Business model and strong fundamentals work for Just Dial: Mohit Modi, Crisil

In an interview with ET Now, Mohit Modi, Director, Equity Research, Crisil, shares his views on the Just Dial IPO. Excerpts:


What is your recommendation on the issue and what is the rationale behind it?

Crisil Research has done the fundamental grading, IPO grading of Just Dial, and we have assigned the fundamental grade of 5/5, which suggested strong fundamentals. We have looked at the financial performance, the industries attractiveness, management capability and corporate governance practices and if you look at these parameters, if you look at the business model per se, there are four things which are required in this business model to be successful. I am talking about the local search in model. The no. 1 is data base where Just Dial has a decent database of around nine million entries. The second is distribution or reach where they are able to garner paid campaigns out of this database. So they have given around 4x growth in four years. For a company like this, the third thing is search request which depends a lot on their marketing and brand building.

They have been able to shore up numbers by 3x over last four years and as of last FY, they have around 254 million search request and the fourth thing is technological platform. They have been able to migrate from a pure voice only search to a mix of voice plus internet based platform which we incorporated in our grading. As a consequence of all of this, their financial performance has improved substantially in the last four years. It is a negative working capital and a debt-free business model. So if you look at their revenue growth around 39% CAGR in the last four years, if you look at their profitability, PAT has grown from around 2.4% points to 20% points, which are the factors we have taken in our grading rationale.

What are your thoughts on the longevity of this business and global competition? As of now, Just Dial is operating and they are doing fine in a very niche segment, but if global players decide to venture into this same data category, will that be a challenge for them?

See we also acknowledge that the biggest competition for Just Dial is from Google at this stage and at the same time the truth is that Google tried to get into the local search engine space in April 2008, but they were unable to achieve scale and it requires a good amount of initial burn to achieve that scale. So they exited this space around December 2010. Future entry again into this space cannot be ruled out.

What I believe is that there are two things which are going to be important for someone to be successful in this space – one is the ability to achieve scale and to put together operational matrix across the four parameters that I earlier talked about, that is where Just Dial seems to have done a very good job. At the same time it is important that the player who comes in here is able to make that kind of investment which Google is capable of because of their deep pockets. So a future entry by a global firm can be a threat, but historically we have seen them not being able to gather the scale because of maybe their own reasons and that we have considered in our grading.