Ahead of its September quarter results, Just Dial Ltd's shares traded at valuations of around 45 times estimated earnings for the year till March 2016. Although the shares had fallen by over 40% in the preceding 12 months, expectations were still running fairly high.
So, it isn't surprising that investors were hugely disappointed when Just Dial reported tepid growth in the September quarter. Reported revenues of Rs.171 crore were below consensus estimates of Rs.181 crore. More importantly, paid listings in the company's classifieds business grew just 0.8% sequentially and by 18% on a year-on-year (y-o-y) basis. In the June quarter, paid listings had grown by nearly 25%.
Analysts at Nomura Research said they had estimated listings to grow by 6%, sequentially, which essentially would have meant that growth remained at the 24-25% level on a y-o-y basis. For a company that enjoys valuations as high as 45 times earnings, slowing growth is an unthinkable proposition for investors. Just Dial's shares have fallen by nearly 17% since the results were announced last week.
The company said that there was some delay in the expansion of its sales efforts, which led to the slowdown in growth; but that is now hardly any consolation. Worse still, margins fell by 560 basis points sequentially on an adjusted basis. One basis point is one-hundredth of a percentage point. The results, therefore, have led to a double whammy, with analysts forced to tone down both revenue and profit margin assumptions. Analysts at Barclays Research have cut earnings estimates by 6% and 7% for FY16 and FY17, respectively. As such, valuations remain rich at around 40 times estimated FY16 earnings.
Of course, one can argue that part of Just Dial's valuation comes from its Search Plus business, which has just been launched, and is not yet reflecting in earnings. Even so, the pace at which this new service is being rolled out has left investors unsatisfied. Analysts at Nomura said in a 29 October note, "We view both the deceleration in core search revenues and the delay in the launch of Search Plus commercial advertising by the company negatively."
After the results, Barclays cut its target price for Just Dial shares by 20% to ₹935. The company now faces a tall order to win back investor confidence.
In arrangement with HT Syndication | MINT
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