IGI Logo

Strong collections to drive revenue; reiterate our Buy rating

Margin recovery to take time as growth investments continue

* INMART delivered a strong performance in 2QFY23, with revenue up 32% YoY and 7% QoQ (in line). Collections grew a strong 18% YoY to INR2.4b, suggesting good visibility on FY23 revenue growth. Deferred revenue rose 30% YoY to INR9.8b, which should support 31% revenue growth in FY23. Strong paying subscriber additions (up 8.8k QoQ) are encouraging. EBITDA margin moderated by 70bp QoQ to 27.9% (100bp below estimates) due to higher manpower costs.

* We expect INMART to deliver 28% revenue CAGR over FY22-24 on the back of sustained paying subscriber additions and resumption of price hikes after a hiatus during the COVID-induced slowdown. With continued investments on growth, the management expects EBITDA margin to remain soft. It also indicated a 3% hit on margin in 4QFY23. The management said it will achieve 80% gross margin in FY24. We estimate an EBIDA margin of 27.9%/ 29.6% for FY23/FY24. This, in turn, should drive 9% PAT growth over the same period.

* With good performance by Busy Infotech, we see an expansion in its accounting software as a positive long-term driver to INMART’s business. We remain watchful on the performance of its other investments. While Busy Infotech remains synergistic to INMART’s customer base and can drive long-term differentiation, it needs to scale up to be a meaningful value add.

* INMART saw a significant de-rating due to margin concerns. We view it as a key beneficiary of technology adoption within India’s MSME universe as well as a shift to a formalized ecosystem. The company remains poised to drive significant value due to its industry-leading position in the segment.

* We lower our FY23/FY24 EPS by 4.4%/6.5% on account of a lower margin outlook. We value INMART on a DCF basis to arrive at our TP of INR5,060 (a potential upside of 16%), assuming 12% WACC and 6% terminal growth rate, implying 43x FY24E EPS. We reiterate our Buy rating.

In line revenue, margin weak

* Revenue grew 32% YoY and 7% QoQ to INR2.4b (in line).

* Collections remained strong at INR2.6b (up 18% YoY). Deferred revenue grew 30% YoY to INR9.8b.

* The QoQ growth in subscriber additions was decent at 8.8k paying subscribers.

* EBITDA margin moderated by 70bp QoQ to 27.9%, 100bp below our estimate.

* PAT fell 17% YoY to INR684m, slightly above our estimate on higher other income.

Highlights from the management commentary

* The company added 8.8k paid customers in 2QFY23, bringing it to ~14k paid customer additions in 1HFY23. It expects customer addition of ~9k for the next four quarters, while maintaining the churn.

* Margin in 2QFY23 remains impacted by higher manpower expenses and growth investments. It continues to see higher than normal wage inflation.

* The management continues to invest in growth. Manpower expenses are expected to increase, with a greater headcount required to serve new clients.

* It expects to hit 80% in gross margin at some time in FY24.

Strong collections to sustain; growth story intact

* Strong collections are testimony to the recovery in the demand momentum. We anticipate the momentum in collections to remain intact in the near term.

* We are confident of strong fundamental growth in operations, propelled by: a) higher growth in Digitization among SMEs (~25%), b) the need for out-of-thecircle buyers, c) a strong network effect, d) over 70% market share in the underlying industry, e) the ability to improve ARPU on low price sensitivity, and f) higher operating leverage.

* We have arrived at our DCF-based TP of INR5,060, assuming a 12% WACC and a terminal growth rate of 6%. Our TP implies a 16% potential upside from current levels. We reiterate our Buy rating.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer