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Near-term headwinds; reasonably valued

According to the management, Matrimony’s Q2FY23 performance (especially matchmaking services) was impacted by heavy seasonality due to presence of inauspicious days across the country. Revenue and billings within the matchmaking services segment (~98% of overall revenues) declined by 1.5% and 7%, QoQ (up 3%/0.4% YoY). Marriage services (~2% of overall revenue) grew 31% QoQ, 203% YoY. EBITDA margin stood at 16.1%, a decline of 90bps QoQ and 780bps YoY. Ex-marketing expense EBITDA margin continued to be stable at 56%. Paid subscriptions (240k) was also down on a QoQ basis though reported a growth of 8% YoY. The average transaction value (ATV) continued to decline 3% QoQ; 7% YoY based on changing customer mix.

Based on the billings in Q2FY23, management expects subdued revenue growth in Q3FY23. Therefore, management guided for a sequential decline in EBITDA and PAT in Q3FY23. However, management is confident of a recovery in Q4FY23 (revenue growth >10%). Management ruled out cutting ad spends to improve profitability in the near term citing competitive intensity and long term brand health.

We think Matrimony is well placed to capture penetration-led growth in the matchmaking classifieds space in the medium term. Its foray into marriage services space is also a step in the right direction, in our view, However, we believe the stock is likely to remain range bound in the near term until more clarity emerges on the potential revenue recovery in Q4FY23.

We build in revenue growth of 8.6%/16.8% and EBITDA margin of 16.4%/22.2% for FY23E/24E, respectively. Our revenue and PAT estimates are lower by 4%/12% in FY23E, while PAT is above consensus by 14% in FY24E. We re-initiate coverage on the stock with HOLD rating and value the company at ~17x PE multiple on FY24E EPS.

Key risks for the company include: i) Weaker-than-expected conversion of active profiles into paid subscriptions, ii) adverse market consolidation, iii) slower than expected scale up in marriage services, and iv) increase in competitive intensity driving lower pricing.

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