Home >Market >Mark-to-market >Justdial’s chase for growth has hit margins badly

Just Dial Ltd’s shares have more than halved in value in the past year, after having fallen over 40% in 2014. After such a steep correction, one would have imagined valuations are cheap. But the stock still trades at over 23 times trailing earnings, that too at a time when core earnings are declining sharply.

In the June quarter, earnings before interest, taxes, depreciation and amortization fell by over 35%. Growth in revenues ebbed, while costs soared, as the company added a large number of sales staff to drive volumes.

Justdial had added a large number of sales staff in the March quarter as well, and some of this is reflected in an increase in the number of paid listings, which grew 12.3% year-on-year (y-o-y). But because incremental growth is coming from smaller towns, and thanks to the increased competition (some of it from no less than Google), average realization for its paid listings fell by 9% y-o-y.

As a result, revenues grew by only 6% y-o-y. And with employee costs increasing at a sharp pace, operating profit margin fell by over 800 basis points y-o-y. A basis point is 0.01%.

Analysts at JM Financial Institutional Securities Ltd said in a note to clients, “We believe management’s solution to the problem—to increase its sales team to expand in tier 2/3 cities—underestimates the competition/demand shifts and could be realization/margin dilutive."

As pointed out earlier in this column, the core online listings business is facing tough competition from sector specialists such as in healthcare and in the restaurants space. In addition, since Google lists information on various businesses on the search page, this eats into the traffic that comes to Justdial. All of this is resulting in lower revenue growth in the core business. And as JM Financial’s analysts point out, these are structural challenges which may not be offset by hiring a larger sales team.

Meanwhile, the wait for the company’s commercial launch of Search Plus continues. This is its attempt at capturing the growth of e-commerce in the Indian market. The only silver lining here is that investors have practically written off the possibility of meaningful gains from this venture, and news of further delays in the launch of these operations hardly impact investor sentiment now.

All told, the sharp fall in profit margins in the June quarter is a clear worry. And although Justdial’s shares have corrected sharply, there’s room for further decline, unless the company bounces back in terms of value growth of its core listings business.

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