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Confidence booster for FY23

IoY) in the standalone business in 1QFY23 driven by a robust sequential increase of ~10k paid suppliers (ahead of management guidance of 8-9k additions). On a TTM basis, the collections growth stood at 28% YoY, indicating the company is well poised to deliver very strong revenue growth in the nearmedium term (JMFe CAGR of +21% over FY22-24E). However, as indicated by the management, growth continues to be driven by significant ramp-up in sales efforts (own as well as channel partners). The Company also ramped-up its product team during the quarter (+49% QoQ). As a result, EBITDA margin in 1QFY23 compressed 20.2ppts YoY to 28.6% (50bps below JMFe). Management expects both revenue and employee costs (including outsourced costs) to grow 5-6% on a QoQ basis in the near term, with margins staying in the 28-30% range in FY23 (vs. 40.9% in FY22). Strong operating leverage is likely to kick-in thereafter leading to very strong operating profit growth (JMFe of 25% CAGR over FY23- 25E). Treasury income is likely to remain depressed in the near term due to rising yields

* Strong paid subscriptions growth drives collections: Paid subscription in 1QFY23 grew ~10k QoQ (beat of JMFe of ~9k additions) aided by increased sales efforts and stabilisation of churn (close to pre-Covid levels). This led to robust cash collections of INR 2.41bn (+42% YoY) in the standalone business. Company continued to guide for 8k-9k paid supplier additions per quarter in the near term, albeit with lower realisations, as a majority of new additions typically happen at lower ARPU tiers (Silver Monthly/Annual). However, flattening of most buyer metrics (traffic, active buyers and unique business enquiries) over the last few quarters remains a worry. Company indicated that it was due to waning of Covid-related searches and would likely improve over next 2-3 quarters.

* Near term margin guidance of 28-30%: In 1QFY23, EBITDA margin contracted 20.2ppts YoY to 28.6% due to elavated sales and product investments. Management indicated that such investments would continue to grow in proportion to revenue growth (5-6% QoQ) in the near term, which would lead to margins staying in the 28-30% range

* Busy Infotech consolidated: It contributed 4.7% to the consol. top-line in 1Q with margins higher than historical levels due to lack of investments. Near term focus is to retain existing customers, partners and revenues. Over long term, focus would be on 1) doubling the annualised top-line growth from 10% histroically to 20%, 2) significantly increase number of licenses sold and 3) invest to expand market reach.

* Maintain ‘BUY’, TP of INR 4,800: We cut our FY23E EPS by 13% mainly due to lower treasury income and FY24/25E EPS by 1-3% to factor in higher D&A (due to acquisitions). While near-term ramp-up in employee costs (80%+ of total costs) will continue to affect near term earnings, we expect the company to report strong EPS CAGR of ~33% over FY23-25E. We roll-forward our DCF (FCFF CAGR of 12.8% over the next 15 years, 5% terminal growth rate and 12% WACC) to set-up a Jun’23 TP of INR 4,800 (vs. INR 4,700 earlier). Our TP implies FY24E PER of 47x.

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