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Sector tailwinds to aid robust recovery

We reinitiate coverage on IndiaMART InterMESH (IndiaMART) with a BUY rating and target price of Rs6,000 (~38% upside). We believe the company is likely to deliver strong revenue growth of ~34% YoY in FY23E despite declining margins as it hires personnel aggressively to capture growth in the discovery and classifieds space over FY23E-FY25E (revenue CAGR of ~64.6%). We believe the margins reported in FY22 were one-off and we are not overly concerned about a likely decline in FY23E. We expect margins to improve in FY24E/FY25E as increased collections arising from investments into the workforce start to reflect in revenue. We estimate EBITDA margin to improve by ~350bps over FY23E-FY25E. Stock has already corrected ~50% over the last year and, at current valuations of ~37x 1-year forward EV/EBITDA, we think it is a compelling BUY, given likely growth prospects.

* Key beneficiary of strong growth in B2B e-commerce space. We have created a proprietary model to assess the total addressable market (TAM) size and revenue opportunity for the B2B e-commerce segment in India. The total TAM for the B2B ecommerce segment as of FY23E is ~US$25bn by our estimates and this is likely to grow very rapidly led by increasing digital penetration. We estimate digital penetration in India B2B e-commerce at ~1.2% by the end of FY23E compared to 13% (2019) in the US (link). We estimate B2B e-commerce CAGR at ~55.8% over FY23-FY25E. In our view, IndiaMART is likely to be a key beneficiary of this growth. (Link to our detail report)

* All growth drivers in place for the medium term. We think revenue growth in IndiaMART will be driven by: 1) growth in paying subscribers for the core business, 2) increasing revenue contribution from Platinum customers, and 3) strong growth in new business segments. We estimate a revenue CAGR of ~32% over FY22-FY25E. We are higher than consensus revenue estimates by 4%/14%/21% over FY23E/FY24E/FY25E. We expect EBITDA margin decline in FY23E to accommodate front-loaded investments into manpower and outsourcing. For FY24E, we estimate EBITDA margin expansion led by employee efficiency improvement – and in FY25E we expect efficiencies of scale to start playing out. We are 10%/20%/26% higher than consensus EBITDA estimates over FY23E/FY24E/FY25E.

* Reasonable valuations; favourable risk-reward skew. IndiaMART is currently trading at ~37x 1-year forward EV/EBITDA correcting ~55% in the past year. We believe the company is likely to deliver strong revenue growth of ~34% YoY in FY23E despite declining margins as it hires personnel aggressively to capture growth in the discovery and classifieds space over FY23E-FY25E (revenue CAGR of ~64.6%). We value the stock at ~34x FY24E EV/EBITDA. We believe the stock at current valuations has a favourable risk-reward ratio of 3.1:1 (heavily skewed to the upside).

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