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Revenue growth to accelerate; margin seems to have bottomed

IndiaMART reported strong collections growth of 28% YoY on a TTM basis in its core business between 2QFY22-1QFY23. However, revenue growth was relatively modest during this period at 13% YoY due to weak collections during Covid (as translation of collections to revenues happens with a lag of 4-5 quarters). Hereon, the company’s core business revenue growth is likely to accelerate (JMFe of 20% CAGR over FY22-25E) driven by strong TTM collections as well as continuation of these trends (as indicated by management guidance of 8k-9k paid supplier additions per quarter that is well ahead of pre-Covid levels). IndiaMART’s core business margins had plunged severely to 28.4% in 4QFY22 from the highs of 49-50% during Covid affected quarters, due to sharp rise in investments in sales and product teams. Further deterioration in the near term is unlikely as robust top-line should ensure that EBITDA margin stabilizes between 28-30%. Later, we expect the company to report robust margin expansion over FY23-25E due to strong operating leverage. We continue to like IndiaMART as it offers high earnings visibility, has strong market leadership in a digitally underpenetrated B2B market, benefits from strong network effects and has a robust balance sheet.

? Strong collections to ensure robust top-line growth: IndiaMART’s aggressive focus on paid supplier additions and normalisation of the churn rates is likely to ensure robust cash collections for the company in the near term. Realisations however are likely to remain sub-dued as a majority of new paid additions would happen at lower ARPU plans (Silver Monthly/Annual). We also expect sequential improvement in margins here-on aided by strong topline growth of 5-6% QoQ. Overall, we forecast strong organic revenue CAGR of 20% over FY22-25E and expect EBITDA margin to recover to 33% by FY25E.

? Rich valuations likely to sustain: We believe recent growth trends for IndiaMART demonstarte its ability to withstand growing competition from horizontal classifieds platforms as well as transactions-focused vertical players. This is because the company benefits from strong network effects and has a well-diversified supplier base across industries, both of which are very difficult to replicate. The Company also remains assetlight, operates on negative working capital and is expected to re-demonstrate strong operational leverage once impact of recent strategy changes subsides. Lastly, we note that between FY16-20 (a period which saw SME’s whethering multiple challenges such as demonitisation, GST implementation and NBFC credit crisis), the company had reported a Collections/Revenue CAGR of 25%/27%, respectively, indicating that the company’s business is highly resilient to macro challenges (barring the pandemic). We therefore expect the stock to continue to trade at rich valuation (current 1-Yr fwd PER of 49x).

? Re-iterate BUY, raise TP to INR 4,920: We believe IndiaMART remains well-poised to report strong Consol. Revenue/EBITDA/EPS CAGR of 18%/26%/33% over FY23-25E due to robust collections trends and operating leverage in its core business. We re-iterate our ‘BUY’ rating and roll-forward our DCF (FCFF CAGR of 13.3% over the next 15 years, 5% terminal growth rate and 12% WACC) to set a Sep’23 TP of INR 4,920 (vs. INR 4,800 earlier). Our TP implies Sep’23 PER of 42x.

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