Buy IndiaMART Ltd For Target Rs.2,600 by Motilal Oswal Financial Services Ltd
Waiting for an upturn
Churn in silver accounts continues to haunt; reiterate BUY
* IndiaMART (INMART) reported 3QFY25 revenue growth of 16% YoY/1.9% QoQ, in line with our estimate of 17.6% YoY growth. Collection growth was 10% YoY at INR3.6b. Deferred revenue rose 17% YoY to INR14.9b. EBITDA margin expanded ~30bp QoQ to 39%, above our estimates of 29.9%, on the back of lower outsourced sales costs and other expenses. Adj. PAT was INR1,210m, up 10% QoQ/48.5% YoY, beating our estimate of INR900m. For 9MFY25, revenue/EBITDA/PAT grew 17.1%/61.9%/57.1% compared to 9MFY24. We expect revenue/EBITDA to grow 11.6%/38.7% and PAT to decline 5.0% YoY in 4QFY25. We reiterate our BUY rating on the stock, citing undemanding valuations, but reduce our TP to INR2,600 due to ongoing churn in silver accounts and a slow recovery in cash collections.
Our view: Cash collection still slow; churn rate an overhang
* Minimal churn in gold and platinum accounts; concerns in silver bucket: Despite a 14% YoY increase in ARPU, churn in Gold and Platinum accounts remained minimal. However, the Silver segment continues to face higherthan-expected churn rates, a key monitorable for the company.
* Supplier adjustments and churn reduction efforts: Paying subscribers declined 3.7k QoQ, largely due to a deliberate slowdown in gross supplier additions. The company is prioritizing the onboarding of high-quality suppliers over volume growth, which we view as a sensible move - however we remain in a wait-and-watch mode for a quarter or two - to address churn issues effectively.
* Its efforts include reducing the unique inquiries ratio to 4 from 5.5, aligning inquiries more closely with geographical preferences, and improving the quality of RFPs and matchmaking processes between buyers and suppliers. In our view, these initiatives reflect a strategic shift toward sustainable growth and better customer retention, which could pay dividends in the long run.
* Collection growth improves: Collections grew 10% YoY to INR3.6b, reflecting improved execution compared to previous quarters. However, flat customer additions have limited the growth rate. Management anticipates clearer trends to emerge over the next 2-3 quarters, with near-term growth expected to hover at around 10% or lower. While this could well be the bottom, we believe collections will steadily improve as INMART’s strategic initiatives take effect.
* Margins: While margin expansion was driven by cost optimization, management expects a gradual normalization as customer acquisition costs rise with growth. The margin expansion will normalize to the operating leverage inherent in the business. Hence, we expect margin to contract in the medium term.
Valuation and changes in estimates
* We continue to view INMART as a key beneficiary of technology adoption by India’s MSME universe and the shift to a formalized ecosystem. We have updated our FY25 estimates by ~6%, primarily driven by intentional reductions in marketing expenses, which resulted in higher margins. We expect INMART to deliver a 15% revenue CAGR over FY24-27. We estimate EBITDA margin of 37.2%/33.8%/32.8% for FY25/FY26/FY27. This, in turn, should drive a 19% PAT CAGR over FY24-27.
* Currently, INMART is trading at an undemanding valuation, in our view, as the valuations reflect uncertainties surrounding the churn rate, collection, and subscriber growth. We value INMART on a DCF basis to arrive at our TP of INR2,600, assuming 11.5% WACC and 6% terminal growth. Reiterate BUY.
Revenue in-line and margins beat; paying subscribers down 2% QoQ/flat YoY
* INMART reported 3QFY25 revenue of INR3.5b, reflecting a 16.0% YoY growth, in-line with our estimate of 17.6%.
* Collections stood at INR3.6b (+10% YoY). Deferred revenue rose 17% YoY to INR14.9b.
* Paying subscribers declined 3.7k QoQ. ARPU grew 14% YoY to INR63k.
* EBITDA margin stood at 39%, up 30bp QoQ and above our estimate of 29.9%, attributed to lower outsourced sales costs and other expenses.
* Adj. PAT was at INR1,210m, down 10% QoQ/up 48.5% YoY, beating our estimate of INR900m due to higher other income and lower depreciation.
* Traffic grew 2% YoY at 276m. Total suppliers on the platform stood at 8m, up 5% YoY.
* Total cash and investments stood at INR26.1b.
Highlights from the management commentary
* Collections grew 10% YoY to INR 3.6b. Despite this growth, the flat trend in customer additions is limiting the overall collections growth. The collections growth is not reflective of poor execution as seen in the previous quarter. The company expects clearer trends to emerge over the next 2-3 quarters and believes a growth rate of 10% or below is sustainable in the long term.
* Churn rates in the Silver bucket remain largely consistent, though price hikes have had an impact on churn. If performance does not improve within the next 2-3 quarters, the company will reassess its pricing strategy. Despite these challenges, gross additions have not slowed down, and the company is intentionally avoiding over-investment in market expansion.
* Gold and Platinum subscribers demonstrate lower churn rates. Their success stories generate word-of-mouth referrals, contributing to a systematic increase in ARPU.
* Less than 20% of total inquiries are directed to free suppliers. Individual BuyLeads and RFQ options are available for purchase on the platform.
* The company is prioritizing the onboarding of quality suppliers, leading to a QoQ decline in supplier numbers. Efforts are focused on improving matchmaking relevancy.
Valuation and view
* We are confident of strong fundamental growth in operations, propelled by: 1) higher growth in digitization among SMEs, 2) the need for out-of-the-circle buyers, 3) a strong network effect, 4) over 70% market share in the underlying industry, 5) the ability to improve ARPU on low price sensitivity, and 6) higher operating leverage..
* We value INMART on a DCF basis to arrive at our TP of INR2,600, assuming 11.5% WACC and 6% terminal growth. Our TP implies a 13% potential upside. We reiterate our BUY rating on the stock.
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