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May 21, 2013 08:31 AM IST | Source: CNBC-TV18

Valuation a key argument: Udayan on Just Dial IPO

CNBC-TV18's Udayan Mukherjee expects Just Dial IPO to evince a lot of interest on the way up and on the way down over the next few days while the issue is open.


Just Dial's Rs 950 crore initial public offer (IPO) opened for subscription today. According to Udayan Mukherjee, managing editor, CNBC-TV18, the key argument for a lot of people will be company's valuation.


"The call on the IPO is whether Just Dial remains in this extraordinary growth phase that they have been in over the next three-five years. If the answer to that is yes, then you must go ahead and pay 30 times next year earnings. I don’t think valuations are that big a concern as whether the business model can retain its sheen," Mukherjee explained.


The IPO, which does not have issue of fresh shares, would see its promoters offloading 17.49 million shares. This would make up for 25.2 percent of the company’s paid up equity capital.


Below is the analysis of Udayan Mukherjee's views on the IPO on CNBC-TV18


The Just Dial IPO is a deep discount for retailers, for the first time the concept of a safety net on Just Dial will be issued. Everybody knows the brand; it is typically one of those IPOs which will generate a lot of talk in the market because pricing is expensive, the proposition is good. It is from a good space and not a public sector unit (PSU). So, I expect it to evince a lot of interest on the way up and on the way down over the next few days while the issue is open.


The key argument against it for a lot of people will be valuation. However, the valuation is not the most restrictive factor in Just Dial. This is because looking at the last published numbers of FY12, you take it to FY13 which has already ended and then go to FY14 which is what most stocks are valued on. They are on course to do Rs 110-120 crore of profit after tax in FY14 which means for retail if you take Rs 3800 crore, the top end of the band and then discount it by the retail discount, you are still left with a market cap of Rs 3400-3500 crore which is 30 P/E.


Now 30 P/E for something like Just Dial is a niche value, good space, terrific earnings profile and margin profile. I don’t think that is restrictive, considering how much Jubilant Foodworks got when they came in and how well they continued to do after that.


The bigger question with Just Dial is whether the kind of steam that they have been able to exhibit on growth as a model over the last three-five years, whether in an era where search is increasingly moving from voice to internet, whether they can replicate their success over the next three-four years.

It is a big management challenge and therefore, it puts the business model into a slight question mark. You could argue whether they can continue to grow like this given penetration. The call on the IPO is whether Just Dial remains in this extraordinary growth phase that they have been in over the next three-five years. If the answer to that is yes, then you must go ahead and pay 30 times next year earnings. I don’t think valuations are that big a concern as whether the business model can retain its sheen.

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