Indian search engine provider Just Dial will raise about Rs9.19 billion ($165 million) from its initial public offering after fixing the price at Rs530 per share, according to sources. The total funds raised include a discount of Rs47 per share for retail investors.
According to data provided by the Indian stock exchanges, the deal was 11.6 times covered and could easily have priced at the top of the Rs470 to Rs543 range. But instead it decided to stick with Rs530, which was the price that the anchor investors agreed to pay earlier in the week. If the final price had been fixed any higher than that, the 15 anchors, which included key international names such as Fidelity, Eastspring, Quantum Partners and Columbia Emerging Markets Fund, would have had to put up additional cash to make up the difference.
But the company and parties involved in the transaction also had another incentive to do what they could to ensure that the stock will trade well in the aftermarket, namely a safety net clause for retail investors. The clause will allow Indian retail investors to put the shares back to the promoters if the share price is consistently below the IPO price towards the end of the first six months, meaning they are essentially getting a six-month capital protection.
By fixing the price at a level where there was solid support from institutional investors, as indicated by the anchor tranche pricing, the company would have increased the room for the share price to move higher – or limited the risk that it will fall, whichever way one looks at it.
These same intentions are likely to have been behind the decision to give retail investors a discount of 10% to the floor price (or Rs47 per share), compared to the more usual discount of 5% to the IPO price.
Ensuring a good debut and aftermarket would also be in the interest of the sellers, who will still own shares in Just Dial after the IPO, and the sharp drop in global equity markets on Thursday last week may have increased their willingness to leave something on the table for the new shareholders. The three-day subscription period ended on Wednesday last week, but the price wasn’t finalised until this weekend.
This was the first time the safety net clause was used on a sizeable IPO and the outcome will be closely watched by all market participates – not least by other listing candidates in the pipeline. It isn’t compulsory for IPO candidates to include a safety net clause for retail investors, but there is a belief that the regulators won’t be approving offerings without it as they strive to come up with ways to attract more retail investors to the country’s lacklustre IPO market.
The price that will trigger the retail put option is the volume-weighted average market price in the fifth and sixth month after the listing. All the IPO funds received from the sale of shares to retail investors will be held in escrow for the first six months, until it is clear whether or not the safety net clause will be triggered.
According to the prospectus, 10% of the offering was ear-marked for retail investors, while 22.5% went to anchor investors, 52.5% to other qualified institutional bidders (QIB), and 15% to non-institutions, which are mainly high-net-worth individuals and companies.
As per the bookbuilding data available on the Bombay and National Stock Exchange of India websites, the QIB tranche was 10.1 times covered (eight times by foreign institutional bidders alone). The non-institutional portion was 22.3 times covered and retail investor subscribed to 3.5 times the number of shares available to them.
The IPO consisted of close to 17.5 million secondary shares, which means the company is raising no new capital from the listing. Most of the sellers were pre-IPO private equity investors, although the promoter put up 4.01% of the shares in order to meet the 25% free-float requirement. The deal was close to twice the size of what the pre-IPO investors were planning to sell last year and sources said none of them were willing to dispose of any more shares than they were already doing.
According to the prospectus, 8.51% of the shares were sold by SAIF Partners, 6.51% by Tiger Global, 5.51% by Sequoia Capital, and 0.46% by SAPV.
The promoters, including founder V S S Mani, will still own about 33.2% of the company after the IPO, while the private equity investors will own a combined 25.4% (SAIF 11.2%, Tiger Global 8.26%, Sequoia Capital 4.87% and SAPV 1.11%). Another 2.26% will be held by employees.
The price range translated into a price-to-earnings ratio of about 25 to 30 times for the fiscal year to March 2014, or 35 to 40 times if you exclude treasury income resulting from the interest gained on client deposits. The final price puts the 2014 P/E multiple at approximately 28.7 times, or 39.2 times depending on which number you use.
Either way, Just Dial will came at a sizeable discount to the two companies that are viewed as the closest comparables, in terms of both business and size – Indian online travel agency MakeMyTrip and US-based Yelp, a provider of an online business directory and review services. The company prefers to compare itself to Google and Baidu, but given their significantly larger market capitalisation and (in the case of Google) more mature market, analysts don’t view them as the best benchmark.
MakeMyTrip and Yelp are both listed in the US, are growing fast and are trading at very high multiples of 50 to 70 times forward earnings. In the case of Yelp that is due partly to the fact that it isn’t expected to be profitable until 2015. As a reference, Google and Baidu are currently traded at P/E multiples of 16.7 times and 15.5 times respectively for the 2014 calendar year.
Just Dial provides users of its search service with information and user reviews of local businesses, products and service across India. In addition to its internet platform, people an also search its data bases via telephones or text messages.
Searches are free, but businesses can pay for their listings to be prioritised in search results. The number of businesses doing that amounted to 195,100 at the end of last year, up from 40,500 three years earlier. That increase has helped support a sharp rise in revenues from continuing operations to Rs2.77 billion in the fiscal year to March 2012 from Rs716 million in fiscal 2008. Net profits increased to Rs522.8 million from Rs17.1 million in the same period, which is equal to a compound annual growth rate of 135%.
The company first started offering search services under the Just Dial brand in 1996 and added the internet platform in 2007, which according to its prospectus gives it a first mover advantage among consumers seeking information on local businesses. As of the end of March this year, it had approximately 9.1 million listings in its data base.
The company said its service bridges the gap between its search engine users and businesses by helping users find relevant providers of products and services quickly, while at the same time helping businesses to market their offerings. It added that it believes its search service is particularly relevant to small and medium-sized enterprises, which currently do not have many other cost effective options to access and advertise to such a large number of potential customers.
Just Dial has been looking at going public for the past two years, but the offering has been delayed a few times, partly because of a challenging market environment that has led to muted demand for Indian stocks. And last summer, one of the company’s existing private equity investors – Sequoia Capital -- stepped in and bought the entire primary portion of the planned deal, meaning there was no longer any need for the company to do an IPO for capital-raising purposes.
However, the pre-IPO investors have been looking for a way to monetise part of their holdings and the company did do a round of pre-marketing in September and October last year. It never did launch a deal, though.
It has revisited the plan in the past few months and after holding meetings with a number of the investors it met the last time around it decided to go ahead. The current deal was roughly twice the size of what the company was aiming for eight months ago. At that time the shareholders were looking to sell approximately 9.6 million shares, which would have accounted for just 13.5% of the company.
At the current size it is the largest IPO in India since Bharti Infratel raised $763 million in December last year.