Why Justdial IPO Defies My IPO 101 Beliefs And Why I Wouldn’t Buy it

NextBigWhat
Justdial just opened its IPO yesterday. The size is about 900 CR and they will sell 1.75 crore shares (read NextBigWhat’s analysis of Justdial IPO and another analysis here).justdial_thumb.jpg

Jusdial has been around for a few years and is generally considered a successful Indian company. It has Amitabh Bachchan as a brand ambassador and as a frothing at the mouth ToI / ET reporter reports, he reportedly will make 53x on his investment of 6.3 lakh which is about 3.4 CR – just about enough to buy a new Jaguar for Aaradhya baby.

When the IPO came out, several points struck me as concerning / bordering on red flags Some of them defied what we read in B schools as the resons for going for an IPO – but we all know how much reality B-schools teach. Let me capture those points and ask you to apply logic – rather than any B-school gyaan and take your own call.

Assumption 1: An IPO is to raise money from the capital markets to use for the growth of the company primarily.
In JD’s case all the money goes to existing investors. They already have about 475 CR in cash + other instruments. So they don’t really need the money for the growth of the company – but to provide an exit for the existing shareholders. Will you, as a retail investor, put money for another investor to exit? Or will you put it for the company and the business to grow? Which brings me to my next assumption.JustDial
Assumption 2: A lucrative IPO is about a company that has made money and is showing a good trajectory of growth
JD’s growth has been slowing. The last year was their slowest. One might argue the economy, the denominator growing substantially etc – but the fact remains that the advent of new companies and newer technology is taking its toll on the growth of the company. More on point 4.
Assumption 3: A lucrative IPO has an appealing P/E ratio
At IPO P/E of 49? While one metric is usually not the best indicator, here is a list of P/E of companies in a similar space trading today and their P/Es. At IPO, a large P/E almost inevitably affects the price post listing southwards (e.g FB). Now the promoters have come up with an innovative model to protect retail investors – covered in the last point
Assumption 4: The company is leading with technology and is ahead of / equal to its peers in technology / experience or has a history of buying out competitors and adopting their technology.
Have a quick look at both consumer and merchant signups at JD. Searches also typically have Zomato / Google’s own listings / Sulekha in results than JD. Similarly niche players rule in niche segments e.g. commonfloor / magicbricks in Real Estate or even new players like NowFloats for small businesses. They have (and admirably so) resolved the call query scenario, they do not track leads or businesses getting real customers. It is still a listing service – and that’s about it.

And the “red herring” – The promoters have promised to buy back assuming the volume weighted average price for the last 60 days is less than the IPO price. I have two issues with this – a) how difficult is it to maintain this above or just around the IPO price in the last 60 days? b) Why the defensive move?

Frankly speaking there arent too many IPOs coming and too many options to invest either in the secondary markets, but this has too many pointers against it. I would read the tea leaves thus –

a) A lot of top executives would be looking to get their kitty and leave within the 6-8 month timeframe
b) If possible I would get a nice put after 180 days when the safety net goes. When – I am not sure.
c) With the cash they have, they will acquire some companies (but that’s not an IPO related development).

Thoughts?
[Written by Pratyush Prasanna.]

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