Wait, don't Justdial

A 300 sq ft garage in Malad, borrowed equipment and rented computers — when VSS Mani set up Justdial in 1996 with just ₹50,000, the business didn’t have a lot going for it. Since he didn’t have the ₹15,000 needed for an immediate MTNL connection, Mani had already waited for more than a year for a telephone that was vital for the voice-based directory service he wanted to establish. It didn’t help that he had already tried his hand at setting up a telephonic directory some seven years earlier in Delhi, and failed. Sure enough, the beginning was especially tough.

With five employees to pay, not only did Mani not draw a salary, his wife mortgaged her jewellery to keep Justdial afloat. Seventeen years later, the company is the leader in the search services space with 9.1 million listings in FY13 and its founder isn’t doing badly either: the 46-year-old, who quit chartered accountancy midway to become an entrepreneur, today drives a BMW 7 series and the recently concluded IPO catapulted his net worth to over ₹1,300 crore: ₹87 crore came from selling nearly 1.56 million shares in the IPO, while his 33% holding was valued at ₹1,241 crore on the day of listing.

The Justdial IPO was one of India’s most successful listings by a technology entrepreneur. What makes it extra special for Mani is that he listed his baby after five previous failed attempts — twice on Nasdaq, two aborted filings in India in the last two years and once, the idea of listing on a smaller exchange. This time, after initial lacklustre retail participation, a few carrots were thrown to the retail public, including a Sebi-mandated safety net to buy back stock should the share price fall post-IPO, and a discount of 10% on the issue price of ₹530 per share.

The result: the IPO was oversubscribed 12 times, selling 175,000 shares, with FIIs and mutual funds being the largest subscribers with 75% of the allotment, and HNIs and retail investors accounting for the rest. PE investors in Justdial earned a stupendous 850% return on their investments and Mani became the first Indian internet entrepreneur with a successful listing since Deep Kalra listed Makemytrip on Nasdaq three years ago. Justdial is also the biggest domestic IPO so far in CY13 and the strong debut has continued with the stock quoting 28% higher at ₹679 against its issue price of ₹530 a share.

The business model

How does Justdial work? An SME or small business service provider lists with the company for no charge, while those wanting to be listed at the top of the rankings pay a subscription. The premium listing is divided into three categories (platinum, gold and silver) and packages can be weekly, monthly, quarterly or annually. As of March 31, 2013, Justdial has approximately 206,500 campaigns for its paid advertisers, a growth of 21% compared with 171,000 campaigns the previous year, and a 5.8% increase since end-December 2012. This translates to around 2.2% paid listings out of the total 9.1 million listings on the site (see: The hit list). According to analysts, Justdial’s platform is accessed by around 19 million unique users across India, of which the top 11 cities account for about 17 million, or nearly 90%. Going by the user base, the company has penetrated just 38% of the total addressable market in the top 11 cities where it has a presence.

The hit list

Paid listings growth, rather than

overall listings, holds the key

Analysts believe that given the number of quality leads generated by Justdial and the subsequent higher return on investment accruing to its clients, this figure could ascend rapidly in future. “In the early days, we went door-to-door trying to convince hard-nosed businessmen to take the risk of using our service. After a year or two, they would call us back enthused by the quality of our services, asking for more products and services,” recalls a jubilant Mani. That record is holding strong: 70% of Justdial’s paid listings even today are repeat customers. 

Over the years, Justdial has expanded its reach to include a website and in 2007, mobile search services covering 40 cities. This was just after it received funding from a PE investor: Saif Partners. Today, the management is betting big on the potential for growth in both internet-enabled smartphones and broadband internet services. Mani points out that the share of voice in total searches dropped from 64% in 2009 to 39% currently, as cell phones become ubiquitous and Indians increasingly turn to the net. “Today, India’s internet penetration is only 11.4%, compared with other Bric nations where the number is in the 40s. We see a huge opportunity for penetration in India to explode due to the mushrooming of internet-enabled smartphones for as cheap as ₹5,000 at the lower end,” he adds.

Most studies bear out those projections. As internet penetration grows to an expected 30% by FY16 — when India will also become the third-largest smartphone market in the world — the share of the online classifieds market is also expected to grow (see: Look, quote, buy). Research agency Netscribes says this increases the potential market for Justdial to ₹3,940 crore by FY16 from ₹1,580 crore in FY12, a CAGR of 26%. Similarly, teledensity is set to increase by a CAGR of 6% till FY16. Little wonder, then, that Mani is optimistic. 

Top of the heap

What sets Justdial apart from the competition? First off, there is the easily recalled hotline number and a well-known brand ambassador — Amitabh Bachchan, who incidentally also picked up about 63,000 shares of the company at ₹10 each in February 2011. Both these have helped establish brand identity and recall, ahead of rivals such as AskMe, Zomato, Burrp and Asklaila. Then, there is its huge database. The next largest player is AskMe — which, ironically, is the company Mani first helped set up — but despite being older, the Delhi-based company lags considerably behind in listings, with only around 3 million names in its database.

Look, quote, buy 

The online classifieds

market size could grow

three times in five years

Mani also invests much effort on maintaining the database’s accuracy. “We do a lot of regression-oriented data analysis, which helps us clean data, which in turn makes the entire search process learning-oriented,” he says. The one-on-one relationship with SMEs built over the years is another advantage: Justdial executives meet with potential SME advertisers and explain the benefits of listing and converting to a paid membership.  

In FY09, Justdial also rolled out evergreen contracts, a payment mechanism for advertisers to pay for their listings on a weekly and monthly basis against the earlier annual system. “We believe this helps to increase the paid subscriber base and most importantly, act as a big entry barrier for any new entrant/existing competitor. We also expect this move to substantially improve the percentage of paid advertisers from 2.4% in FY12 to 3.1% in FY15E, thereby driving growth,” says Niket Shah of Motilal Oswal. Justdial also has a massive marketing team of more than 7,000 employees whom it offers cash incentives to convert free listers to paid: 2% of the contract value goes to the tele sales executives and 4% to the marketing executive who make this happen.

Equally importantly, Justdial operates an asset-light model where costs are kept to a minimum, giving it operational leverage — even collecting new entries for the database has been outsourced to a third party to save time and money. But, at 49% of total costs, employee costs account for the largest chunk, so how does that give Justdial operational leverage? “You must remember that as revenue grows, employee costs, which were 69% in FY09, have fallen to 49% today and are expected to fall further,” explains Abhishek Shindadkar, analyst with ICICI Securities. Also, Justdial has already incurred costs in getting paid listings. So any incremental growth in revenue will be non-linear. And with the shift towards mobile internet searches, additional infrastructure costs to facilitate this may not be proportional to revenue growth, Shindadkar adds.

Of course, non-linear revenue growth is contingent on the service maintaining its quality and leadership position since it requires people to renew their subscriptions. As a report by Emkay points out, “At present, 70% of paid listing members are the ones who have paid Justdial in the past. This clearly points to the fact that the return on their investment (fees) is high, though 30% of members have not renewed their business with JD.” Needless to say, Mani would like to see that ratio improve, which is why he is working so hard to stand out from his rivals.

It’s different

A search system is an easily copied model, which is why Justdial has introduced several new features to stay different: all businesses listed with Justdial can upload images, videos and brochures of what they offer in the search results page; reviews and ratings allow users to submit feedback on the website; and with Tag-Your-Friend, users recommend their reviews to family and friends. According to alexa, the Justdial site is No.40 among the top websites in India and is the top site in its category. Its dominance is obvious from the fact that total searches showed a 45.7% CAGR over FY09-12. In FY13, there was a 208% increase in mobile internet visits, from 13.6 million in FY12 to 41.9 million. The total 364 million search requests (a 43%
hike from FY12) included 182.6 million internet searches, a 47% growth over FY12. 

But there are some fundamental business risks as well. The large database needs to be constantly updated. And while Justdial has constantly evolved with technology, past performance — as the saying goes — is no guarantee of future success. A sudden shift in technology could well make the business obsolete. As Shah says in his report, “Competition from MNCs such as Google poses the single biggest challenge to Justdial. Google for its next leg of growth may plan to develop local search platforms and earn from local companies. Any such move by Google is a key monitorable, given its technology competence and capital availability.” 

Mani disagrees. “Google complements the entire internet — they are internet search specialists and we will see Justdial results also showing up on Google. They are not rivals unless they get into specific local search verticals,” he says. Besides, Justdial is looking to up the stakes in the internet search space by providing more than just contact and location details. It is working on allowing users to directly order a meal, fix an appointment with the dentist, order groceries from a store or book a taxi through its website. Also on the anvil is a plan to allow users to buy or sell directly from its website, starting with cars — the company is developing a listings web page where users can review different models, sell used cars and receive price quotes for new vehicles. A “quick quotes” option will allow users to receive quotes from multiple vendors. And it is developing a multiple-platform downloadable mobile application that will offer all these different services. Justdial developed an application, Master App, for Android devices and iPhones in April 2013 and is in the process of developing it as an application for Blackberry and Windows Phone 7.

But there’s a big challenge with the internet platform. In voice, every enquiry from a potential customer is shared along with his contact numbers across three to five paid listings; with the net, the user may check, if at all, with one of the listings. Hence, every enquiry may not lead to potential business for more paid listings. Though the company has tried to address this issue by asking for contact details on the web, users may not fill in their details. “Thus, the internet platform usage may impact the lead generation for paid listings, which may impact JD’s growth,” says the Emkay report.

That’s not all. Justdial also faces regulatory concerns, with the DoT and TRAI having enforced the do-not-disturb list practice, preventing users from directly connecting with the service provider. Any further regulations to do so or regulate the online classified space will inhibit the company’s ability to monetise its listings and squeeze realisations. 

Hotline to growth 

Revenues grew at a robust 31%

CAGR between FY08 and FY13

Of course, there are several positives as well. The company’s topline has grown at a CAGR of 30% over the past five years (see: Hotline to growth), with PAT growing at a CAGR of 106% over the same period. Its Ebitda margins, too, have expanded from under 5% in FY08 to 28% for FY13. So clearly, there is high operating leverage in business, wherein PAT growth is at a much higher rate than topline. Between FY12 and FY15, topline is expected to grow at a CAGR of 15%, driven by an increase in paid advertisers to 356,000 by FY15. Increased internet penetration would also mean that its operations margins would expand to 31% in FY15.  Also, Justdial collects advance cash payment from its advertisers and is debt-free. It has a negative working capital cycle of 154 days. Being an asset-light business model over FY13-15, it is expected to generate free cash flows to the tune of ₹440 crore. In the same period it is expected to pay out 40% of profits
as dividends, giving it healthy return ratios. 

While most brokerages feel it deserves premium valuations, at ₹679, the share is trading at trailing 12-month multiple of 69 times and at 45 times estimated FY14 consensus earnings per share of ₹14.9. For now, perhaps, investors would do well to hang up on the stock and dial in later when valuations look reasonable.