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Robust collections provide strong revenue visibility

Remain watchful of higher churn; reiterate BUY

* IndiaMART (INMART) delivered a strong 2QFY24 performance, with revenue growth of 22.5% YoY/4.5% QoQ (in line). Collections jumped 28% YoY to INR3.3b, suggesting healthy visibility of revenue growth in FY24. Deferred revenue rose 26% YoY to INR12.4b, which should support ~23% YoY revenue growth in FY24E, despite a high base of FY23. EBITDA margin declined 30bp QoQ (70bp miss), driven by higher-than-expected employee costs.

* Customer addition was at a multi-quarter low of 2k (vs. normal range of 6- 8k) on account of lower gross adds due to price hikes and higher-thanexpected churn. The management remained cautious about higher churn and refrained from providing guidance on net additions in the near term, and suggested that it will take some time for churn to normalize. However, despite muted expectations for subscriber additions, they remain confident of maintaining collection growth at 22-23%.

* As its sales investments are over, INMART should see a healthy margin recovery going ahead. The management remains confident of maintaining quarterly standalone margin at 28-30%. We believe INMART should continue to benefit from ARPU improvements and operating leverage over FY23-25E. We estimate EBITDA margin of 27.3%/29.6% in FY24/FY25, and a PAT CAGR of 33% (excluding one-time gain) over FY23-25.

* BUSY continued to deliver a strong performance. Given the company's investments in manpower, marketing, and distribution, there is a healthy growth visibility for BUSY going forward. As a result, we believe that the expansion of BUSY's reach will serve as a key long-term driver for INMART’s business. However, the performance of its other investments remains a key monitorable. Although BUSY has synergies with INMART’s customer base and has the potential to provide long-term differentiation, it must scale up its operations to become a truly meaningful value addition.

* Though we remain watchful of higher churn, we expect INMART to deliver a 23% revenue CAGR over FY23-25 as visibility remains strong on account of robust collections and deferred revenue.

* We lower our FY24E/FY25E earnings by ~3.5% to account for lower subscriber additions and margin miss. We value INMART on a DCF basis to arrive at a TP of INR3,250, assuming 12.5% WACC and a 6.5% terminal growth rate. We reiterate our BUY rating on the stock.

In-line performance; muted subscriber addition

* INMART’s 2QFY24 revenue grew 22% YoY, EBITDA rose 19% YoY and Adj. PAT was up 1% YoY.

* Collections remained strong at INR3.3b (+28% YoY). Deferred revenue rose 26% YoY to Rs.12.4b

* Subscriber addition was weak at +2k paying subscribers QoQ vs. normal range of 6-8k. ARPU jumped 10% YoY to INR 53.5k.

* EBITDA margin at 27.1% declined 30bp QoQ and 70bp below our estimates on the back of higher-than-expected employee expenses.

* Adj. PAT was up 1.5% YoY at INR694m, in line with our estimates.

* Traffic saw a strong 10% YoY jump to 210m after many quarters of decline. Total suppliers on the platform stood at 7.7m, up 5.5% YoY.

* Total cash and investments stood at INR19.1b.

Highlights from the management commentary

* In 2QFY24, the company added 2k paid customers, due to 1) lower gross addition due to price hikes and 2) higher churn.

* Given the higher-than-expected churn, the management refrained from giving any guidance for net customer additions. The management suggested that maintaining 6-8k subscriber addition would be difficult without solving the higher churn.

* Despite weak customer additions, the management remains confident of strong collections and deferred revenue at least for the next 2-3 quarters. It expects over 22-23% growth in collections.

* Though consolidated margin is difficult to predict, the management expects to maintain standalone margins at around 28-30%.

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