19 May 2013

Just Dial IPO - Better to give it a Miss(ed) Call

JustDial is an online Indian search engine. The company is coming out with an IPO with a price band of Rs 470 to Rs 543. To voo retail investors, it is offering a 10% discount and a safety net, which would be triggered in case share prices fall 20% below the issue price. At this juncture, promoters would be forced to buy back the shares from retail investors at issue price.

Just Dial IPO - Is it worth investing?

CRISIL believes that company's business model is great. It has gone ahead and assigned a rating of 5/5 to the issue. But with Google being one of the major competitors of JustDial, we don't agree with what CRISIL has to say. By the way, ratings should always be taken with a pinch of salt. ReliancePower's IPO was assigned a rating of 4/5. And we all know what happened. :-)

But there are a few other things which concern us...

  • Sometime in 2012, company's CEO VSS Mani made a remark - "The IPO (initial public offering) next year will just be a liquidity event for our investors." Nothing wrong with that. Our only concern is that if we do invest in this IPO, we will be on the receiving end of this liquidity event :-)
  • We are not sure that we would like to have Google as a competitor in the businesses we invest. Just a little effort by Google in Indian markets can cause a lot of trouble for JustDial.
  • The online space has very low entry barriers. Anyone can come up with a better solution than JustDial. It is a fast changing landscape. And any adverse developments on the technology front can make this stock volatile in times to come.
  • With EPS of around Rs 9, JustDial would be available at multiples of 52x to 60x. And that is damn expensive!! Something like a Google trades at 25x multiples. Just imagine the growth rate which the company would need to maintain to justify these multiples!! And if we are really interested in buying something at 50x multiples, why wouldn't some go for a much better and established businesses like HUL or an ITC?
  • CRISIL's IPO grading only looks at company fundamentals relative to peers. It tells absolutely nothing about its valuations.
  • Lets talk about the safety net which company has proposed.For this, there is a defined safety net period of 180 days from the date of listing. The safety net gets triggered if the weighted average market price of equity shares in the 60 days after the safety net period gets over is lower than the allotment price. If this happens then the safety net providers, in this case promoters of the company, will buy back shares from the original retail shareholders at the retail offer price. The point to note here is that company is not offering too many shares for the retail investors. So the benefits of overpricing this IPO far outweigh the possible losses in case of trigger of safety net option. So this is more of an eyewash by the company.
  • Mr Amitabh Bachchan (who has done a few ads for the company) has received 67,000 plus shares of the company at just Rs 10. Not sure if this was part of the compensation or his investment acumen  :-) But he is getting an option to sell his shares in open market for 5000% profit. Same shares which he bought (or got) at Rs 10, is available to us for Rs 500 plus. We don't like this :-(

Lucky him Or Unlucky you?

Not sure what retail investor's response would be, but we are sure that we don't like this issue. It may go up in the short term because a rising tide lifts all the boats. And with current markets looking to move up, anything might be possible. But we might get interested in this business again when prices would have cooled down [substantially]. Reason for our interest would be the uniqueness of the business, which has a negative working capital cycle. The company collects 100% of the money from its customers upfront. But no point discussing these things till share prices go down (& profits go up).

Lets see how the issue pans out :-)

______

13 comments:

  1. Post listing it will go above1000 after 3years below 100

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  2. Hope history does not repeat like RPower listing and the whole market comes crashing down :( Dont they have any sense to price such issues.

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  3. @anon.coder

    As a company, JD is not wrong in asking for as much money as possible from the investors. Even if you see in real life of an average person, he would like to receive the maximum amount if he is selling something.

    It is the investors who need to have some sense when buying. We all wait to buy clothes, shoes in a sale. Isn't it? So why are we interested in IPOs when we know that they are usually overpriced. You can read more about IPO overvaluations at http://www.stableinvestor.com/2013/02/why-are-ipos-overpriced.html

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  4. It has become a joke. IPO has lost the glamor quite a few years back and that is a good sign. But JD has the perfect timing to find scapegoats since the margin is in a bull run. Good luck to them. BTW, nice article, thanks for sharing.

    ReplyDelete
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  6. @Mansoor
    Interesting :-)
    Thanks.

    ReplyDelete
  7. Even though online space have low entry barriers in terms of setting up the business, for a new business to get to the scale at which Justdial is very tough. To collect the number of listings that Justdial has will take a lot of time for the new business and that is not easy. The e-com space is a good example of this. Low entry barriers but really tough to scale up to achieve profitability.
    Google remains a potential threat, and it is putting in a lot of money in local search in India, but then remember that Google is not guaranteed to win. We have seen how badly it is failing in social networks.

    ReplyDelete
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  9. @Ruchir
    Great to know your views Ruchir and you are right when you say that Google is not destined to win. Even Baidu defeated Google in China :-)
    We do like this business for reasons like negative working capital cycle, etc. But valuations seem to be ridiculous. But nobody knows what would happen on the listing day. It might go up and it might go down. Lets see what happens. We just hope that people dont lose their hard earned money.

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  10. If this IPO is so bad, why has been it oversubscriber 11 times?

    ReplyDelete

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