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Strong collections; operations in line

Long-term outlook intact; maintain Buy

* IndiaMART delivered in line revenue performance in 4QFY21. While paid suppliers remain modest (at 4k v/s their target of ~5k), collections jumped 53% QoQ (partially led by seasonality) and 34% YoY.

* Margin remained resilient, with EBIT margin at 45.6% (v/s our estimate of 44%). Expected sequential moderation in margin was cushioned by yet another quarter of headcount rationalization. Channel sales partners are acting as a partial substitute for those involved in acquiring new accounts.

* The management’s long-term guidance of adding 25-30k paid suppliers in a year remains intact. We expect some moderation in net additions for FY22, given pressures from a partial lockdown in India. That said, while paid supplier additions should remain modest (4-5k per quarter), revenue growth will remain strong, supported by strong collections during the quarter.

* While we concur that margin at current levels are not sustainable, IndiaMART should see a structural shift in operations from pre-COVID levels. Half of the savings, led by cost optimization, would continue to flow through on: 1] permanent optimization in G&A, 2] sales through channel partners are making cost variable (and would lead to a reduction in total employees), 3] higher productivity benefits, and 4] reduction in travel expenses by shifting some of the meetings to video conferencing. Revenue/EBIT/adjusted PAT grew 4.9%/112%/134% in FY21.

* We reduce our FY22E/FY23E EPS estimate by 6% to factor in some impact from the partial lockdown on paid suppliers. We rationalize our margin as we bake in higher cost pressures than that anticipated earlier on employee expenses. While we expect some moderation in the near term, our long term view remains intact.

* We value IndiaMART on a DCF basis at INR9,320 (+18% upside), assuming 11% WACC and 5% terminal growth rate, implying 70x FY23E EPS. Reiterate Buy.

Revenue in-line, Beat on margins

* Revenue was up 5.6% YoY and 3.5% QoQ to INR1.8b (in line).

* Total collections surged 53% QoQ and 35% YoY to INR2.7b.

* While EBIT margin declined 280bp sequentially to 45.6%, it came in above our estimate of 44%.

* Since all of the traffic on the platform was organic in nature, the company has not incurred any advertisement expenses.

* Adjusted PAT, at INR666m (up 50% YoY), came in lower than our estimate due to lesser other income. During 4QFY21, reported PAT was impacted by INR 109m due to de-recognition of deferred tax assets on goodwill.

* IndiaMART posted a 43% YoY growth in traffic to 257m in 4QFY21.

* The total number of suppliers on the platform rose 9% YoY to 6.5m.

* The total number of paid suppliers stood at 152k (in line with our estimate), an increase of 3% YoY and 5% QoQ. ARPU rose 4.5% YoY to INR47k (in line).

* Deferred revenue was up 6% YoY and 15% QoQ to INR7260m.

* Total cash and investments stood at INR23.6b v/s INR11.4b QoQ. The increase in cash was on completion of a QIP amounting to INR10.7b.

* OCF was up 76% YoY to INR1650m, implying an OCF/PAT ratio of 296%. OCF was up 24% YoY to INR3230m in FY21.

* The company recently acquired 11%/25%/26% equity in Legistify Services Pvt/TruckHall Pvt/Shipway Technologies Pvt (in the business of running SaaS solutions).  It declared a dividend of INR15/share.

Highlights from the management commentary

* In CY21, IndiaMART raised INR10.7b through a QIP. The management plans to invest the proceeds in an array of smaller and fewer larger acquisitions over the next 2-3 years. It will acquire both minority and majority stakes in companies depending on the prospect in which it is investing.

* IndiaMART has become stringent with suppliers, with GST number, e-mail, and a mobile number mandatory to list on the platform. This will help in improving the quality of suppliers on the platform, reduce supplier attrition, and increase APRU.

* The management has refrained from hiring on two counts: 1] use of channel sales partners, and 2] Increase in productivity of existing employees due to work from home. Channel sales partners will be used majorly for client acquisition, while mining/servicing will be led by its own sales employees.

Valuation and view

* Apart from collections and revenue growth, IndiaMART has shown higher resilience on the margin front. While we concur that margin at current levels are not sustainable, it would see positive benefits from cost optimization and operating leverage in the long term.

* We remain confident of strong fundamental growth in operations, led 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 increase ARPU on low price sensitivity, and f) high operating leverage.

* We arrived at our DCF-based target price of INR9,320 per share, assuming 11% WACC and 5% terminal growth rate. Our TP implies an upside of 18%. Reiterate Buy

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