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Money Jun 6, 2013

Justdial’s boss is a quarter-billionaire, but are valuations too rich?

By Sunainaa Chadha

Justdial's Rs 950 crore offer for sale, wherein the company's founder VSS Mani and investors Tiger Global, Sequoia Capital and SAP Investors sold 1.75 crore shares to investors, marks not only the beginning of a recovery in what has been the worst year for IPOs but also the start of such offerings by other Indian technology companies in India.

Its listing on the NSE is not only a big achievement for its founder Mani, whose wealth has now grown over Rs 1,300 crore but also raised the hopes of others of his ilk and of venture capitalists who have been eyeing an exit from dozens of investments, an Economic Times report points out today.

"It's good news for the Internet industry in India and demonstrates confidence among institutional investors investing in this space," Murugavel Janakiraman, founder of BharatMatrimony.com, a matchmaking e-commerce website, was quoted as saying by ET.

Justdial made a strong debut with its share price closing at Rs 590, an 11.32 percent premium to the offer price of Rs 530 on the National Stock Exchange.

Mani sees a "fantastic opportunity" to grow as internet connectivity, especially on the mobile front, goes on improving. "The company is going to only do better, maybe even in terms of growth percentage, or maybe in terms of overall profitability and offerings to customers or users," he said in an interview with CNBC-TV18.

According to a report in Mint, internet penetration in India, is likely to gain significantly from here on as other existing and upcoming Internet-based companies stand to gain premium valuations after Justdial's good listing.

"Justdial IPO is an important milestone for digital companies because it is the second instance of the Indian markets rewarding a strong high-growth Internet brand with very attractive multiples, Aashish Bhinde, executive director, digital media and technology, Avendus Capital was quoted as saying by Mint. He added that the Justdial IPO is vindication that the Indian capital markets can provide an attractive exit for investors focused on the Internet segment. (Read more here)

However, several analysts have termed the company's premium valuation as unsustainable. "Its a solid opening, but further gains could be capped, as valuations are way too high. I expect the stock to find stiff resistance at Rs 650," said Nilesh Karani, assistant vice-president for research at Magnum Equity Broking.

Ambit Capital too is not so impressed with the listing and has a 'sell' rating on the company. According to Ambit, its fair value stands at Rs 420 per share. Ambit does not see Justdial retaining its dominance going forward. It expects both the topline and bottomline to grow by just 25 percent in the next few years. "Given the punchy valuations we remain negative on current valuations and would urge buyers to sell into any pop today," Ambit said.

"We wouldn't advise entry at these valuations. However, investors who took part in the IPO can book profits and re-enter later at better valuations. We would advise a wait-and-watch policy for at least the next two quarters," AK Prabhakar, senior vice-president (equity research), Anand Rathi Securities, was quoted as saying by Financial Express.

But brokerage Motilal Oswal is of the view that Justdial's monopoly in the local search engine market and healthy return ratio's justify this valuation.

" Given that the company is in a high growth phase, generating strong free cash flows, and maintaining healthy return ratios, we believe the premium valuations are justified," it said.

Justdial not only enjoys a first mover advantage among consumers seeking information on local businesses, but is also a well-known and established brand on the internet and has an accurate database.

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Justdial made a strong debut with its share price closing at Rs 590, an 11.32 percent premium to the offer price of Rs 530 on the National Stock Exchange.

"We believe the biggest strength of Justdial is maintenance of its database by keeping it updated and accurate through feet-on-street, and also direct and personal relationship with SMEs coupled with its strong voice-based search option, which is difficult to replicate by competitors," said the brokerage in its research report.

But it also cautioned that any failure in updating its database might lead to customer dissatisfaction and lead to lesser number of search requests going forward, and hence might impact its paid campaign growth.

Moreover, the threat from Google cannot be ignored if the latter plans on developing local search platforms and earn from local companies.

" Globally, Google's search services are based on technology, while the search market in India requires collating and maintaining databases through feet-on-street and voice-based search options. Hence, probability of Google re-entering the local search market is low. But any such move by Google is a key monitorable considering its technology competence and capital availability," it said.

by Sunainaa Chadha

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