For B2B startups, IndiaMART IPO might drive investment and exit sentiment

Financial Express

IndiaMART belongs to the first generation of internet companies such as Just Dial, Info Edge (India), MakeMyTrip etc., that scaled in a bootstrapped environment and in a linear fashion with tightly-run operations without having sleepless nights over valuations and discount-driven customer acquisition.

IndiaMART turned profitable in FY18 with Rs 55 crore in net profit that declined to Rs 20 crore in FY19. (Image: Indiamart.com)

On one hand, there are startups, which emerged in over a decade and quickly leapfrogged their value to multi-billion dollars with their hyper-funded non-linear growth under the glory of famed venture capitalists and fuel by deep discounts with questionable loyalty and business model to an extent. On the other hand, there are companies such as Just Dial, Info Edge (India), MakeMyTrip on the B2C e-commerce side and IndiaMART on the B2B e-commerce side, which have emerged and been built in a bootstrapped environment and grown in a linear fashion with tightly-run operations without having sleepless nights over valuations and discount-driven customer acquisition.

Strong and Steady

While the ones on the B2C side had already chosen IPO as their road to the next level of growth, IndiaMART, among the oldest B2B e-commerce companies in India too have found its rightful place in public listing with the recent IPO that performed good — subscribed by nearly 36 times on the last day of bidding this week.

IndiaMART, in terms of business performance, had 55 lakh sellers on its platform with products listed across 97,000 categories as of FY19. Its paid supplier base increased from 72,000 in FY2016 to 1.3 lakh in FY19 at a CAGR of 21 per cent while its revenue grew at 29 per cent CAGR to Rs 507 crore during FY14-19, as per Angel Broking. The company turned profitable in FY18 with Rs 55 crore in net profit that declined to Rs 20 crore in FY19. IndiaMART had 8.27 crore registered buyers as of March 31, 2019. The company was founded in 1996 by Dinesh Agarwal and Brijesh Agarwal.

Ecosystem Play

While the IPO for IndiaMART validates its strong business fundamentals but it also directs towards the broader B2B e-commerce ecosystem in India. “It is a very inspiring story as the company fought through infrastructure and regulatory problems that existed in the last two decades to get to the IPO successfully. India needs a lot of such stories to keep coming up,” Abhishek Goyal, co-founder, Tracxn told Financial Express Online.

To put in perspective the B2B startup ecosystem in India, the country saw growth from only 900 B2B tech startups in 2014 to whopping 3,200 in 2018 witnessing 30 per cent compound annual growth between 2014-18. Moreover, the country has around five B2B unicorns including Udaan, InMobi, Freshworks, Delhivery, and BillDesk.

However, out of these 3,200 startups, 70 per cent of them belong to pure technology areas including enterprisetech, fintech, and healthtech while fewer are into industrial sector etc., said a report by management consulting firm Zinnov and hybrid cloud data services provider NetApp in May this year.

B2B startups have traditionally been seen as unviable businesses with a long sales cycle and longer runway to growth. “There is a lot of misconception around B2B companies viability. It is also assumed that B2C companies scale better in India but that’s not true because we are growing in the B2B space as well and have also increased multifold from the funding perspective,” Ajeya Motaganahalli, Senior Director and Leader, NetApp Excellerator, NetApp had told Financial Express Online.

Signalling

Coming back to IndiaMART, the IPO is expected to better investors’ sentiments towards emerging companies in the B2B procurement space where there are startups including IndustryBuying, Moglix, and mid-size companies like Power2SME.

“When it comes to India B2B story and the opportunity in the unorganised-to-organised segment, classic B2B supply chain or B2B e-commerce verticals, IndiaMART IPO is a great development. In these areas, IndiaMART will definitely drive the sentiments for investors to enhance their commitment to related startups. The fact that IndiaMART has grown to IPO gives comfort that the management has a wise head on its shoulders and that it is in for the long term and can survive any downturn,” Deepak Natraj, managing director, Aarin Capital told Financial Express Online. Aarin Capital is co-founded by former Infosys CFO, TV Mohandas Pai.

Indeed the company is in for the long term. In B2B, there are primarily three kinds of models — ad-driven, classified kind of a model, and transaction-driven model. “While there is a larger shift from classified to transaction-based model, we believe that the digital ad market is also large enough. This translates to a larger road for players like IndiaMART. It was the early mover in the ecosystem when the B2B digitisation wasn’t very high,” Ujjwal Chaudhry, Director, RedSeer Consulting.

Beyond investment, for IPO too, there would certainly be a set of B2B companies that would be looking to take that route. “With IndiaMART there is certainly a positive sentiment for going for IPO instead of an M&A because the promoter sees giving more meaningful exit to investors. In general, too B2B space would have better unit economics compared to B2C space and hence it is beneficial to go IPO path instead of having hyper growth with a higher burn,” added Chaudhry.