Covid-19, China tensions give this internet stock a solid upside ahead

NEW DELHI: Just Dial, a local search engine for small businesses, has been on analysts’ radar of late. The stock, which has lost its market value by 45 per cent in last one year, has seen analysts raise price targets by up to 60 per cent, even though uncertainty looms over its business due to Covid-19 disruptions.

Analysts say they are trying to make a long-term case from the recent disruptions. They expect Just Dial to benefit from the recent maturing of the Indian internet landscape and consumer behaviour changes like openness to transacting online and paying for delivery. They also expect lesser competition for the company going ahead.

The company sits on a cash pile of Rs 1,640 crore, which accounted for 68 per cent of its total market capitalisation of Rs 2,426 crore as of Tuesday. Analysts find comfort in that.

Nomura India has a price target of Rs 600 on the stock, suggesting a potential upside of 61 per cent from Tuesday’s close at Rs 373.75. Edelweiss Securities‘ price target of Rs 575 suggests a 54 per cent upside. Ambit’s target of Rs 523 suggests 42 per cent legroom.

“Digitisation of supply chains will prompt companies to increase brand and performance marketing spends to create ‘pull’ demand,” Ambit Capital said.

This brokerage said rapidly rising 4G adoption has prompted venture money to pursue highly capital-intensive businesses, which differed from low marginal cost tech 1.0 internet businesses. “But funds are now drying up due to Covid-induced stress and geopolitical tensions between India and China. This will benefit players, such as Just Dial, that were hurt by the hypercompetitive onslaught of VC-backed tech 2.0 businesses,” it said.

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Of late, the stock market bears have tightened their grip on Dalal Street, and analysts believe the index is likely to stay vulnerable and hence recommend a highly stock approach to the market. “Avoid aggressive longs unless Nifty takes out the 11,300-11,350 zone on a closing basis. Until that happens, we will find the index vulnerable at higher levels. A highly focused and stock-specific approach is advised for the day,” said Milan Vaishnav, CMT, MSTA is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services.

To fight Covid, Just Dial curtailed advertising spends, both digital and non-digital, from April. In July, average daily traffic for the company slipped 12 per cent from February (pre-Covid month) levels. On an organic basis i.e. without advertising, the July traffic number surpassed pre-Covid levels, the company claimed.

The company, however, offered discounts and payment holiday terms to SMEs, which hurt realisations. Increased proportion of tier-II and III cities resulted in 22 per cent drop in realisations for the quarter.

Collection in June quarter declined 52 per cent while unique visitors fell 36 per cent YoY. Edelweiss said while the lockdown is hurting Just Dial’s business, indicators clearly suggest the worst is behind.

“Considering consumers are still shying away from non-critical purchases and with further extension in lockdown, we expect slower revenue recovery. However, we expect the business to not only return to normalcy post lockdown, but emerge stronger as digital adoption drives more enquiries online, funding slump blunts competition from marginal players, and reduction in operating cost helps improve profitability,” Edelweiss said.

Nomura said the company is seeing cash collection of Rs 50 crore per month and hopes it to reach Rs 75-80 crore by the end of the year, touching the pre-Covid 19 levels.

The company is in the middle of a share buyback. Kotak said the buyback via the tender offer route will result in repurchase of 4.8 per cent of existing shares for a total consideration of Rs 220 crore.

“While there is downside support from cash (Rs 263 per share), weakness in core earnings will persist in the foreseeable future,” it said. This brokerage sees the fair value target for the stock at Rs 400.

The company reported a Rs 83.32 crore profit for June quarter compared with Rs 57.27 crore profit in the year-ago quarter. The rise in profit was led by other income, which jumped to Rs 76.91 crore from Rs 31 crore in the year-ago quarter. Revenues fell to Rs 162.43 crore from Rs 240.17 crore year on year, the company said.

JM Financial expects the company’s top line and collections growth to remain under pressure in the near term, but finds some support in the company’s efforts to arrest margin decline by minimising incentive payments, employee retrenchment and cutting discretionary spends, such as advertising.

This brokerage sees the stock at Rs 420.

“We value the stock by assigning a one-year forward PE multiple of eight times to its core business and adding cash per share, separately, that leads us to a target of Rs 420,” the brokerage said.

Ambit said Just Dial has weathered the VC-funded hyper-competitive and managed to report 10 per cent growth in revenue and 17 per cent growth in Ebitda over FY16-20.

“It is now launching B2B and transaction capabilities for certain B2C services. Reducing competition and past investments (JD Omni) will ensure success and drive 12 per cent FY21-25 revenue CAGR. Existential threats are reduced as funding dries up for startups having negative unit economics. Google’s overbearing presence and dependence on indirect traffic remains a challenge. But valuations don’t factor in survival beyond FY25,” it said.

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