Fair value for Just Dial at Rs 440/share; sell it: Ambit

Ankur Rudra of Ambit Capital recommends selling Just Dial, which hit the bourses today at Rs 590, up 11 percent over its issue price of Rs 530 apiece. The fair value for this stock is closer to Rs 440, which is 20-25 percent lower from current levels. Investors who have made money on it should exit the stock now, he said in an interview to CNBC-TV18.

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Rudra who is concerned about the company's valuations feels, Just Dial may not manage to retain its dominance in the market going ahead. "We are a bit more worried about quality of user review, lack of enough social aspect and the fact that one can search for contact details on the internet more freely than on the phone," he added.

He sees the company's topline and bottomline growing by 25 percent in FY14.

Below is the verbatim transcript of Ankur Rudra's interview on CNBC-TV18

Q: What are your thoughts on Just Dial at Rs 600 plus? Do you recommend exiting this stock or hold on to that one?

A: We would recommend selling into the strength of the stock at this point. Our fair value is close to Rs 440, clearly around 20-25 percent lower from where the stock seems to be hitting right now. So, for all holders who made good amount of money on the pop, we would recommend selling right now.

Q: Are you uncomfortable with the valuations or you don’t think that this kind of volume momentum or volume traction might remain for a company like Justdial?

A: I think valuations, but then valuations, because the success that Just Dial has had so far was been build on its dominance on voice-led searches. As the company attempts to transform into internet and mobile application-led searches, they may not be able to retain the dominance as much. We are a bit more worried about the quality of user review, the lack of enough social aspect with the fact that you can search for contact details on the internet more freely than on the phone.

Q: How acute is this problem in terms of the voice brand not shifting to the internet because that seems to be the main concern for people who are trying to value Justdial? Do you think it is the prime problem going ahead?

A: I would characterise it as one of the bigger issues facing the firm. One has seen usage shift quite a lot from the company’s displayed numbers – close to 60 percent of usage comes from the internet and mobile applications. But it is B2B business as SME business realise that they might find alternate forms of advertising a bit more attractive. They might find the competition on the internet a bit more intense and hence the choices are more than Justdial and that is the main thing we fear for them.

That apart, valuations value the firm as an internet franchise. They will have to prove themselves there going forward. We also have a few concerns about possible changes to working capital efficiency of the firm. It has enjoyed excellent working capital and cash conversion because most of the money has been taken up front. They are valuating working capital in growth to expand growth in smaller SMEs who may not be able to pay year-end advance for example. So, that might change the value of forward earnings compared to historical earnings.

Q: What does your Rs 440 price target include in terms of the sales and earnings per share (EPS) that you expect to see from Justdial going into FY14?

A: We expect them to grow at about 25 percent compounded annual growth rate (CAGR) both top-line and bottom-line so, it is a healthy growth on both sides and effective PE multiple we will be comfortable with closer to Rs 30-Rs 31 as oppose to FY13 perspective, as oppose to what it is currently suggesting.