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Nov 14, 2017 03:44 PM IST | Source: Moneycontrol.com

For Google will Just Dial be a strategic fit?

Though Just Dial has denied any acquisition proposal from Google, a possible strategic fit cannot be ruled out. While Google comes to the table with its financial prowess, innovation acumen and reach in the virtual space, Just Dial might try to get better value from its various strengths

Anubhav Sahu @anubhavsays
 
 
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While Just Dial is apparently witnessing some stability in its business, buzz surrounding a potential acquisition plan by Google has suddenly made the stock interesting. Though Just Dial has denied any acquisition proposal from Google, a possible strategic fit cannot be ruled out. While Google comes to the table with its financial prowess, innovation acumen and reach in the virtual space, Just Dial might try to extract better value from its presence in tier 2/3 cities, small businesses and recent traction in app aggregation.

Uptick in business. Is the innovations paying off?

Just Dial witnessed 105 million (100.5 in Q1 2018 and 76.6 m in Q2 2017) quarterly unique visitors in Q2 FY18. Of this, mobile share is continuously increasing – 65.7 percent in Q2 FY18 vs 54.2 percent in Q2 FY17. App share is 8-10 percent of the mobile pie.

While this seems to be aided by Just Dial’s focus on the new app which aggregates various services and the market campaign around that, it remains to be seen if the visitors remain on the platform. To give a perspective, the cumulative download of the app was 17.3 million in Q2, of which 30 percent are active users.

Cut-throat competition

While traction in some of the operating businesses has improved, realisations remain a sore point. Year-on-year realisations per campaign were up by a mere 3.1 percent. Another trend of interest is the change in customer preference from a yearly package to a monthly one. In Q1 FY18, 35 percent customers opted for the monthly option, which is now 46 percent (Q2 FY18) which raises concerns about customer retention.

While over the years, domestic competitors like AskLaila have weakened or closed down, Google, which also directs 70 percent of Just Dial’s overall traffic, has emerged as the biggest competitor to Just Dial.

In the recent past, Google has expanded into utilizing its listings business through Google maps, which is well received. Further, introduction of an aggregator services app – Aero – in collaboration with already established players (Urbanclap, Fassos) in the services and food ordering business is a serious competitor, given Google’s reach.

What is Google going to gain from Just Dial?

While Google has already gained some traction in this segment this is largely top-down, IT innovation-led, aggregation with specialized service providers. With Just Dial, Google can accelerate its penetration at the ground level. A database of 19.8 million listings is a case in point. Secondly, access to tier 2/3 cities is another area to look at. Currently, Just Dial’s revenue share from tier-2/3 cities is 18.5-19 percent and share in campaign is 40-42 percent.

Valuations

Valuation of listed companies (GICS sector – internet software and services) for India, USA and China, suggests that Just Dial is quoting at 21-24 percent discount to the sector median multiples. While even at this sub-sector level the group is heterogeneous, one might still conclude that rerating is possible should the deal happen.

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Relative weak margins and cashflow

However, the moot question is at what price Google might be willing to acquire? Given that Just Dial’s operating metrics are relatively on a weaker footing, current valuations might already be reflecting the acquisition upside.

In fact, if we look at the cash burn rate, say, in terms of cash flow invested in terms of sales, it is not on par with global peers. Global giants like Alphabet, Baidu and Tencent have invested cash of the order of 34 to 50 percent of sales. Which means, in a sector that is highly competitive with an accelerating rate of innovation and order of monetization, it may be increasingly challenging for Just Dial to remain relevant.

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# Last fiscal year/CY

Source: Thomson reuters

At this point, it is difficult to fathom if Google would find any value for the app when it itself has an app well-rated with a different ecosystem. Further, other channels like, Omni (business management tool for small businesses) and Search Plus have still to gain considerable mass. Given this, at the current enterprise valuation of Just Dial, the acquisition cost for every database listing of the company is Rs 1850, which seems to be at a premium.

Having said that if a scenario of Google bidding for Just Dial emerges, it can possibly open an exit opportunity for the investors.

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