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According to our proprietary model, B2B e-commerce total addressable market (TAM) is poised for a CAGR of ~55.8% over FY23E-FY25E. However, IndiaMART and Just Dial, the two listed stocks in the space, have corrected by ~55% and ~40% over the past one year. On the other hand, strategic investors and private financial investors have turned bullish on the space. In our view, this divergence is unlikely to last much longer. We expect both IndiaMart and JustDial to outperform the broader markets over the next year given their large exposure to the fast growing B2B e-commerce space.

What will drive growth in the segment?

We have built a proprietary bottom-up model to predict growth of the eB2B space across different sub-segments. We estimate penetration led growth in the segment as digital penetration of B2B space is expected to increase to 2.3% in FY25E from 1.2% in FY23E. The resultant marketplace revenue opportunity is likely to increase to US$16.5bn from US$6.8bn during the same period at a CAGR of 55.4% (base case). Our revenue opportunity assumption in downside case is 27.6% CAGR and that in upside case is 82.1%. Our underlying GDP assumption for FY23-FY25E is: i) average growth 6% YoY (base case), ii) 2% YoY (downside case), and iii) 9% YoY (upside case). For more details, please refer model methodology {Page 9}.

Why now?

The MSME space, which is one of the key focus areas of the India government in terms of employment generation over the next decade, had been hit hard by the pandemic. The overall contribution from the informal segment (a large proportion of the MSME space) has declined as its proportion of GVA fell to ~11% from ~13% over the past 2 years. As the MSME space recovers, we observe a sharp increase in the adoption of online channels [Refer chart 5].

Stock implications

Large exposure

We reinitiate coverage on IndiaMART with a BUY rating and target price of Rs6,000 (~38% upside)???????

We believe IndiaMART is likely to deliver strong revenue growth trajectory in FY23E (~34% YoY) despite declining margins as the company hires aggressively to capture growth in the discovery and classifieds space over FY23E-FY25E (Industry CAGR of ~64.6%). We believe the margins reported in FY22 were one-off and we are not overtly concerned with likely decline in FY23E. We expect margins to improve in FY24E/FY25E as the increased collections arising from investments in the workforce start to reflect in revenue. We estimate ~350bps EBITDA margin improvement from FY23E to FY25E. The stock has already corrected ~55% over the last year and, at current valuations of ~37x 1-year forward EV/EBITDA, we think it is a compelling BUY, given relatively attractive growth prospects. We value the stock at ~34x FY24E EV/EBITDA. We believe the stock at current valuations has a favourable risk-reward ratio of 3.1:1 (heavily skewed to the upside).

Reinitiate on Just Dial with BUY and target price of Rs750 (~32%upside)

Just Dial now has ~26% revenue exposure to the B2B e-commerce segment. We think this is likely to be the primary growth driver for the company and estimated to increase to ~36% of overall revenue by FY25E aided by growth in the segment. The stock has corrected ~40% in the last year due to concerns regarding growth prospects and fears that the parent may delist the entity. However, we think these concerns are overpriced into the stock and current valuations at ~3.8x 1-year forward EV/EBITDA provide a good opportunity to BUY. Given the compelling risk-reward skew (4.7:1), we reinitiate coverage on Just Dial with a BUY rating and a target price of Rs750. We value the stock at ~7x FY24E EV/EBITDA.

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