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Collections remain robust; expect strong growth to continue

Investments to keep near term margin rangebound

* INMART delivered a strong performance in 1QFY23, with revenue up 24% YoY and 12% QoQ (in line). Collections grew a strong 49% YoY to INR2.5b, suggesting good visibility on FY23E revenue growth. Deferred revenue rose 32% YoY to INR9.6b, which should support 25% revenue growth in FY23E. Strong paying subscriber additions (up 10k QoQ) are encouraging. EBITDA margin was largely flat QoQ at 28.6% (est. 26.3%) due to lower than expected manpower expenses.

* We expect INMART to deliver 23% revenue CAGR over FY22-24 on the back of sustained paying subscriber additions and resumption of price hikes after a hiatus during the COVID-19 induced slowdown. With continued investments on growth, the management expects EBITDA margin to be in the 28-30% range in FY23. Our estimates indicate a gradual pickup in EBITDA margin as investments fall over FY24, and build in 31% margin in FY23. This, in turn, should drive 11% PAT growth over the same period.

* With a good start to the integration of Busy Infotech (a revenue of INR105m in 1QFY23), we continue to see expansion in its accounting software as a positive long-term driver for 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 continue to view it as a key beneficiary of technology adoption within India’s MSME universe as well as of a shift to a formalized ecosystem. We believe that the company remains poised to drive significant value due to its industryleading position in the segment.

* We lower our FY23/FY24 EPS by 12.5%/2% on account of lower other income due to mark-to-market losses on investments in 1QFY23. We value INMART on a DCF basis to arrive at our TP of INR5,000 (a potential upside of 23%), assuming 12% WACC and 6% terminal growth rate, implying 42x FY24E EPS. We reiterate our Buy rating

Strong operational performance, PAT miss on investment loss

* Revenue grew 24% YoY and 12% QoQ to INR2.2b (in line). Excluding inorganic gains from Busy Infotech (INR105m), revenue grew 18% YoY.

* The company posted another quarter of strong collections (up 49% YoY to INR2.5b). Deferred revenue rose 32% YoY to INR9.6b.

* It maintained its robust additions in paying subscribers (up 10k QoQ). ARPU was largely flat v/s 4QFY22 levels.

* EBITDA margin was largely flat QoQ at 28.6%, above our estimate of 26.3%, due to lower than expected manpower expenses.

* PAT fell 47% YoY to INR476m, a 25% miss to our estimate, due to MTM losses on investments as against gains in the preceding quarters.

Highlights from the management commentary

* Collections grew 49% YoY and deferred revenue rose 32% to INR9.6b in 1QFY23.

* Priority for Busy Infotech in FY23 is to: a) double the growth rate, b) create a new customer base, and c) build a strong team to support growth.

* The management continues to invest in growth. Manpower expenses are expected to increase in line with growth over the next few quarters, keeping margin in the 28-30% range.

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 INR5,000, assuming 12% WACC and a terminal growth rate of 6%. Our TP implies a 23% potential upside from current levels. We reiterate our Buy rating.

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