IndiaMART’s IPO success: New day or false dawn? | The Ken

The Ken

23-year-old B2B e-commerce behemoth IndiaMART has had a great day at the bourses. Celebrations, though, could be premature as the battle ahead is a tough one

IndiaMART, the country’s largest e-commerce firm, has gone public
IndiaMART has intentions to compete with Chinese juggernaut Alibaba, which has B2B operations in India
With funding in the B2B sector rising, IndiaMART could have a battle on its hands
IndiaMART has retained its dominant position while following a subscription model. Will it have to pivot?

There was a celebratory atmosphere at the Hyatt in Noida last Saturday. Drinks flowed and a cake was cut, but the highlight of the night was a speech from the man of the moment—Dinesh Agarwal, CEO of business-to-business (B2B) e-commerce firm IndiaMART. The 50-year-old Agarwal had, after all, just led IndiaMART InterMESH Ltd, which operates IndiaMART.com, to the brink of a successful initial public offering (IPO). The offering raised about Rs 475 crore ($69.3 million) and was subscribed over 36 times in the past week, landing IndiaMART a valuation of Rs 3,748.06 crore ($547.1 million).

“My first investor came in about 10 years ago, Intel Capital. There were two options for us to give him an exit, either we could have taken another round of private equity or we could have gone public. For domestic businesses, I think an IPO gives you visibility and credibility both, which will help us attract better buyers, vendors and employees,” IndiaMART CEO Agarwal said in a telephone interview.*

At the Hyatt event, Agarwal declared that now that its domestic listing was complete, it was time for IndiaMART to focus on Chinese conglomerate Alibaba Group. “Agarwal’s motive is to beat Alibaba. That’s what he tells us. We consider them the main competition,” an employee told The Ken. He declined to be named as he wasn’t authorised to speak to the media. 

IndiaMART was started by cousins Dinesh Agarwal and Brijesh Agrawal in 1996, and is now to the B2B market what e-commerce giant Flipkart is to the B2C market. Its target—billionaire Jack Ma’s Chinese conglomerate Alibaba Group, which operates domestically through B2B platform Alibaba India—has a valuation of over $450 billion. When Alibaba listed on the New York Stock Exchange in 2014, it raised nearly $21.8 billion, giving it a market cap of about $168 billion. IndiaMART gearing up to fight Alibaba is a real David versus Goliath battle.

Several analysts such as BP Wealth and SMC Global said IndiaMART’s stock was “aggressively priced” and gave it an ‘avoid’ rating. “On the valuation front, at the upper end of the price band, IndiaMART is valued at a P/E of 140X to its FY19 earnings, which is aggressively priced given the intense competition from emerging players and new entrants,” said BP Wealth in its IPO note.

The stock market, however, begged to differ. IndiaMART listed on both the NSE and BSE on 4 July, and opened at Rs 1,180 ($17.2) a share, a premium of 21.3% on its issue price of Rs 973 ($14.2). It closed at Rs 1,302.55 ($19) a share on BSE, 10.4% higher than its opening price of Rs 1,180 ($17.2) and 33.9% higher than its IPO price.

But a Rs 3,748 crore valuation for a 23-year-old company with a 60% market share in the B2B digital classifieds space is considered high by many. Especially since VC-funded B2B startups have comfortably eclipsed IndiaMART’s current valuation. Udaan, one such B2B e-commerce marketplace, is a prime example. Started in 2016, it took less than four years to become a unicorn (companies valued at $1 billion or more)—the first of its kind in the Indian B2B space. (Read about Udaan here.)

Similarly, Bengaluru-based BlackBuck, a B2B logistics firm providing trucking services, raised $150.6 million in May, according to data research platform Tracxn. This puts it within touching distance of the unicorn club. 

Investor interest in B2B e-commerce players has not always been this strong, with B2B businesses often relegated to the shadow of their business-to-consumer (B2C) counterparts. But that started to change around 2015, when big-name investors like Tiger Global, Yuri Milner’s DST Global, Sequoia Capital and Qualcomm Ventures jumped into the fray. 

Government regulations have also propelled B2B e-commerce into the limelight. In 2016, the government permitted 100% FDI (foreign direct investment) in B2B e-commerce trading, while clamping down on B2C e-commerce firms for excessive discounting and restricting ownership structures, among other measures. 

Suddenly, it was not just venture capitalists who were looking at B2B e-commerce; B2C companies such as Amazon, Walmart-owned Flipkart and Indian conglomerate Reliance Industries also announced B2B intentions. In an environment where newer B2B companies are the flavour of the season, is IndiaMART really overvalued?

War of the models: Subscription vs transaction

The dichotomy between the valuations for B2B startups and more established companies like IndiaMART begins with their differing business models. 

Broadly speaking, B2B e-commerce startups such as Udaan, agricultural marketing platform NinjaCart and wholesale food and grocery platform Jumbotail follow a transaction model. The likes of IndiaMART, JustDial and Alibaba India, meanwhile, follow a subscription model. 

For all its growth potential, the Indian B2B market is still a largely fragmented and unorganised space, where most deals are struck offline and adaption to the internet is slow. Internet penetration in rural India has risen from 9% in 2015 to 25% in 2018, according to market research agency Kantar IMRB. This is a far cry from the situation in China, where some 788 million people are mobile internet users, of which 71% used online payments or e-commerce services. 

For IndiaMART, its subscription model brings in almost all of its revenue, according to its prospectus. Since the company counts itself as a digital classifieds, suppliers or sellers are charged for listing their wares on the website and app. This gets them greater visibility and ‘buy leads’, where buyer requests are routed to the suppliers. 

IndiaMART has six subscription packages, with its basic catalog costing Rs 30,000 ($437.6)  a year and Rs 75,000 ($1,094) for three years. Its next offering—the ‘maximiser’ package—costs Rs 55,000 ($802) a year and Rs 1.65 lakh ($0.17 million) for three years.  “Our focus has always been on B2B because of the fact that B2B has revenues from day 1, we have been profitable, we don’t have to depend on too much capital,” Agarwal said.*

In the transaction-led model, Udaan and its ilk also tackle the supply chain, collecting products from suppliers, placing them in warehouses, and then delivering these to the customer. B2B businesses also typically run on cash transactions, so many startups have teamed up with third-party lenders and NBFCs (non-banking financial companies) to offer credit to buyers and sellers. They earn revenue through commissions and logistics charges for each transaction.

Both models have their advantages, say analysts. A subscription model, for example, provides predictable, recurring revenue and is asset-light. As a result, IndiaMART has no debt. “Its working capital cycle is negative, on that basis it should do well. You don’t require that much debt and they don’t want debt,” said a source at one of the underwriters to its IPO, declining to be named.

“We are already sitting on cash of about Rs 685 crore ($99.7 million) as of March 2019. This year, we will again generate a good amount of cash flows. I don’t see any need for debt or company financing for the next 2-3 years,” says IndiaMART’s Agarwal.*

A transaction-led model, on the other hand, is more capital- and asset-heavy, but has higher chances of ‘stickiness’ thanks to discounts, free delivery and easier payment options. 

Interestingly, IndiaMART isn’t just fighting transaction-led companies. It will also have to contend with a company that has mastered the subscription-based model—Alibaba.

Chinese Whispers

This battle between subscription and transaction models is already playing out in China through Alibaba and JD.com, the country’s second largest e-commerce firm. JD.com went public in 2014, and is backed by marquee names such as Walmart, Alphabet Inc’s Google and China’s Tencent Holdings. At present, it has a market cap of $45.8 billion—a tenth the size of Alibaba. China, incidentally, is set to become the world’s top retail market in 2019, surpassing the US by more than $100 billion, according to eMarketer’s retail and e-commerce forecast.

JD.com sells an array of products from computers to home appliances. The business is capital intensive as it takes on buying, storing, transportation and delivery of products, in addition to payment options for vendors. Alibaba, meanwhile, charges sellers a fee to display their products and has little need for tangible assets. It even outsources deliveries to third-parties. 

As a result of these divergent approaches, JD.com posted higher net revenues than Alibaba in the year ended March 2018. Alibaba’s total revenue for the period was $39.9 billion, an increase of 58% year-over-year. JD.com, however, posted net revenues of $67.2 billion. The rub, though, is in their respective bottom lines. JD.com’s net loss from continuing operations for the year was $0.4 billion, while Alibaba’s net income attributable to shareholders was $10.2 billion. 

Similarly in India, IndiaMART’s subscription-based approach and the 60% market share it has garnered in the online B2B classifieds space, has allowed it to chase profitability. This is a far cry from the younger startups that burn cash with no clear timeline on profitability. But by spending VC money on customer acquisition, newer companies are gunning for a meaningful market share. Something which could see IndiaMART needing to pivot.

IndiaMART, however, isn’t focusing on the startups chasing it. Instead, it is bracing to fight Alibaba, whose B2B platform in India is geared towards new, growing and established businesses. Alibaba’s monthly charge for its most basic offering is Rs 7,691 ($112) while its premium package costs Rs 32,833 ($479) a month. Flush with cash and with a global supplier base spread over 190 countries and regions, it’s a rival unlike any IndiaMART has seen before. 

Taking on all comers

To take on the Chinese conglomerate, IndiaMART plans to expand its supplier acquisition efforts by upselling higher-margin, higher-value subscription packages to its existing customers. It also wants to bring onboard more corporate brands, while upgrading its search results to include regional dialects like Hinglish—a colloquial cross between English and Hindi. In the meantime, it will also have to find ways to keep its biggest expense—employee costs—in check. 

“We will continue to grow the classifieds business, improving it by increasing products, suppliers and geographies… If you are a business and you are doing any product, you must be available on IndiaMART. That’s the first goal. We now have started to attract medium-sized and bigger scale companies and suppliers, both,” says Agarwal.*

While both Alibaba Group and Udaan did not respond to The Ken’s request for comment, market analysts indicate that IndiaMART is well ahead of the chasing pack in terms of size. IndiaMART adds businesses by identifying suppliers and creating ‘supplier storefronts’ for them. It then notifies them of this through email or SMS, allowing them to delist from its platform if they so choose. This strategy has helped the company grow to 4.7 million supplier storefronts for the year ended March 2018—an increase of 49% year-on-year.  

“Looking at the current picture—the segment in which IndiaMART is operating—there are no other players that have the scale, the network and brand it has built for itself,” says Umesh Mehta, head of research at Samco Securities. Alibaba Group does not provide specific numbers for its India operations.  “I have seen it all in 23 years. I have seen Alibaba come in for the last 10 years, trying to enter into the Indian market. They haven’t yet gotten even 1% of the B2B market in India,” Agarwal claims. Foreign players, he says, struggle to understand the finer nuances of the Indian market.*

For Udaan, in a blog post in January 2018, the company pegged its number of buyers at 200,000. IndiaMART, for its part, had 59.8 million registered buyers for the year ended March 2018, but it’s worth noting that it considers all its suppliers as buyers. 

The problem for IndiaMART, however, is that not all suppliers translate into paying customers. For the year ended March 2018, only 0.1 million of its 4.7 million suppliers were paying subscribers. This represented only a 13% year-on-year growth in 2018, down from 33% in the previous financial year, according to its prospectus. “As of now, the revenue model might work for a few years more. After that, if the competition increases, it will be really difficult for it to sustain, and it might have to diversify to other modes of revenue generation,” says Samco Securities’ Mehta. 

Peer pressures

For IndiaMART, a more apt comparison might not be the likes of Udaan or Alibaba but its B2B digital classifieds peer JustDial. Today, JustDial’s valuation stands at just over $735 million, a steep dive from the $1.8 billion it was valued at in 2014, a year after it went public. 

Started to disrupt telephone directories like ‘Yellow Pages’, it was, in turn, disrupted by other digital offerings. Search engines like Google and vertical platforms like UrbanClap, where you can hire professionals for home services ranging from like pedicure or pest control, signalled the end of JustDial’s heydays.

Today, JustDial continues to operate on its original subscription model, but has had to adapt to the changing times by also including a transaction-led model. You can now book flight, train and bus tickets, make hotel bookings and buy movie tickets through JustDial, all of which bring in transaction revenues. The company has also upped its marketing spend and added a JD App that has features like map-aided search, videos and chat messengers. 

All of this has seen JustDial’s revenue from operations for the year ended March 2018 grow to Rs 781.77 crore ($114 million). IndiaMART’s revenue from operations, meanwhile, was Rs 403.5 crore ($59 million). Unlike JustDial though, IndiaMART has had a negative net worth for the last three years, with its operating losses stemming from employee expenses, advertising, providing premium numbers to its paid suppliers and scaling its operations.

“Sulekha (a service similar to JustDial) and JustDial are B2B, but they aren’t growing in a rapid fashion. They are struggling and finding things to do. If you are on Sulekha and JustDial and not on IndiaMART, it could be because you can’t afford the subscription or do not have a high volume of transactions. At some point, IndiaMART might want to attract the smaller buyers as well and then they would have to consider a transaction model,” says Jessie Paul, founder and CEO of marketing advisory firm Paul Writer. 

The fight ahead

A transaction-led model could be the answer to IndiaMART’s problems. Take the example of restaurant discovery and food delivery platform Zomato. Initially started as a listing business for restaurants (a subscription-based model), it followed rival Swiggy’s path into the delivery business, thus adding a transaction-led model to its arsenal. In March 2019, Zomato raised$62.5 million, taking its valuation to around $2 billion.

Can IndiaMART be nimble enough to adopt a transaction-led model and see the sort of resurgence Zomato has enjoyed? All signs seem to indicate it must eventually do so, but its 23-year-old subscription model has bought it enough market share to not have to rush into this. “The classifieds or listings are a classic winner-takes-all situation. It’s very hard to come from behind in these kind of spaces,” says Rahul Chowdhri, partner at Stellaris Venture Partners. Chowdhri takes the example of Alibaba, which hasn’t really done much on the B2B classifieds side. “Unless, say, they get Chinese suppliers to India, which could be a huge disruptor. But in pure classifieds, it’s hard to break the monopoly,” he adds.

IndiaMART has already showed signs of adapting to the times. “We are now doing payment gateway and payment facilitation. Currently, SMEs don’t have access to newer age payment options like LazyPay, ePayLater and ZestMoney. We provide them with a payment gateway which helps them take money from buyers, either by way of debit and credit cards but also through LazyPay,” says Agarwal, adding that IndiaMART is also becoming a credit aggregator for SMEs.*

One would imagine that the money IndiaMART raised from its public offering would go towards gearing up for the fight ahead. In IndiaMART’s IPO, though, none of the proceeds from the offering went to the company. Instead, it allowed three of the company’s VC investors—Intel Capital, Amadeus IV DPF and Accion Frontier Inclusion Mauritius—a partial exit. Its promoters, including CEO Dinesh Agarwal and full-time director Brijesh Agrawal, trimmed their stake by 5% to 52.6%. 

“Amadeus Capital Partners led the financing in IndiaMART as we identified a need for a marketplace focused on B2B buyers and sellers, that would address discoverability and trust. We are selling a small portion of our holding and continue to remain enthusiastic about the long term prospects,” said Bhavani Rana, partner at Amadeus, in an emailed response. He added that Amadeus will continue to fund opportunities in the B2B market.

But even while its older investors remain bullish, clouds of competition are gathering. B2C players, in particular, are eyeing the sector. Amazon already has its B2B segment, where it has 100 million products and handles logistics, delivery and payment options. Reliance, meanwhile, is planning toleverage its Jio telecom network to tie-up with kirana stores for an upcoming e-commerce offering. Walmart, too, which backs JD.com in China, has a similar bet in India with its acquisition of Flipkart and its plans to expand its cash-and-carry stores. 

And even as a deluge of competition looks set to come in, there is also the possibility of consolidation. “Each of these spaces go through this phase, where everybody goes crazy about an idea. But eventually only 2-3 of these players will survive. Amazon and Flipkart can’t do everything in-house because of competing priorities. So it leaves enough room for these vertical-focussed startups to either grow big or get acquired by Amazon,” says Sachin Dalal, ex-co-founder of e-commerce firm Infibeam. 

When all of the dust clears, IndiaMART will be hoping the bastion it has built over more than two decades is still standing. As Dinesh Agarwal told the employees gathered at the Hyatt, in 15-20 years, everything will move online and there will not be any offline transactions and vendors. What remains to be seen is whether IndiaMART is nimble enough to adapt to an evolving B2B landscape and still be one of the top dogs when that day comes.

Clarification: The copy has been updated to reflect the premium on the issue price of IndiaMART’s stock.

*This story has been updated to include comments from an interview with IndiaMART founder and CEO Dinesh Agarwal shortly after the story was published.