JustDial - Equity Research - To invest or Not ?

17^th September, 15

Just Dial

About the company

Started in 1996 under the label Justdial, where it provided telephone search services. In 2007 it came out with its website allowing Internet based search followed by mobile application in august 2007. The mobile application for android was launched in the year 2011 and for iOS in the year 2013. Justdial offers its services through telephone (voice), digital both Internet on your computers and smartphones.

Just Dial recently announced its quarterly result with 18% growth in Net profits.

Current Company Standings

According to website rankings, justdial stands at the 41^st position behind Google and most of the e commerce companies like flipkart , amazon , quickr etc.

Currently India has about 140 million smartphones and about 2 million tablets. The number of downloads for the justdial application is between 5million to 10 million as per the Google play store data. This show that around 4-7% of the Indian smartphone users have downloaded the application, which is an encouraging number given that the services are just in 13 cities in India currently.

Justdial has currently signed deals with the IPL teams for its promotions in the last season, which would continue this season also. The increased marketing and advertising expenditure is taken by the users as a good sign for the company and is believed to be move to increase the trust factor in the company.

Justdial not only offers search services but offers services like Search Plus which is all services under one roof and also enable online food ordering.

Positives

First Movers Advantage

JD is first voice search company to be launched and with its unique and simplifies telephone number to call, it still gets a lot of voice searches due to its brand image and the first company in its space.

Great brand recall 

Today JD commands a great brand recall, be it the telephone number to call on or the logo, people associate voice search as a justdial search and no other name comes to their mind. There are other player like Ask Me , but they do not command a brand recall at all.

Increased promotions and tie-ups

 JD has recently tied up with the IPL teams to boost its promotional efforts , and with an increased promotion a company receives a greater trust and much better sentiment as it makes it presence felt.

Launching search plus by October 2015

 Search plus is what JD is hoping does wonders to them. Search plus is a tool which enables all activities of searching and going ahead with execution under one roof i.e. at one go , on a single platform. The launch has been delayed by a month and a half , but currently the Search plus tools are not causing any excitement , but JD hopes that once launched , it would cause a lot of trials and they hope to convert them to continuous users.

Negatives

Late movement into e commerce

What JD did to yellow pages, is what I guess is happening to JD currently. JD had a very big first movers advantage with a database of about 15 million listings, which they could not protect and have been left behind in the e commerce platform range. JD has only recently started entering into the e-commerce space where it has started online food delivery and conceptualized Search plus tools. JD was the first one to have paid listings but with the increased convenience of Google, more new paid listings are going towards Google. JD had a very big competitive advantage but it did nothing to protect its competitive advantage.

Google threat

The biggest threat JD has faced in the last 3 years is Google , Google has forced a lot of traffic towards its own website as it has started providing listings , phone numbers and reviews at he click of a button. Google with its smartphones and android platform works better in performance compared to the justdial application. Though the revenues of JD have increased but the overall market share has definitely decreased.

Zomato threat

 The most number of searches that used to happen on JD were for restaurants and eateries , but with the advent of zomato the searches for eating joints and cafes have shifted from JD to Zomato. Zomato recently started with online food ordering which is more famous than JD online food ordering. So Zomato who has built its network of listings in India and created a huge database, has shifted all the restaurant searches toward themselves from JD.

E commerce services threat  

Today justdial is lagging the E commerce companies in the website rankings, the application download numbers and the services offered. Today you ant to purchase a new product without the knowledge who makes it or where is it available, you log on to a e commerce website and search for the product find a good deal and purchase it. Whereas earlier you used to call up just dial and find out who produces this product , take down the address and go and purchase it from there.

Current downtrend

Currently JD stock is going through a major downtrend, where the stock price has fallen to half of its peak value ( from 1890 to 900) and investors are vary of this. They cannot predict that will it fall further or has it fallen enough , the company has strong investors but currently it is being sidelined by a lot more other famous brands, so it is struggling to get out of this downtrend.

Financials And Valuations

In Crore	FY12	FY13	FY14	FY15
Net sales	262.1	362.77	461.29	589.8
EBITDA %	25.7	112.85	182.15	214.65
Depreciation	9.0	14.4	17.29	24.1
Finance Cost	0.0	0.0	0.0	0.0
Other Income	13.31	12.01	39.95	48.86
Reported PAT	50.58	68.46	120.61	138.89
EPS	9.74	9.85	17.19	19.7

Revenues and PAT have grown at 22% and 38% CAGR respectively for FY12-15 , while EBITDA has grown by 70% CAGR in the same period of time . One of the major ratios to check out for is EPS which has shown a steady increase .Even looking at the June quarter end results we see 18% increase in net profit YoY and this had caused a 2% boost in our share prices.

Thank You,

Sarthak Gupta

Your replies eagerly awaited .

The E-Commerce Blue Ocean

We have been classifying E-Commerce industry in various ways , but I would like to present a new form of classification. I would like to classify the industry into 2 categories , one part which is purely electronic or digital and the second which is partially electronic ( electronic+physical).

So , how do we use this classification ?

Think in terms of the cost structure , a purely electronic form of E-Commerce will have a greater investment in the hardware to distribute , as in the majority investment will be a fixed cost and not variable cost.

eg. A book being available on kindle , amazon over here has to purchase the rights of the books once from the writer or the publisher , convert it into an e-copy and then can sell it how many ever number of times. So the cost faced by the company is fixed and not dependent on the number of consumers or customers.

Like amazon there are various examples like iTunes, software companies, online advisory, online education videos etc.

So as these companies have close to negligible variable cost the economies of scale work majorly in their favour as the average cost keeps reducing , and in turn the profit keeps rising.

On the other hand we have an Electronic+Physical E-Commerce , here we have a physical good and due to the presence of this physical good we have logistics , transfers , storage , maintenance etc. All of these costs are associated with a physical good and hence the physical good purchase and delivery comes with a high variable cost. Here the variable cost would be a significant part of the order purchase , as the number of orders rise the cost also rises (because of variable cost). 

Here we have players like flipkart and amazon , who use both inventory and market models. But the market model being more dominant , but the biggest problem with that is that the market model cannot achieve economies of scale . 

A market model would have 100's os sellers selling the same product at competitive prices , but what if these sellers were clubbed into 1 , the advantage this one seller could have commanded would have been a bulk discount which it could pass on to its consumers . This is exactly what a Walmart does and hence offers everyday low prices.

So , by this i would infer that it is much simpler to achieve economies of scale in a purely electronic model rather than a partially electronic model . Making the purely electronic model much more sustainable and profitable. Today we have the rising indian middle class who are looking at startups and also funding these startups , so this could be a good tool to evaluate , how and where you would want to invest or maybe have a start up.

The purely Electronic E-Commerce is majorly under explored , specially in terms of online services like marketing , consulting , trading etc. and there is a growing opportunity in these areas in the age where we feel the e-commerce space is saturated.

Thank You,

Sarthak Gupta

Kill your own Product

These two terms Market leader and Complacency , do not go well together but believe you and me , it forms the order of truth for many companies as suggested by history.

Does a company who attains the market leader position become complacent , my answer to this is NO . Dont be surprised , i have my explanation for the same . A company which has risen the ranks and fought its way through to achieve that number 1 spot , does understand the value of that position and realises what has gone into reaching that position. So it does not take it lightly and never becomes complacent , obviously there are exceptions. But a company which claims to be the market leader because of some other reason like the first mover advantage or technology or differentiation does not remain the market leader for a very long period of time .

Take the example of K-Mart and Walmart , K-Mart was the market leader in the 1980s to early 90s , but it did nothing to defend its position , so slowly and steadily Walmart ate into them and by 1994-95 Walmart became the market leaders . Walmart not only has become the market leader but it has become such a player which has imposed such high entry barriers on any competitor to enter the same field. So does Walmart get complacent now , NO ,Walmart is aware about the challenge it will face the moment it lapses in any field , so it leaves no stone unturned to maintain the market leader position.

Lets look at JustDial , India's first voice based search company . It rose from the ashes of Yellow Pages but it was in the market for good 10years as the leader , but it failed to take advantage of its superior database or the technology or the listings and today E Commerce companies like Quikr , Flipkart and Zomato are killing its market share . The major rival Google is eating into its search engine operations and business listings areas. Google is causing a lot of customers and businesses to switch from JustDial to Google.

So what is it that a leader should do ?
A leader has to make sure that he remains the market leader , that can be done by continuous improvements in your own line of business , your biggest competition has to be yourself and no one else. I believe the best way to stay ahead of competition and specially if you are the market leader is to " Kill your own Product" you kill your own product before someone else does that for you. Continuously challenge your limits and keep on changing with the changing times as the only thing that is constant is Change.

Looking at MakeMyTrip , this is a company who has become the market leader , but is continuously improving at all times and never takes a chill pill . MMT notices a slight threat from GoIbibo and starts working towards it immediately not waiting for it to become a bigger threat, it takes no threat lightly.

Thank You,
Sarthak Gupta

Joy or Fear ? What works in Advertising ?

We go through a lot of advertisements on our television which invoke us to use the product out of the fear that something bad will happen to us if we do not . Like a shampoo company would sell its shampoo by saying use our shampoo to prevent dandruff . And this really works well in this case . A classic Indian example where a lot of priests would say that you need to get a certain ritual done or you have to make a certain charity else something wrong will happen to your or your business .

On the other hand we look at advertisements which evoke the positive sentiment in us and hence compels us to use the product . Looking at chocolates , which deliver the message of the joy of having that candy , the pleasure you receive from this bar of chocolate is unmatched . The way condoms are sold , the focus on the joy of using a condom , rather than saying what happens if you do not use one .

One very successful campaign in India is the Polio campaign , which say ' Do Boond Zindagi Ki ( 2 drops of life ) ' it is marketing a heavily negative feature , that is they are spreading the message about the disease , but rather than focusing on what will happen if you do not get the vaccination it rather focuses on the Freedom from fear . They focus on how just 2 drops of medication can help you live a healthy life.

So what is it that causes a positive message to work in a few cases , but in some cases a negative message ? Is it totally subjective a call , or does it come with experience only ? The worst , is it trial and error ?

So what happens when we try to communicate through a fear psychosis , I believe it works to a certain extent but it stops being effective when it is overdone . For example there a graphic images on packs of cigarettes which are supposed to serve as a deterrent , but till date i have not come across anyone who has stopped smoking looking at those images . Maybe these images serve as a deterrent to the entry level smokers , which I would not deny and hence would want the images to still be there.  

So what happens in case of those regular smokers ?
What happens is when the message gets to extreme there occurs a break down in the communication , i.e the communication is not processed by them . They would willingly look at the image but just would not want to process it. They know that if they start processing the image , looking at it will make them uncomfortable and hence they would shy away from it at times physically at times mentally. To explain it further lets take a personal example , how many people you know who would be comfortable looking at a cut ? compared to the number of people who would be comfortable looking at a chopped leg ?

So this is what I have learnt , fear psychosis does work , and works effectively but only when taken to a certain extent beyond which it fails to work at all. It like how a teenager would react to a little caution and fear , but when he starts feeling that his freedom is curbed , he would start revolting and go in the totally opposite direction.

Thank You.

Is this the right time to invest in GOLD in India ?

Is this the right time to invest in GOLD ?

As far as investment in gold is there I would like to sight Warren Buffet, who said, "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it”

Since the new government the gold prices have declined, and the question which we face right now is the price low enough? Some things which we need to consider while answering this question are 1.Hedge against Inflation 2.Derecognizing gold as a reserve 3.Ever growing Sensex & the correlation 4.Import Laws and 5.Gold Monetization.

Gold since historical times has been hedged against inflation. But in the current global scenario where the governments are trying their level best to create a greater demand for real goods, there does not exist a need to hedge gold against inflation. Moreover with global commodity prices coming down (crude, agriculture products, steel), inflation is moving in the backward direction and hence very remote chances that inflation would rise in the future subsequently no hedging would be required.

Banks when operating have to keep a certain amount of reserve currency and central banks around the world have recognized gold as a secure reserve, which can be monetized easily. But recently the debate over gold not being recognized as secured reserve, especially in the European nations can cause a lot of changes. As banks will have no incentive to keep it in their vaults this will cause a rapid boost to the supply of Gold. 

  

Traditionally we have seen a big correlation between the Indian stock market and the gold prices, but that was till the early 2000’s. Post that we have seen both the commodities to rise and sink together. The theory, which supported this correlation earlier was that, the Indian investor would invest either in gold or stocks and hence when investment in gold increases the gold prices soar and markets crash and vice versa (this is shown in the graph below). But in the modern day this theory fails as the increased number of FII’s that invest in the Indian Market. But even with the increased FII’s investing in India I support the traditional theory as I feel the increased FII’s have a domino effect on the Indian investors also. This causes an increased transfer of funds from gold to the stock market. With the Indian market creating new peaks, I feel it is not the right time yet to purchase the precious “ Yellow Metal ”

The Indian government has made import laws strict to curb the import of gold, they want to reduce the amount of gold you carry with you when travelling to India from outside. The government recognizes that purchase of gold takes place through large cash transactions, which means a lot of unaccountable money. The government who intends to reduce the cash economy, Gold does not fit well in their plan forward. 

The government wants to curb the import of gold as it is the second biggest source of deficit to the country and hence it has come up with the gold monetization scheme. The gold monetization scheme would make use of the tradition gold stocks in the Indian lockers and the temples of India. The scheme aims at making that gold kept in the locker to give the owner a source of income and in turn satisfy the demand of a few gold buyers. This essentially prevents us from importing gold from outside. This scheme has been rolled out but not yet in action. The government is working day and night with banks towards this scheme and once this scheme come into actual working, it will cause the gold supply to surge with mostly a constant demand. This can be a factor, which would cause the gold prices to reduce further.

Hence I would like to conclude that as per my opinion Gold does not seem as a viable long-term investment option going ahead and looking at the current Indian scenario. But the factors mentioned above could also backfire so an investor should act on his own judgments whether to go ahead with the investment or not.

Linking Social Media and Stock Markets

For any one who knows the main driver for the stock market is the consumer sentiment. And Social media serves as the best way to access this public sentiment for free. All you need to do is to tap on this sentiment deep enough to make a viable decision. Tapping the huge population and tracking their social feeds is the most tricky part here ( if not the one i wish to discuss later ) , There are softwares built to efficiently derive this sentiment and supercomputer which are there to make sure a huge chunk of the population falls under the scanner . This though is the technology which is not at the disposal of common individuals. But for a second lets just think that you have a supercomputer at your disposal which would tap into the sentiments from people all across the world and convert this sentiments into stock market tips which you may choose to follow.

But I have 2 concerns here ,

1) How do I make out between a genuine and a fake sentiment , there are a lot of people who would just post a social statement without actually doing anything , or might just post a fake social statement . So how do I filter the genuine ones from the fake ones ? If this can be done or is already being done then i am not aware about the same.

2) Does the sentiment come first or the investment comes first . An investment into the stock market will cause you to form a sentiment , or would a sentiment cause you to invest in the stock market . This is puzzle similar to who came first Hen or Egg ? This is a cyclical process which does not have a fixed head or a tail.

Another Concern ,

If I believe that there is mechanism for the above and the above two concerns can be taken care of , and we can develop a system to convert social sentiments into stock market tips . Then can this system be cheated , and cheated by any individual who has access to social media . A person might not lie but only cause a selective of his intentions and sentiments to go public and hide the rest . He can modify his sentiment in such a manner to benefit him and only him and this audience is going to be huge . This can cause companies to crop up who can specialise in creating a social sentiments , which go under the tracker of a lie detector .

Lets believe all of the above is possible and all my concerns will be taken care of ,

Then if everyone has the same tips , how does one make a profit in the market ? Because the markets model is ones gain is others loss . Would everyone have access to the above system or is the above system already in place and used when all of us are just thinking of its possibility ?

Would the above system just turn into news tips if everyone starts using it , because one of the things i have learnt from the market is never follow the tips of the news channel or that "market guru ".

Thank you .