The recent fall again showed that
Buy back of shares won't change Co's fundamentals
CMP: 824
Sell either below 820 or on rise around 890-910
TGT: 788-755-735*-690
TSL> 850/925
Note: Sustaining below 820, one may sell JD with TSL>850 for lower targets as above. If it does not sustain below 820, it may also rebound towards 845-870-890-910 zone and in that alternative scenario, one can even take the opportunity of rally to sell at higher range of around 890-910 with a TSL>925.
Sustain above 925 for any reason, JD may scale 972-1000 zone which is again a strong supply zone for the stock and in that scenario, one can cover the shorts for an appropriate strategy near 1000 zone.
JD scrip corrected significantly by more than 50% in the last one year and over 40% from early July this year.
In July, the scrip topped around 1290 on the story of company's plan of entry into e-commerce space (JD-Cash and JD-Omni; a cloud based plug& play solutions) beside its existing business model of online directory. The company was very confident about its "Search Plus-SP" as 90% of India's small local business or SMES has no website of its own. JD has around 15 mln SMES on its search platform which is around 35% of India's total SME business and is highest among its peers.
The JD management was also very optimistic to compete with "Yellow Pages" and "destroy" its business model in the process. The company has also indicated that they are planning to sell its various subsidiaries by FY-17 (de-leveraging).
JD also announced small buy back of shares recently (around 1.5% of its FFS at price up to 1550/- per equity share with record date was at 04/12/2015). But, the scrip already rallied by around 35% from its recent low in mid November as the buy back news was already there, since Aug.
Market buzz was that JD will go for inorganic expansion/diversification in the highly competitive e-commerce space in India (likes of Flikpart, Snapdeal etc), but it appears that it abandoned/delayed that plan and are now returning excess cash in BS to shareholders by way of share buy back.
But off late, analysts are increasingly skeptical about its business/revenue model. Recently GS downgraded JD for TP 750/- as it feels that JD's SP business model is not sustainable in the near term due to rising competition and company's inadequate investment. GS expects 19% revenue de-growth for the core operation of JD (search revenue) over FY-15-18 and along with it, rising operating expenses may cause downward bias for projected EPS in the coming quarters.
Analysts at GS believe that JD's core search business has long term value due to its brand recall, market leadership and innovation but not immune to disruption. Going forward, successful execution of SP platform will be key for JD and for that, substantial investment by the company is required incrementally.
Over the last few months, analysts are also somehow very skeptical over the entire "online/internet" listed space in India. Even Info-Edge scrip is on pressure for various reasons like lackluster results, increased competition, general economic & real estate slow down (classified advertisements affected in 99acres.com & naukri.com).
Q2FY16 result of JD was very tepid and search revenue (paid listings) just grew by 0.8% sequentially (far lower than street estimates).
Though Q2 PAT was around Rs.46.30 cr against consensus of Rs.41 cr, it was aided by other income of around Rs.26.26 cr (YOY-8.51; QOQ-7.12).
Q2 EBITDA was also down by around 6.7% on YOY basis.
The company has also entered into agreement with KIADB for setting up an IT Park in Bangalore.
Looking forward, although the SP platform may be a place under one roof, where paid subscribers has search facilities for nearly everything in our day-to-day transactions, but in the age of free world of search engines (Googles and all) and individual e-commerce verticals, the business/revenue model seems to be very difficult, unless JD can execute something different of its own (who will book a "Ola" by going into SP or search for anything local by paying for it ??).
Although JD may become a full e-commerce player in the coming days, it may be a M&A target also because of its brand image, local search data etc, but for that reasonable EV/EBITDA or EV/Sales (valuation) is also required; i.e. it will have to be more cheaper and properly valued wrt to its business potential.
To be cont for more news inputs & analytics----
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