Ltd website.

This is a straightway reduction of 46% in the traffic to the Just Dial Ltd website and a resultant decline in the leads for the SMEs advertising on Just Dial Ltd platforms.

Moreover, this impact is only from the one aspect of the links of Just Dial Ltd website shifting from the first position to second position on the search results page due to the direct results shown by Google.

Another big factor that impacts any user visiting Just Dial Ltd website from Google is the user drop off due to the number of clicks needed to get the information.

iii.b) Users like to get the information with the least possible number of clicks:

In the internet and web designing, one behaviour of users is acknowledged widely. The least number of clicks needed to get any information makes the user happy.

If users need to click more times to get any information, then at every step many users will bounce off/drop off.

If we have a relook at the search results page of Google for “ac service in andheri east”, then the user is getting the details of three AC service providers with their ratings, contact number, address, Google Map location, website, navigation without clicking anything. It is right there at the top of the page. Whereas to get similar information from Just Dial Ltd website, the user has to click at a Just Dial Ltd link and visit away to a different page.

This extra step of one additional click for the user to get the information is a drop-off point meaning that many users will simply use the information provided by Google at the top of the page accessible without any additional clicks than scrolling down the page and making additional clicks to access similar information at Just Dial Ltd website.

On the mobile phone, the factors of position in the search results and requirement of a click to reach Just Dial Ltd website become even more influential. This is because, on the mobile phone, Google’s own local search results have a “direct phone call” button next to the listings. Therefore, before a user reaches to Just Dial Ltd website, which is at the second position in the search results, she has three “direct phone call” buttons that where she can directly click and talk to the AC service providers instead of scrolling down the search results page and then clicking on the Just Dial Ltd website link.

An investor would appreciate that nowadays, most of the users surf the internet on mobile phones. The data from the annual reports and corporate presentations of Just Dial Ltd about its traffic from different channels is a good indicator of changing user habits of internet access.

The following data indicate that in the last 10 years, from FY2011 to FY2020, the share of mobile as a source of traffic has increased from 2% to 80%, the share of traffic from laptop/PC has decreased from 76% to 15% and the share of voice/SMS has decreased from 22% to 5%.

A customer calling Just Dial Ltd on its phone number or via SMS to ask for local services is a captive customer who does not have any other distractions while Just Dial Ltd provides it with the leads of SME vendors. However, the voice segment has declined consistently in its contribution to the overall traffic in the last decade. Nowadays, most of the users surf the internet and search for services on mobile phones where there are many distractions that take the user away even before she reaches the Just Dial Ltd website.

From the above discussion, an investor would notice that now, the Just Dial Ltd website link is pushed to the second position on the search results page and there is a requirement of an additional click to get information from Just Dial Ltd website in comparison to direct display of information by Google on the top of the page. An investor would appreciate that these changes would have a significant impact on the number of leads Just Dial Ltd will get from Google.

Previously when there were no direct local search results by Google on the search results page, then the number of clicks factor was irrelevant because every search result link would require the user to click at least once to get the information. At that time, the competition for Just Dial Ltd was only with other similar services like Sulekha, Asklaila, Askme etc. and Just Dial Ltd could get ahead of the competition by utilizing better search engine optimization (SEO) techniques.

However, when Google has started showing its own local search results on the top of the page, the playing field has changed drastically. Now, even the best amount of SEO efforts will put Just Dial Ltd only on the second position in the search results. In addition, the factor of the number of clicks needed to get the information also comes into play. This is because; the local search results from Google are present at the top of the page without any click (zero clicks). Any other company wishing to get the user to visit their website for obtaining information will need the user to make at least one click. Therefore, this puts the direct local search results provided by Google on the top of the page at a significant advantage over other websites like Just Dial Ltd, Sulekha, and Asklaila etc.

As a result, an investor would appreciate that the entry of Google in the local search business has changed the landscape for all the other local search players like Just Dial Ltd.

In the conference call in August 2016, the management of Just Dial Ltd acknowledged that it has affected the company significantly.

August 2016 conference call, page 10:

V.S.S. Mani: I’d like to highlight some of these broad challenges that we have. One is our best friend Google has now become the local search destination, so they are kind of putting up local listings upfront so the traffic that we used to enjoy for free is no more there. So basically we have to get paid traffic only from Google, so we have to find a way out, you know, how to handle this thing.

An investor would notice that the founder-promoter of the company, Mr. V.S.S. Mani highlighted that the amount of free traffic that Just Dial Ltd used to enjoy from Google is now drastically reduced and the company has to get paid traffic from Google. Paid traffic means that Just Dial Ltd has to buy keywords from Google where the link of Just Dial Ltd features on the top whenever any user searches for the “keywords” bought by the company. It is the same model that Just Dial Ltd sells to its SME customers i.e. pay to get the top position in the search results.

An investor would notice that the above conference call of August 2016 was in FY2017 when Just Dial Ltd reported its lowest ever OPM of 15% and it had the lowest ever average revenue per paid listing. In addition, we noticed that Just Dial Ltd was losing its market share/mindshare, as the increase in its unique quarterly visitors was lesser than the growth of internet users in India.

To counter these challenges, Just Dial Ltd increased its advertising spending. From the above discussion, an investor would note that in FY2018, the company more than doubled its advertising spending to ₹66 cr from ₹32 cr in FY2017.

It was only after more than doubling the advertising budget that Just Dial Ltd could increase its profit margins, average revenue per paid listing as well as the market share from FY2018 onwards.

Read: How to do Business & Industry Analysis of a Company

iv) Competition from industry-specific local search apps (vertical players):

Just Dial Ltd is a general local search engine service that provides information about almost every local product and service like doctors, restaurants, cabs, movies, home repair services like plumbing, electricity, AC, RO water systems etc. Nowadays, in almost each of these segments, there are specialized players offering competing services like:

• Practo for doctors’ search and appointment booking,
• Zomato and Swiggy for restaurant search, online ordering and booking
• Bookmyshow for a movie booking
• UrbanCompany (formerly called UrbanClap) for at-home services like beautician, electrician, plumber, AC service, RO water system service etc.

The management of Just Dial Ltd has acknowledged the competition from such industry-specific (vertical) players citing that most of these players are surviving by giving cash back to the customers.

August 2016 conference call, page 10:

V.S.S. Mani: The other thing is there is still a lot of indiscipline among the vertical players pretty much most of them are throwing away money and, you know, so those kinds of segments, you know, we get affected a bit.

The founder-promoter of Just Dial Ltd, Mr. V.S.S. Mani acknowledged that due to these cash backs, even the employees of Just Dial Ltd are not using Just Dial Ltd app.

August 2016 conference call, page 17:

V.S.S. Mani: a large percentage of our own employees don’t use our App. The reason for that is, say, well, I go to this wallet app and they give me 10% cash back on paying bills, I go and use this restaurant app, he gives me Rs.100 cash back on every transaction.

Similarly, the founder-promoter acknowledged that the family members of the promoters are also not using Just Dial Ltd website.

August 2016 conference call, page 22-23:

V.S.S. Mani: Then, of course, I mean, I cannot stop my colleagues, my family members from going to a site which is giving 20-30% off, I mean, they definitely go there, I mean, there’s no way they are going to come to you, so those are issues.

The promoters of Just Dial Ltd acknowledged that at the one hand, the vertical players (industry-specific search apps) have impacted the business of Just Dial Ltd by giving cashback to customers and on the other hand, these vertical players have tied up with Google and are driving the traffic away from Just Dial Ltd by their special arrangements with Google, like putting online food ordering, booking tabs on the search results page itself.

August 2016 conference call, page 17:

V.S.S. Mani: one interesting thing that Google has done now I notice that when you search for restaurants, they have this order online tab and you need to click on it, you go to one of those vertical players, so that’s a very smart move from Google. So when you search for movies, they do ticketing there. So those are real competition; that is real competition. We need to learn how to counter that competition.

An investor would acknowledge that due to the increased competition from Google’s local search result and industry-specific vertical players, by FY2017, Just Dial Ltd was facing a tough time with its profit margins and average revenue per paid listing at the lowest levels in years.

Its sales were growing during these years as the total addressable market in terms of overall internet users in India was also growing. However, the rate of increase of the visitors to its website was less than the increase in overall internet users in India. As a result, the company was losing mindshare for the customer.

Then, the company realised that it needs to significantly increase its advertising spending and it collaborated with Mr. Amitabh Bachchan as the brand ambassador.

The company focused on promoting its app during its ad-campaign with Mr. Bachchan and the key message delivered was that Just Dial is a single master app for all the needs of the user. The company promoted the JD App as a counter to the app fatigue of user due to downloading multiple single-purpose apps in the phone.

See this ad (YouTube) in which Mr. Bachchan communicates, “Jab dus app da kaam ek JD app kar sakta hai, then why have so many”. It means, “When one JD App can do the work of ten apps, then why have so many apps”.

After the ad-campaigns with Mr. Bachchan and the increased sales promotions, the company could recover its profit margins.

However, the threat from Google as the local search engine and the vertical players is high and the promoters of Just Dial Ltd also acknowledge it. In one conference call, the founder-promoter admitted that the fortunes of the shareholders of the company have taken a turn for the worse in Just Dial Ltd.

August 2020 conference call, page 18:

V.S.S. Mani: there was a time that our market cap was more than all the Indian internet companies put together in India, okay? And today, our market cap is probably a fraction of one of those companies.

The company acknowledges that it is facing severe competition with improving local search services from Google and other industry-specific vertical players. The founder-promoter accepted that the investors fear that in future, Just Dial Ltd may lose its relevance in the changing landscape.

August 2020 conference call, page 7:

V.S.S. Mani: From a perspective for most investors also, as a growing concern, does this concept, does this company continue to exist in the future? Of course, it will. But it has to also evolve from what it is today.

The founders acknowledge that Just Dial Ltd will have to evolve from its current stage if it has to stay relevant in the changing environment when Google and other players are working hard to get users attention while searching for local services.

The founders admit that they would have to move away from the business model of simply providing leads to a model where they facilitate the transaction between the website users (customers) and the SME vendors and then take a percentage share of the transaction value. However, the founders also admitted that they are already late in realizing it and implementing it.

August 2020 conference call, page 7:

V.S.S. Mani: We want to transition into a good blend of certain keywords to monetize only on the basis of percentage on transaction, certain others are probably monetized only on a lead basis, and some others continue to be as is right now is on listing. So this transition is important from various points of view: One, first, it all begins with the user experience. We are focusing on what users like, and we need to transition that. I think we are a bit late for that,

Investors should continue to closely monitor the strategic steps that Just Dial Ltd takes in future in order to reduce its dependence on Google search for getting traffic and make its offering more value-adding to the user than other mediums/competitors.

While looking at the tax payout ratio of Just Dial Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been below the standard corporate tax rate prevalent in India.

While reading the annual reports, an investor notices that the key reasons for a low tax payout ratio are related to its non-operating income/other income:

• Interest income from tax-free bonds,
• Profit from sale of current investments on which indexation benefit leads to lowering of the tax impact,
• Effect of the different tax rate on capital gains

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Just Dial Ltd:

a) Net fixed asset turnover (NFAT) of Just Dial Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Just Dial Ltd in the past years (FY2011-20), then she notices that the NFAT of the company has been consistently in the high ranges of 6-8.

An investor would notice that the entire business of Just Dial Ltd is based on technology infrastructure, internet, servers etc. In addition, the key business drivers for its business are its salespeople & other employees who approach SMEs to convince them to sign up for its advertising packages.

Therefore, the tangible fixed assets like buildings etc. are not a direct determinant of the business productivity of Just Dial Ltd.

As a result, NFAT may not be the best parameter to judge the asset utilization efficiency for Just Dial Ltd.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Just Dial Ltd:

While analysing the financial performance and the annual reports of Just Dial Ltd, an investor notices that the company does not keep any physical inventory. This is because; the company deals in information technology where it sells space on its webpages. There is no physical product that it has to process and manufacture.

Therefore, the parameter of the inventory turnover ratio loses its relevance for Just Dial Ltd.

Read on: How to Assess Operating Efficiency of Companies

c) Analysis of receivables days of Just Dial Ltd:

While analysing the business of the company, an investor notices that Just Dial Ltd collects money in advance from the SMEs for its advertising packages. Therefore, the company does not have receivables on its balance sheet and in turn, it has avoided the risk of bad debt.

FY2020 annual report, page 46:

Just Dial follows a prepaid model for its various paid subscription plans. Customers can either pay upfront for the entire tenure or through monthly advance payment plans through ECS. Owing to this policy, it enjoys negative working capital and no receivables.

Further Advised Reading: Receivable Days: A Complete Guide

Looking at the business position of Just Dial Ltd where it does not carry any physical inventory and it does not have any receivables, an investor would appreciate that the company would always collect its profits into cash. In such a situation, an investor would expect that the cash flow from operations (CFO) of the company would be either equal or higher than its net profit after tax (PAT).

An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Just Dial Ltd for FY2011-20.

Over FY2011-20, Just Dial Ltd reported a total cumulative net profit after tax (cPAT) of ₹1,296 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹1,510 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

The Margin of Safety in the Business of Just Dial Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it is able to convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

While analysing the SSGR of Just Dial Ltd, an investor would notice that the company has consistently had a very high SSGR of 75% to 150% over the years. One of the key reasons for very high SSGR for the company has been its very high asset turnover. As discussed above, Just Dial Ltd has consistently had a high NFAT of 6-8.

While studying the formula for calculation of SSGR, an investor would understand that the SSGR directly depends on the net fixed asset turnover (NFAT) of a company.

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

Therefore, an investor would notice that Just Dial Ltd has continuously had a high SSGR (75%-150%) over the last 10 years (FY2011-FY2020). This is primarily because; the business of the company is not dependent on heavy investments in physical infrastructure like plant & machinery.

The company can increase its business significantly by hiring more employees and making them work primarily in the field without having to create any manufacturing plants.

Therefore, the parameters of NFAT, as well as the ratio of SSGR, are both high for Just Dial Ltd.

b) Free Cash Flow (FCF) Analysis of Just Dial Ltd:

While looking at the cash flow performance of Just Dial Ltd, an investor notices that during FY2011-2020, it generated cash flow from operations of ₹1,510 cr. However, during the same period, it did a capital expenditure of about ₹403 cr. Therefore, during this period (FY2011-2020), Just Dial Ltd had a free cash flow (FCF) of ₹1,107 cr (=1,510 – 403).

In addition, during this period, the company had a non-operating income of ₹594 cr and an interest expense of ₹9 cr. As a result, the company total free surplus cash of ₹1,692 cr (=1,107 + 594 – 9).

Moreover, in the last 10 years (FY2011-2020), the company has raised equity of about ₹251 cr before IPO in July 2012.

FY2013 annual report, page 33:

The Company raised additional share capital (including share premium) to the tune of ₹ 2,510 Million in July 2012.

Investors may note that the IPO of the company in April 2013 was an offer for sale where existing shareholders sold their shares in the market. The company did not raise any money in IPO.

Therefore, if an investor assesses the total amount of spare cash with Just Dial Ltd during FY2011-2020 including share issuance in July 2012, then she notices that the company had spare cash of ₹1,943 cr (= 1,692 + 251).

While reading the annual reports of the company, an investor notices that the company has used the surplus cash of ₹1,943 cr in the following manner:

• Paid dividends excluding dividend distribution tax of about ₹28 cr in FY2014 and FY2015,
• Undertaken three buybacks during FY2011-FY2020. The first buyback was in FY2016 that used ₹164 cr. The second buyback was in FY2018 and used ₹84 cr. The third buyback was in FY2019 and used ₹220 cr. Therefore during FY2011-2020, the company returned a total of ₹468 cr (=164 + 84 + 220) to shareholders by way of buybacks. Please note that in the current FY2021, the company has undertaken another buyback for ₹220 cr; however, its impact is not reflected in the above financial position as its implications will be reflected in the balance sheet at the end of FY2021.
• After making the payments to the shareholders for dividends and buybacks, the company has kept the remaining money of ₹1,447 cr (= 1,943 – 28 – 468) as cash & investments with itself. As a result, during FY2011-2020, the cash & investments position of Just Dial Ltd increased from ₹136 cr in FY2011 to 1,592 cr in FY2020 representing an increase of ₹1,456 cr (= 1,592 – 136).

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Just Dial Ltd:

On analysing Just Dial Ltd and after reading its publicly available past annual reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Just Dial Ltd:

The company was established in 1996 and currently three brothers Mr. V.S.S. Mani (MD & CEO, age 54 years), Mr. Ramani Iyer (WTD, age 51 years) and Mr. V. Krishnan (WTD, age 50 years) are managing the company.

FY2020 annual report, page 89:

Mr. V.S.S. Mani, Mr. Ramani Iyer and Mr. V. Krishnan are brothers and Ms. Anita Mani is wife of Mr. V.S.S. Mani.

An analysis of the annual report of Just Dial Ltd does not mention any person from the next generation of the promoters’ family working in the company.

However, the changes in the shareholding pattern of the promoters from June 2013 (after the IPO) to the latest Sept 4, 2020, reflect the following changes:

• The shareholding of the eldest brother Mr. V.S.S. Mani has increased from 27.47% (June 2013) to 29.56% (Sept 4, 2020),
• The shareholding of Ms. Anita Mani, wife of Mr. V.S.S. Mani has increased from 0.78% (June 2013) to 1.76% (Sept 4, 2020),
• The shareholding of Mr Ramani Iyer has decreased from 2.03% (June 2013) to 0.58% (Sept 4, 2020), and
• The shareholding of Mr V. Krishnan has decreased from 2.03% (June 2013) to 0.73% (Sept 4, 2020)

The above changes indicate that Mr. V.S.S. Mani is increasing his stake in the company whereas the other two brothers are reducing their financial stake in the company by selling shares continuously. It may indicate that going ahead; the family of Mr. V.S.S. Mani will play a greater role in the company’s future.

Nevertheless, investors may contact the company directly to know about any succession planning in the promoters’ family, which might be under progress.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

2) High customer attrition rate faced by Just Dial Ltd:

While reading about the business of the company, an investor notices that almost 45% of customers of Just Dial Ltd leave it within a year.

The management of the company has clarified that out of the 45% customers who leave Just Dial Ltd.’s advertising plans, about 20% leave because they fail in business and therefore, shut it down. Remaining 25% customers leave it, as they do not renew the advertising plan.

August 2020 conference call, page 16:

V.S.S. Mani: And for the last 25 years I have seen, the so-called churn has been constant at around 40-45%. How does it happen? Mortality of businesses. 18% to 20% of small businesses don’t exist same time next year. So how will you renew the contract? Then there are people with a free will, they would want to get in and get out, so that is also there.

Therefore, an investor may appreciate that if Just Dial Ltd has 100 paid listings in the current years, then about 45 of them will become non-paid listings in next 12 months and only 55 of the existing listings will stay paid listing until next year. Therefore, if it has to show a 20% year on year growth in the number of paid listings, then it should have 120 paid listings next year. Therefore, the investor would note that instead of 20 new paid listings, Just Dial Ltd needs to add 65 new listings to have 120 paid listings (=55 + 65). It needs to more than double its remaining existing live customer base every year to show a 20% year on year growth in paid listings.

High attrition of paid listing puts pressure on Just Dial Ltd to continuously have aggressive advertising and sales promotions in order to keep getting new SME customers to advertise on its website.

As a result, an investor would appreciate that the company must continue to spend money on advertising.

As per the above discussion on the business of Just Dial Ltd, an investor would remember that during FY2015-2017, the company had faced challenging times when its OPM declined to the lowest level of 15%, its average revenue per paid listing declined to the lowest level and its customer market share/mind share was continuously declining.

It was only when the company doubled its advertising spending to ₹66 cr in FY2018 from ₹32 cr in FY2017 and continued to spend the higher amount on advertising in the later years, that Just Dial Ltd could improve its average revenue per paid listing, OPM and customer mindshare.

Therefore, an investor would appreciate that Just Dial Ltd needs to continuously spend money on advertising if it intends to stay relevant. In the absence of continued advertising and sales promotions, it may lose the customer mindshare and may face the risk of becoming obsolete.

3) Pledge of shares by the promoter Mr. V. Krishnan:

While analysing the shareholding details of Just Dial Ltd over the years, an investor comes across multiple instances where one of the promoter brothers, Mr. V. Krishnan has pledged his shares of Just Dial Ltd to the lenders to avail loan against these shares. At June 2020, 79.21% of the shares owned by Mr. V. Krishnan are pledged to lenders i.e. 374,720 shares out of total 473,094 shares owned by Mr. V. Krishnan are pledged to the lenders.

In addition, when an investor notices that in the past, at multiple instances, the lenders had invoked the pledge of Mr. V. Krishnan indicating that he could not repay the loans and as a result, the lenders sold the shares of Just Dial Ltd present with them as security and recovered their loans.

As per FY2019 annual report, page 62 and FY2020 annual report, page 73, during the last two financial years, on the following occasions, the lenders invoked the pledge and sold shares of Just Dial Ltd held by Mr. V. Krishnan when he could not repay the loans on time.

• 09-10-2018 – Invocation of Pledge 1,03,880 shares
• 18-11-2019 – Invocation of Pledge 10,000 shares
• 18-02-2020 – Invocation of Pledge 11,400 shares
• 27-02-2020 – Invocation of Pledge 10,000 shares
• 17-03-2020 – Invocation of Pledge 50,000 shares

In most of the cases, an invocation of pledge indicates financial difficulties on the part of the borrower to repay the loans. In addition, when an investor analyses the FY2020 annual report, then she notices that as per the disclosures under related party transactions at page 188, Mr. V. Krishnan received an advance salary of ₹38 lac from the company during the salary.

Looking at the above instances, it may come across to an investor that Mr. V. Krishnan is under some financial stress. In such situations, when an investor notices that the remuneration of Mr. Krishnan increased by about 60% in FY2020 to ₹3.20 cr from ₹1.99 cr in FY2019 (page 187, FY2020 annual report), then she may think that the financial stress of Mr. V. Krishnan may be one of the reasons for such high increment.

Read: How to identify Promoters extracting Money via High Salaries

4) Many public shareholders voted against the reappointment of Mr. Ramani Iyer as the whole-time director of Just Dial Ltd.

While looking at the results of the voting in the AGM of the company in Sept 2019, an investor notices that the about 16.62 % public institutional shareholders of Just Dial Ltd opposed the reappointment of Mr. Ramani Iyer as the whole-time director of the company.

An investor may do deeper due diligence to understand the reasons why many public shareholders voted against a particular member of the promoter family of the company.

Looking at the continuously increasing stake of Mr. V.S.S. Mani and declining stake of the other two brothers and the instances of pledging and invocation of the pledge of shares of Mr. V. Krishnan along with the rising discontent among public institutions for board membership of Mr. Ramani Iyer, it may seem to an investor that going ahead Mr. V.S.S. Mani and family may play a greater role in the future of the company.

An investor may contact the company directly for understanding these aspects better and for any clarifications.

5) Incidences of Just Dial Ltd first handing over operating businesses to pre-IPO shareholders and when the businesses did not work, then buying it back from them.

While reading the DRHP before IPO of Just Dial Ltd, an investor gets to know that the company had given the local search business of the company in USA & Canada to the pre-IPO shareholders in July 2011.

Just Dial Ltd had highlighted this arrangement as a risk to the potential IPO investor as a conflict of interest between the promoters and Just Dial Ltd. The company warned that the promoters might give more time and energy to their USA business under JD Global than the Indian business under Just Dial Ltd.

DRHP, 2013, page 19:

Our Promoters and some of our principal shareholders together own almost all the shares and control JD Global, a Group Company, which through its U.S. subsidiary, JD USA, provides local search services under the “Just Dial” brand name to the U.S. and Canada markets. We sold our equity interest in JD USA to JD Global in July 2011 and have demerged some of our assets into JD Global. Our Promoters and principal shareholders may devote substantial time and resources to develop and grow the business of JD Global and JD USA.

However, it seemed that the USA & Canada business of the promoters & pre-IPO investors did not work well. As a result, Just Dial Inc., USA (JD USA), started making losses.

FY2015 annual report, page 45: Financial performance of JD USA (₹):

• Turnover 4,962,249
• Profit before taxation (946,171)

Therefore, in Oct. 2014, the pre-IPO investors sold JD USA back to Just Dial Ltd.

FY2015 annual report, page 42:

the Company has purchased 100% holding of Just Dial Inc. USA, for a consideration of ₹ 44,67,964/-

Similarly, in FY2012, Just Dial Ltd gave away its IT testing business to JD Global Pvt. Ltd (JD Global) i.e. pre-IPO investors. Along with this divestment of IT testing business, Just Dial Ltd let go of its investment of about ₹72.5 cr in JD Global.

DRHP, 2013, page 24:

In fiscal 2012, the assets of the IT-related testing business, with a book value of ₹ 0.3 million, were transferred to JD Global in the demerger and our Company’s aggregate investment of ₹724.8 million in the preference shares of JD Global was cancelled… These adjustments resulted in a decrease of ₹ 725.0 million to our net worth for fiscal 2012.

Later on in FY2017, the shareholders of JD Global sold their data & information division to Just Dial Ltd.

FY2017 annual report, page 44:

Demerger i.e. transfer and vesting of the Data & Information Undertaking of Just Dial Global Private Limited into Just Dial Limited as per the Scheme of Arrangement

Just Dial Ltd issued paid the consideration for the acquisition in the form of issuing preference shares to the shareholders of JD Global.

FY2017 annual report, page 40:

the Company needs to issue and allot 11,25,068 preference shares of ₹1/- per share to the shareholders of Just Dial Global Private Limited.

When an investor analyses the assets received by Just Dial Ltd due to this acquisition of data & information undertaking from JD Global, then she notices that out of the net assets transferred of ₹27.1 cr, more than 95% assets are represented by “deferred tax assets on brought forward losses” of ₹25.9 cr.

FY2017 annual report, page 142: (₹ lac)

• Deferred tax assets on brought forward losses 2,588
• Net assets transferred 2,714

Therefore, an investor would appreciate that the transfer of data & information division from JD Global to Just Dial Ltd is mainly the transfer of accumulated losses in the JD Global to Just Dial Ltd.

It seems a transaction where first, the shareholders of JD Global made losses in their operations of data & information undertaking, then transferred those losses to Just Dial Ltd, and in return got preference shares from Just Dial Ltd.

An investor needs to be cautious when she notices transactions between the company and the promoting shareholders because many times, such transactions have the potential of shifting the economic benefits from public shareholders to the promoting shareholders.

Just Dial Ltd highlighted to the shareholders in its IPO prospectus that it plans to keep on entering into related party transactions.

DRHP, 2013, page 36:

We have entered into, and will continue to enter into, related party transactions.

Read: How Promoters benefit themselves using Related Party Transactions

6) History of poor internal controls in Just Dial Ltd:

While reading the FY2014 annual report, an investor notices that Just Dial Ltd had defaulted in the deposit of tax deducted at source (TDS) for which it received notices from the govt. authorities. The company later revised its TDS filings to correct these defaults.

FY2014 annual report, page 38:

The company in financial year 2013-14 has received notices in respect of defaults in quarterly TDS returns of previous years filed by the Company. The Company is in process of revising the quarterly TDS returns to regularise these defaults

When an investor analyses the DRHP of the company, then she notices that the auditors of the company reported instances of poor internal controls in the past as well.

DRHP for IPO, 2013, page 26:

FY2010 audit report:

• proper records showing full particulars, including quantitative details and situation of fixed assets were not maintained
• the scope and coverage of our internal audit system was required to be enlarged to be commensurate with the size and nature of our business

FY2011 audit report:

• material discrepancies were identified on verification of fixed assets

An investor may note that if the internal control processes of any company are not strong enough, then there have been instances where after many years, frauds have come up, which previously remained hidden due to lack of proper controls.

An investor may read the example of National Peroxide Ltd, a Wadia Group company, where there was a history of inadequate internal controls and later on, a fraud came out indicating that the senior management was siphoning off the money for almost 10 years. Later on, the company fired the senior management including the managing director of the company.

An investor may read our detailed analysis of National Peroxide Ltd and the fraud due to weak internal controls in the following article: Analysis: National Peroxide Ltd

7) Risk of investing at a high PE ratio:

While analysing the history of Just Dial Ltd, an investor notices that at one point of time during FY2015, the company used to trade at a PE ratio of 65. The market was very positive about the future of the company.

However, soon thereafter, the company started facing competition from the local search services of Google and other industry-specific vertical players like Zomato, Swiggy, Practo, Urban Company (UrbanClap) etc. As a result, the company’s OPM and the average price per paid listing declined. The market share/customer mindshare of the company also declined and the investing community started to doubt the competitive advantages of Just Dial Ltd.

As a result, during FY2015-FY2020, the PE ratio of the company declined from 66 to 7. This was despite an increase in sales of the company from ₹590 cr in FY2015 to ₹953 cr in FY2020 and an increase in net profit after tax from ₹139 cr in FY2015 to ₹272 cr in FY2020.

Moreover, during FY2015-FY2020, Just Dial Ltd generated a free cash flow of ₹788 cr and gave dividends of ₹14 cr and four buybacks of ₹688 cr in FY2016, FY2018, FY2019 and FY2021.

This experience of the shareholders of Just Dial Ltd where an investment in the shares of the company at a high PE ratio of 66 did not generate a satisfactory return and the share price declined from ₹1,895 in August 2014 to about ₹380 in Sept 2020.

Over last 6 years (FY2014-2020), Just Dial Ltd has retained earnings of about ₹1,118 cr whereas its market capitalization has declined by about ₹8,537 cr, which indicates a decline in the market value of about ₹7.64 for every ₹1 retained by the company that was not distributed to shareholders.

Just Dial is not the only such example where the once high PE ratio of the shares of a company generated suboptimal returns for the shareholders over upcoming years despite an improvement of the business performance of the companies.

When an investor analyses multiple companies that used to be at the peak of their valuations in the past, then she notices that many of these companies witnessed a decline in PE ratio despite improving business performance over the years.

Look at the example of Gillette India Ltd. During FY2014 to FY2018, the company increased its profits by 5x from ₹51 cr to ₹253 cr. Its net profit margin (NPM) increased from 3% in FY2014 to 15% in FY2018.

However, during this period, the PE ratio of Gillette India Ltd witnessed a decline from 203 to 51.

An investor may see another case of Page Industries Ltd. During FY2017-FY2019, the profits of the company increased by about 50% from ₹266 cr to ₹394 cr. During this period, the sales of the company increased by about 34% from ₹2,129 cr to ₹2,852 cr and the operating profit margin (OPM) of the company increased from 19% in FY2017 to 22% in FY2019.

However, during the same period, the PE ratio of Page Industries Ltd declined from the levels of 100 in 2017 to about 50 in 2019.

An investor would appreciate that when the stock price of any company runs up too much ahead of its fundamentals, then even the good business performance may not keep the sky-high valuations intact.

Therefore, we advise the investor to always be cautious while investing in the stocks that trade a very high PE ratio.

Read: What I learnt from brief analysis of 2,800 Companies

8) Continuously increasing non-current deferred revenue of Just Dial Ltd:

As mentioned earlier, Just Dial Ltd receives advance payment from SME vendor to advertise their listings on its website. Whenever an SME vendor pays an advance to Just Dial Ltd, then the amount of advertising (months of the contract period) that Just Dial Ltd has already provided becomes its revenue and the balance money (balance months of the contract period) for which it is yet to provide the advertising services becomes deferred revenue. Therefore, an investor may understand deferred revenue as the advance received by Just Dial Ltd from SME vendors for which it is yet to provide advertising services.

For example, if an SME vendor pays ₹12,000 to Just Dial Ltd for one year of advertising contract on Oct 1, 2019, until Sept 30, 2020 (one year), then from Oct. 1, 2019, Just Dial Ltd would start showing the listing of the vendor in its search results. At March 31, 2020, when Just Dial Ltd would prepare its financial statements, then it will recognize the money for the past 6 months i.e. from Oct. 1, 2019, to March 31, 2020, which is ₹6,000/- as revenue in FY2020. In addition, Just Dial Ltd will show the balance ₹6,000/-, which is the money paid by the SME vendor for advertising from April 1, 2020, to Sept 30, 2020, will be shown as deferred revenue/contract liability/advance from the customer.

Read this disclosure by Just Dial Ltd in its FY2020 annual report, page 184:

Contract liabilities are primarily deferred revenue against which amount has been received but services are yet to be rendered on the reporting date either in full or parts. Contract liabilities are recognised evenly over the tenure of contract, being performance obligation of the company.

When an investor reads the annual reports of the company to understand the type of contracts that Just Dial Ltd enters with SME vendors, then she notices that the company enters either monthly or annual contracts with the SME vendors.

FY2020 annual report, page 30:

Advertisers pay fixed monthly or annual fees to run search-led advertising campaigns for their businesses on Just Dial’s platforms

Read: Understanding the Annual Report of a Company

From the above disclosure, it becomes clear that Just Dial Ltd enters into either monthly or annual contracts with the SME vendors. Therefore, at the end of any financial year, i.e. on March 31, the company at the maximum should have a deferred revenue for next 12 months e.g. from March 31, 2020, to March 31, 2021, indicating that the deferred revenue should ideally be utilized within maximum next 12 months because the longest contract is an annual contract.

However, when an investor reads the annual reports of Just Dial Ltd, then from FY2018 onwards, she notices an entry under “non-current deferred revenue”, which indicates that the Just Dial Ltd has deferred revenue for advertising services to be provided beyond 12 months. Moreover, an investor notices that this “non-current deferred revenue” is increasing year after year.

• Non-current deferred at the end of FY2018: ₹13 cr (FY2018 annual report, page 165)
• Non-current deferred at the end of FY2019: ₹29 cr (FY2019 annual report, page 171)
• Non-current deferred at the end of FY2020: ₹33 cr (FY2020 annual report, page 183)

An investor would appreciate that the paying customers of Just Dial Ltd are SMEs who usually do not have high advertising budgets. In such a situation, non-current deferred revenue indicating that the SME vendors have paid money for multi-year advertising contracts with Just Dial Ltd seems counter-intuitive.

Moreover, the continuously increasing non-current deferred revenue in the books of Just Dial Ltd indicating an increasing number of multi-year advertising contracts seems opposite to the strategy explained by the founder promoter, Mr. V.S.S Mani in its conference calls with the analysts.

August 2020 conference call, page 11:

V.S.S. Mani: The advantage of the monthly payment plan for the vendor is also that quite a bit of flexibility as well as the campaign signed is kind of perpetual, even as we reiterate every now and then, unless he wants to pause it because he is not benefiting out of it or whatever. So that is best for the company as well

In lights of the above discussion, an investor would appreciate that the company states that it prefers monthly plans. In its annual reports, the company discloses that it enters either a monthly or an annual plan with SME vendors. However, in the annual report, an investor finds that the company has continuously increasing non-current deferred revenue indicating multi-year contract plans.

Moreover, an investor would appreciate that SME vendors do not have high advertising budgets. The company acknowledged that about 20% of the SMEs, even those who choose to grow their business by advertising on Just Dial Ltd, do not survive more than a year. In such circumstances, it seems highly unlikely that an SME would part away money for multi-year advertising contracts represented by non-current deferred revenue.

Therefore, an investor is left assuming that the sales team of the company might be pushing the SMEs into signing up long-term advertising contracts to meet their targets etc. Such kind of push to SME vendors for multi-year advertising contracts may be counterproductive in light of the stated strategy of the promoters that the shorter plans like monthly plans work the best for both the SME vendor as well as the company, Just Dial Ltd.

In any case, an investor may keep a close watch on the trend of “non-current deferred revenue” going ahead and may contact the company directly for any clarifications.

Read: Why We cannot always Trust What Management Claims

The Margin of Safety in the market price of Just Dial Ltd:

Currently (Sept 20, 2020), Just Dial Ltd is available at a price to earnings (PE) ratio of about 7.84 based on consolidated earnings for twelve months ending June 2020 (i.e. from July 2019-June 2020). The PE ratio of 7.84 provides a margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Just Dial Ltd seems a company that has been growing its sales consistently over the last 10 years (FY2011-2020). While the sales growth has been regular, the operating profit margin (OPM) of the company had fluctuated during this period. The OPM was highest (31%) in FY2014 and touched its lowest level (15%) in FY2017. Thereafter, the company recovered its profit margins and the OPM reached 28% in the twelve months ending June 2020 i.e. July 2019-June 2020.

An assessment of the business of Just Dial Ltd indicates that many factors contributed to the decline of OPM of the company, which are at play even today. To diversify its business outside the large 11 cities, the company had to focus on smaller cities where it had to reduce prices of its advertising packages by 50%, which reduced its average price per paid listing to the lowest in FY2017. In addition, Just Dial Ltd could not increase its user base in line with the growth of total internet users in India. The growth rate of its users fell below the growth rate of the internet user base in India and as a result, the company lost customer market share/mind share by FY2017.

The company is facing serious competition from Google’s own local search results. Google provides its own local search results at the top of the search page with all the key information about service providers like contact details, Google Map location, user ratings, website, business hours etc. The website link of Just Dial Ltd is now pushed to the second position on the search page. The lowering of the rank of Just Dial Ltd website link from first to the second position on the search results page has the impact of reducing the free traffic received by Just Dial Ltd from Google by about 50%.

In addition, the industry-specific vertical players (apps) in the local search business are providing stiff competition to Just Dial Ltd. Players like Practo (Doctors), Zomato and Swiggy (online food ordering, restaurant search and booking), UrbanCompany (formerly UrbanClap for home services), BookMyShow (for movie ticketing and reviews) has taken many customers away from Just Dial Ltd. As per the promoters of the company, the employees of the company and the family members of the promoters also prefer these apps that give discounts and cash backs over Just Dial Ltd.

Because of all these challenges, Just Dial Ltd had to respond by more than doubling its advertising and sales promotions expense in FY2018. The company signed up Mr. Amitabh Bachchan as its brand ambassador and launched a big ad campaign. As a result, the company could increase its users’ market share/mindshare and increased its OPM as well as average revenue per paid listing.

Just Dial Ltd faces a high attrition rate of 45% in its SME vendors/advertisers. Out of it, about 20% is due to shutting down of SME businesses within one year and the rest is due to non-renewal of advertising contracts by remaining SMEs. This puts additional pressure on the sales team of Just Dial Ltd to sign-up more and more SMEs to show annual growth in the paid listings. It seems that the sales team of Just Dial Ltd has signed up many SMEs for multi-year advertising packages despite the stated preference of the management for monthly plans.

The challenges faced by Just Dial Ltd like Google’s own local search results, industry-specific vertical players and a high attrition rate force the company to continuously spend a high amount on advertising and sales promotions. Otherwise, it faces the risk of becoming obsolete in the mind of the users, which results in lowering of its average revenue per paid listing, losing market/mind share of users and in turn a decline in the OPM.

The business of Just Dial Ltd is capital-light. It does not need to spend money on physical manufacturing units or inventory. It receives all the payments from its SME customers in advances; therefore, it does not run the risk of bad receivables. As a result, the company is able to convert all its profits into cash flow from operations and report healthy free cash flow.

The company has used its free cash flow to pay dividends to the shareholders, buy back shares from them and in addition, it has retained a large amount of cash & investments.

However, the market fears that in the light of challenges like Google’s own local search results, Just Dial Ltd may lose its relevance for users. As a result, investors have witnessed the valuation levels of the company decline a lot from a PE ratio of exceeding 65 in 2015 to a PE ratio of less than 10 now. The company’s share price has declined more than 80% from its lifetime high in August 2014 even though the company has increased its sales as well as profits since then.

Over the years, out of the three brothers who founded the company, Mr. V.S.S. Mani has increased his stake in the company whereas the other two brothers Mr. V. Krishnan and Mr. Ramani Iyer have sold their stake significantly. In addition, many public institutional shareholders have voted against the election of Mr. Ramani Iyer as the whole-time director of the company in its AGM in Sept 2019. Therefore, it seems that going ahead Mr. V.S.S. Mani would play a leading role in the company’s future.

The fact that Mr. V. Krishnan has been pledging his shares of Just Dial Ltd to lenders to raise loans and has defaulted to repay them leading to the invocation of the pledge by lenders also does not give confidence to the investors that Mr. V. Krishnan would take the leading role to guide the company in future.

An investor may approach the company directly to understand the succession planning of the promoter family.

Going ahead, we believe that investors should keep a close watch on the profit margins of the company, its advertising spending, its average revenue per paid listing, the growth in its unique quarterly visitors, related party transactions, and non-current deferred revenue. The investor should closely track the changes in the shareholding of the promoters, and instances of pledging and invocation of the pledge by lenders for the promoters’ shares.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Just Dial Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.