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Strong margin beat, compelling valuation

Just Dial’s Q3FY23 revenue grew 7.8% QoQ and 39.3% YoY. EBITDA grew 5.2x YoY as operating margin improved by ~900bps YoY (400bps QoQ). It is now 12.3% vs ISec estimate of 9.4%. Ramping up of hiring in previous 3-4 quarters had resulted in increased employee expenses which led to lower margins over the last year but now they are quickly reverting to steady state margins as they benefit from operating leverage. Deferred revenue increased to Rs4bn (+24%YoY) led by ~6% QoQ growth in collections. Sustained improvement in collections on a sequential basis in our view is indicative of an underlying demand for their services. Just Dial has ~26% revenue exposure to the B2B ecommerce segment. We believe this is likely to be the primary growth driver for the company going forward and estimate a revenue CAGR of ~28.5% in the core business over FY22- FY25E (link). We expect the company to reverse its EBITDA margin losses of FY22 over FY23E-FY25E. Execution of e-commerce business opportunities currently being piloted by the company is a key monitorable and any potential upside from the same is yet to be priced in. At current valuation, the stock is trading at ~5x 1-year forward EV/EBITDA (cash balance Rs39.3bn; market cap Rs49.4bn), which is significantly below historical levels. Reiterate BUY with target price of Rs750.

* Better-than-expected performance. Revenue for Q3FY23 was Rs2,214mn, up 7.8% QoQ / 39.3% YoY. Employee expenses at Rs1,673mn were up 3% QoQ / 29.1% YoY. Other expenses at Rs269mn were up 4.2% QoQ / 11.7% YoY. The company reported strong expansion in margins to 12.3% (vs Isec: 9.4%) as operating leverage kicked in. Adjusted EBITDA margin stood at 13.3%. PAT stood at Rs753mn (vs Isec: 355mn) led by higher than expected other income (Rs712mn vs Isec: Rs315mn). Collections in Q3FY23 stood at Rs2,451mn (+6.4% QoQ, 63% YoY). Traffic in Q3FY23 remained flattish as web and voice segment declined 5.8% / 7.8% QoQ while growth in mobile segment was soft at 1.4% QoQ. Paid campaigns grew 3.6% QoQ, 19.3% YoY to 521,880 led by continued focus on signing up majority of customers on monthly payment plans. User engagement on the platform (ratings & reviews) continued to increase. Active listings (35mn) grew 3.3% QoQ, 11.5% YoY.

* Valuation. Just Dial’s risk-reward skew is heavily in favour of the upside. The stock has corrected ~34% in the past year due to concerns regarding growth prospects and fears that the parent may de-list the entity, in our view. We think these concerns are overpriced and current valuations at ~5x 1-year forward EV/EBITDA provide an attractive opportunity to BUY. We value the stock at ~11x 1-year forward EV/EBITDA (previously ~7x FY24E EV/EBITDA)

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