IndiaMART InterMESH Research Report By HDFC Securities

IndiaMART InterMESH Ltd

B2B leadership

IndiaMART InterMESH (IndiaMART) has emerged as a winner in the B2B classified space with a 60% market share and 27% revenue CAGR over FY16-20. The quality of the franchise is established by (1) 100% organic traffic, (2) buyers and business enquiries’ 5-year CAGR of +33/40%, (3) lowest advertisement spend among peers, (4) pricing power, (5) higher ROI for sellers (~2x), (6) and embedded non-linearity. IndiaMART is well placed to ride the digitisation wave in MSMEs (accelerated by the pandemic), enabled by strong network effect, robust technology platform, and excellent execution capabilities. There lies a multi-year growth opportunity as only ~1% of the addressable MSMEs pay for listing services vs. ~4% in China (1688.com Alibaba B2B).

We expect a revenue/EPS CAGR of +22/15% over FY21-23E, following a strong operating performance in FY21E (profit doubled). We initiate coverage on IndiaMART with a BUY rating and target price of INR 9,400, based on 58x EV/EBITDA (DCF implied) at 1.4x the average multiple, supported by top quartile growth/margin performance, high-quality franchise, asset-light business model, negative working capital, robust cash generation (154% OCF/EBITDA) and RoE of 58% (FY21E adjusted for QIP).

 Growth in paying suppliers is the key: IndiaMART has 6.4mn registered sellers and only 0.148mn pay for listing on the platform, resulting in a conversion factor of 2.3% (1688.com is at 9.2%). Assuming a similar conversion, there is a ~4x growth opportunity in paid suppliers. Digitisation push, network effect, and higher ROI for a seller is expected to drive the conversion factor. We expect paying suppliers’ CAGR of 16% over FY21-23E with conversion factor of 2.7%. The sensitivity of conversion factor to EPS is high; 1% improvement in conversion factor results in a 30% increase in EPS.

 Value proposition for a seller is attractive: IndiaMART’s robust two-way discovery platform benefits both the buyer and seller, building a strong network effect. The value proposition for a buyer is diversified product listings (71mn products across 56 industries) and a seller benefits from higher business enquiries, resulting in higher ROI (lower cost per enquiry). The shift to a higher package and lower churn drive ARPU growth (expect CAGR of 5.5%). As per our estimate, the ROI for a silver/platinum seller is 0.8/2.4x, assuming an RFQ conversion ratio of 8%.

 Stellar operating leverage: IndiaMART has exhibited consistent revenue growth without an increase in cost and advertisement expenses. Higher component of variable cost (~83% of the employees are sales), increasing sales efficiency and organic traffic have kept the cost under check. The margin expanded from 11.4% in FY18 to 26.4% in FY20 and doubled in FY21E to 48.5%. We expect an EBITDA margin of ~45% for FY22/23E, assuming +25% cost CAGR for FY21-23E.