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At the start of this quarter, there was heightened optimism over the industry’s prospects considering that it was a quarter loaded with festivals, Cricket World Cup and the wedding season post Diwali. That optimism may have to be tempered, though: short-term pressure on consumer spending could result in 3Q being a ‘soft’ quarter. As guided over the past 12 months, internet companies continue to ramp up profitability with Zomato and PB Fintech expected to deliver their first quarter of reported EBITDA and PAT profitability, respectively. While Zomato’s food delivery will benefit from World Cup and increasing share of Gold programme orders, quick commerce has been the talk of the town recently and we expect Blinkit to continue its strong growth rally. Nykaa’s Q3 performance update has also demonstrated strong growth despite a relatively muted environment, though it was lower than earlier anticipated. CarTrade has fast-tracked OLX integration along with the strategic decision to shut down the loss-making OLX transactions business. We expect the company to feel some heat on profit margins due to one-offs in this quarter. We believe a few of our other coverage companies such as Affle, IndiaMart, Info Edge, Route Mobile, Delhivery will struggle to put up good growth numbers in 3Q, though margins could improve. Overall we believe the longer-term growth and margin expansion story in India internet stays intact and the sector can be a great compounding play.

Affle: We see seasonality driven sequential acceleration for Affle in 3QFY24, broadly in line with our thesis that 2H would be better than 1H. However, on a YoY basis, organic growth trends are likely to remain muted at 13% despite a very soft base for the international business. This is because we see low double-digit growth in India business due to restrained advertiser spends (especially in start-ups) and wipe-off of real-money gaming revenues. Developed markets (DMs), however, should show strong organic growth improvement YoY, albeit due to a favourable base. Including the Youappi business, we forecast consolidated revenue growth of 32% YoY. Margins are likely to be weak especially due to lower gross margin in the international business (as the company would have focused on growth revival), salary hikes in 3Q and drag from Youappi consolidation. Overall, we forecast gross margin/EBITDA margin/EBIT margin to fall by 34bps/ 76bps/ 94bps YoY. Despite improvement in organic growth momentum in 2HFY24 due to festivities and a very favourable base for the international markets business, we do not see Affle returning to its high organic growth path of 20%+ anytime soon.

CarTrade: We expect CarTrade’s standalone business to grow c.18% sequentially and c.27% YoY considering the sustained strength in new auto sales and normalisation of auto industry advertising budgets. However, B2B Remarketing business is unlikely to recover yet as repossessions remain low, resulting in a YoY dip of 2.5% in revenue. Overall, CarTrade should deliver 10.3% YoY revenue growth in 3QFY24 with Adj. EBITDA margin (excluding ESOP expense) of 24.9%, an increase of 677bps QoQ, as the fixed cost structure demonstrates operating leverage. We expect the company to deliver revenue/adj. EBITDA of 19%/36% over FY23-28E with sustained growth in auto industry and shift to digital channels driving operating leverage. On the other hand, with OLX pulling the plug on loss-making transactions business in Oct’23, we expect to see onetime loss of INR 265mn. Simultaneously, even OLX’s classifieds business is expected to be in the red this quarter as product and tech expense of ~INR 300mn will be allocated. We expect this expense to be lower by 50% in 4QFY24. We suggest evaluating profitability of the OLX business only in FY25 after all the one-off costs are accounted for and teams are integrated as well as stabilised. On a consolidated level (including OLX business), CarTrade will see a sequential dip of 670bps in EBITDA margin in this quarter.

Delhivery: With the e-commerce industry not delivering on earlier expectations of a strong quarter, we anticipate sequential volume growth of ~10% in Delhivery’s express parcel business. Also, realisation per shipment will rise sequentially due to category mix but could be flat YoY as Delhivery’s e-commerce partners opening regional warehouses results in lower distances for the shipments. PTL business is expected to deliver subdued volume growth of ~5% QoQ due to Chennai floods and impact of the festive season. On a YoY basis, express parcel revenue will grow by 18% while PTL revenue will see 47% growth. Furthermore, slower-than-expected revenue ramp-up is likely to ensure Supply Chain Services delivering only 10% YoY growth. With incremental gross margin on transportation revenue likely to sustain around 50%, we expect the company to turn EBITDA positive in 3Q with 3.7% Adj. EBITDA margin. We forecast the company to deliver FY23-26E revenue CAGR of 18% with Adj. EBITDA margin (pre Ind AS, excluding ESOP expense) of 6.5% in FY26E. Key things to monitor will be 1) movement in volume and realisation 2) revenue impact/accruals from recent onboarding of customers such as Tata Motors, Havells and MamaEarth and 3) any further clarifications on capex requirements.

IndiaMART: We expect weaker sequential paid subscription additions of only ~2k in 3QFY24 as a result of the recent price hike, continued high churn rate in silver subscriptions and high subscriber addition base of last year. However, cash collections (including Busy) should grow at a healthy rate of 23% YoY due to recent price hikes and subscription up-sales (in terms of realisation as well as tenures). Revenue growth momentum is also likely to remain robust at c.23% YoY (+5% QoQ) due to strong collections reported in recent quarters. We expect EBITDA margin to marginally improve YoY while sequential expansion could be by 91bps due to controlled operating expenses (lower employee additions and sales incentives). However , PAT might dip c.30% YoY due to normalisation of other income, which was unusually high last year. Management commentary on paid subscriptions growth and investments towards account services should be keenly watched.

Info Edge: We forecast standalone business billings’ to remain flattish (+1% QoQ/ 4% YoY) mainly due to subdued billings expected in the Recruitment segment (+1% QoQ as well as YoY). 99acres’ billings is likely to remain strong at 21% YoY due to robust underlying demand in the real estate sector for new and resale homes, in addition to rental properties. Jeevansathi billings could see 19% YoY increase due to improved monetisation. Despite flattish billings trends, we see standalone revenue growing ~8% YoY. Revenue growth will likely be led by 99acres (+23% YoY) and Jeevansathi (+13% YoY) whereas recruitment revenue trends should be muted (+5.5% YoY). We expect the company to continue technology and platform investments in the recruitment business, which could lead to segment margin contracting by 250bps YoY (-20bps QoQ). At a standalone business level, we forecast EBITDA margin of 39.3% in 3Q versus 39.1%/40.7% in 3QFY23/2QFY24.

Nykaa: Despite the festivities this quarter being followed by the wedding season, Indian e-commerce has not seen an exciting quarter. In such an environment, Nykaa BPC delivering growth of 25%/20% YoY in GMV/NSV, though lower considering the commentary in 2QFY24 earnings call, should not be treated negatively. Nykaa hosted the first edition of Nykaaland, its beauty and lifestyle festival, in Nov’23 to educate consumers and empower BPC category creation. The online fashion industry experienced muted consumption in 3Q with our channel checks suggesting YoY decline in Ajio and Myntra being roughly flat. Nykaa Fashion continued to deliver strong growth with 39% YoY growth in GMV. However, NSV as a % of GMV is expected to dip by ~300bps, suggesting higher brand-funded discounting than before to increase order volumes. Overall, Nykaa will deliver 23%/19% YoY/QoQ revenue growth with sequentially flat gross margin, unlike that seen in FY21/22 when gross margin used to inch up sharply in 3Q due to higher mix of cosmetics and luxury in BPC. However, operating leverage should ensure that consolidated EBITDA margin improves 114bps sequentially to 6.5%. Accordingly, we forecast the company to deliver GMV/Revenue/EBITDA CAGR of 28%/27%/59% over FY23-26E period.

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