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Strong cash collections the only positive

IndiaMART reported strong cash collections growth of 27.5% YoY (+7.2% QoQ) in 3QFY23 to INR 2.83bn (~2% beat on JMFe) notwithstanding disappointment on paid-supplier additions (+6.3k QoQ vs. management guidance of 8k-9k and JMFe of +7.6k). Further, despite strong revenue growth of 33.7% YoY (in line with JMFe), the much-awaited operating leverage remained elusive as the company continued to make growth investments. EBITDA margin was flat QoQ and down 13.9ppts YoY to 28.0%, a miss on JMFe by c.40bps. While on the one hand the results are a testament to the company’s ability to up-sell to its existing supplier base, on the other hand they also indicate how steep a task it is to expand the paid-supplier base despite making supportive investments. Recent traffic growth and business enquiries delivered trends have also not been very encouraging. Nevertheless, in the near to medium term, we expect IndiaMART to continue to report strong revenue growth (+5-6% QoQ) on the back of very strong cash collections in the last 6 quarters. As the management is likely to maintain its paid-supplier additions guidance, we lower our EBITDA margin estimates by 10-110bps over FY23-25E.

* Strong collections despite a steep base and weak subscriptions: Paid subscriptions in 3QFY23 grew only 6.3k, significantly below the management guidance of 8k-9k additions per quarter. While we acknowledge that festivities do impact new additions, the fact that the management had only recently exuded confidence of maintaining its guidance runrate likely indicates the challenges in expanding the user base. We also note that due to strong cash collections trends in the previous 6 quarters the base for the company’s collections was quite steep. Despite these challenges, the organic business cash collections grew to INR 2.73bn (+8%/+24% QoQ/YoY). We believe growth was primarily driven by strong up-sell within the existing paid-supplier base. Going ahead, while we marginally trim our supplier additions expectations, we slightly raise our realisation forecasts. Overall, we expect IndiaMART to report 20% revenue CAGR over FY23-25E on the back of strong built of deferred revenue to INR 10.15bn (+28.5% YoY).

* Investments and seasonality to impact 4QFY23: In 3QFY23, Consol. EBITDA margin was flat QoQ (down 13.9 ppts YoY) at 28.0% despite c.5% QoQ (+34% YoY) revenue growth as the company continued to make sales and product investments to drive growth. As the much-awaited benefits of operating leverage continue to be elusive, we trim our EBITDA margin estimates by 10-110bps over FY23-25. We also note that 4QFY23 margins are likely to contract both on a QoQ as well as YoY basis due to the impact of investments as well as seasonality.

* Maintain ‘BUY’, TP unchanged at INR 4,940: While ramp-up in employee costs (~80% of total operating costs) will continue to affect near-term earnings, we expect the company to report strong EBITDA CAGR of ~28% over FY23-25E assuming these investments slow down. We continue to value the IndiaMART stock on DCF (FCFF CAGR of 14.1% over the next 15 years, 5% terminal growth rate and 12% WACC) to arrive at a Dec’23 TP of INR 4,940.

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