Published on 14/06/2018 1:52:57 PM | Source: ICICI Securities Ltd

Buy Just Dial Ltd For Target Rs.620.00 - ICICI sec

Improvement across the metrics of traffic, collections, growth and margin

Reason for report: Q4FY18 results review and earnings revision

Key highlight of Just Dial (JD)’s Q4FY18 results was the 16.8% QoQ growth in unearned revenue to Rs3.33bn. Strength in unearned revenue was more a function of better pricing power and improving category mix with volume growth expected to pick-up gradually in-line with improving traffic. Traffic as defined by Unique Visitors increased by 3.7% QoQ and 28.6% YoY despite significant competition from Google and vertical specific competition. Momentum in traffic and collections has been sustained in first half of Q1FY19 which we estimate should keep sequential revenue growth in the 3-5% QoQ range in Q1 and Q2FY19. We expect revenue growth in FY19 to accelerate to 12.8% from 8.8% in FY18 which should enable adjusted EBITDA margin to expand to 24.7% in FY19 from 23% in FY18. JD generated FCF of Rs2.05bn in FY18 and is trading at FY20 EV/FCF of just 9.5x. We reiterate BUY on the stock with target price revised higher to Rs620 (Rs580 previous), in-line with higher earnings estimates driven by a stronger than expected Q4FY18. Though we expect JD to provide capital return of ~5% on the CMP in FY19 (likely through a buyback), we see no reason for the company to not return a higher proportion of annual free cash flow back to investors than it has in recent years. Existing cash balances are already large enough to take care of any incremental business investments in adjacencies and acquisitions.

* Strong execution in a seasonally weak quarter. Overall revenues in Q4FY18 increased by 1.9% QoQ and 10.3% YoY despite the quarter having lower number of billable days. Key highlight of Q4FY18 was the strength in unearned revenue which grew 16.8% QoQ and 21.4% YoY which should help drive improved revenue growth in H1FY19, especially given sustenance of collections strength thus far in Q1FY19.

* Pricing power returns; lower churn to follow. Paid campaigns increased by just 1% QoQ and 2.2% YoY to 4,45,110. However, more than paid campaigns, one should focus on the growth in unique customers which was higher at ~5% in FY18. Also, a 16.8% QoQ growth in collections suggests strong improvement in realisation because of two factors: 1) improved pricing power, and 2) richer category mix. We expect consistent improvement in traffic to eventually drive lower churn in Tier-1 markets and help volume growth. Tier-1 markets are still leaking customers on a net basis by our estimates. We estimate revenue growth in FY19 to be slightly more broad-based between volume and realisation with growth in paid campaigns likely to accelerate to 5-6%. Headcount also increased by 4.6% QoQ to 11,452 especially in sales functions which should also help drive better new customer acquisition.

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