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‘Stealth’ mode on; compelling risk-reward skew

We reinitiate coverage on Just Dial with a BUY rating and target price of Rs750 (~32% upside). Just Dial now has ~26% revenue exposure to the B2B ecommerce segment. We think this is likely to be the primary growth driver for the company going forward and grow to ~36% of overall revenue in FY25E buoyed by penetration-led growth in the overall B2B e-commerce market. The stock has corrected ~40% in the past year due, in our view, to concerns regarding growth prospects and fears that the parent may de-list the entity. We think these concerns are overpriced into the stock and current valuations at 3.8x 1-year forward EV/EBITDA provide an attractive opportunity to BUY.

* Meaningful gains from strong growth in B2B e-commerce space. We have created a proprietary model to assess the total addressable market (TAM) size and revenue opportunity for the B2B e-commerce segment in India. The TAM for B2B ecommerce segment as of FY23E is ~US$25bn by our estimates and this is likely to grow very rapidly on the back of increasing digital penetration. Digital penetration in India B2B e-commerce will be ~1.2% by the end of FY23E compared to 13% (2019) in the US (link). We believe B2B e-commerce is poised for a CAGR of ~55.8% over FY23E-FY25E. In our view, Just Dial should gain meaningfully from this trend. (Link to our detail report)

* Stock is mispriced due to various perceived overhangs. We believe investors are not pricing-in growth prospects in the core business. We estimate a revenue CAGR of ~28.4% in the core business over FY22-FY25E on a low base (-17.6% CAGR over FY20-FY22). We expect Just Dial to likely reverse the EBITDA margin losses of FY22 over FY23E-FY25E. We are higher than consensus revenue estimates by 1%/3%/6% and higher than consensus EBITDA estimates by 6%/7%/7% for FY23E/FY24E/FY25E. We have not priced-in the potential upside from growth in commissions revenue on successful execution of the e-commerce business opportunities currently being piloted by the company. We also believe Reliance Retail’s actions do not suggest imminent de-listing of Just Dial. In our view, Just Dial existing as a separate listed entity is in the best interests of the parent company.

* Risk-reward ratio at current valuations is heavily skewed to the upside (4.7:1). Just Dial is currently trading at 3.8x 1-year forward EV/EBITDA correcting ~40% in the past year. We believe concerns around the growth prospects and fears of delisting have been overpriced into the stock and the current valuations give an attractive opportunity. Given the compelling risk-reward skew (4.7:1), we reinitiate coverage on Just Dial with a BUY rating and a target price of Rs750. We value the stock at ~7x FY24E EV/EBITDA.

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