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In this edition of Ideas For Profit, Moneycontrol’s Sakshi Batra discusses if the ongoing weakness is an ideal opportunity to gradually build-up position for the long run.
IndiaMart had a stellar debut on the bourses in 2019. The shares got listed at Rs 1180, a 21 percent premium to the issue price. The stock had a strong rally since then only to correct along with the broader markets owing to COVID-19. The stock is down 20 percent from its 52-week high and we feel the ongoing weakness is an ideal opportunity to gradually build a position for the long run.
IndiaMart (CMP: Rs. 2271, Market capitalization: Rs. 6567crore) offers a B2B (business to business) platform. It was incorporated in 1999 and promoters currently own 52.34 percent. IndiaMart has 6 million supplier storefronts, 102 million registered buyers and 67 million product listings with more than 1 lakh product categories.
IndiaMart offers three tiers of subscriptions to suppliers:
1) Mini dynamic catalog or Silver: package includes a supplier storefront and 7 RFQ (request for quotation) credits each week.
2) Gold –Gold based subscribers are provided with 14-21 RFQ per week and their average annual price range is between Rs25,000 and Rs50,000; and
3)Platinum: Platinum based subscribers get the highest priority in search results as well higher RFQ per week. India Mart offer multi-tiered variations of their Platinum package, which is their top subscription package.
All the subscriptions are offered with monthly, annual and multi-year payment options.
Investment rationale
Higher market share to drive growth: IndiaMart has over 60 percent market share (source: KPMG report and RHP) in online B2B marketplaces that helps potential buyers of various products and services connect with suppliers through supplier-specific webs storefronts and telephonic/online enquiries. Its monetization is through a “freemium” model where buyer listings are free but suppliers pay with subscriptions. By paying the subscription, suppliers are given priority in the search results and RFQ credits while buyers are not charged. Currently, India Mart has 1.47 lakhs (as against total registered suppliers of 6 million) paying subscription suppliers growing at a CAGR of 19 percent between FY16-20. This leaves lot of room for conversion from free suppliers to paid subscribers.
The top 10 percent of customers contribute to 40 percent of revenues and subscription revenues contributes nearly 95 percent of income for IndiaMart.Shift from offline-based service to online based offerings: As per IndiaMart, there are more than 63 million MSMEs (micro, small and medium enterprises) in India, of which only 17 percent use the internet. Only 5.7 million of these MSMEs are registered with IndiaMart. Out of the registered customers, only 1.5 lakhs are paying subscribers. Both buyers and sellers want to expand their reach and the internet is providing that medium. Hence there is a steady shift from offline based to online based services. With higher usage of internet and greater adaptability amongst MSMEs, we expect higher numbers of paying subscribers in the years to come.
Visibility in revenues, cash flows and profits: IndiaMart collect advance subscription from its subscribers which gives it good revenue visibility. Deferred revenues (advance subscription received from subscribers) has grown at a compounded annual rate of 28 percent from FY16 to FY20. With higher cash collection from subscribers, IndiaMart has a negative working capital cycle.
Improvement in margin once operating leverage kicks in: IndiaMart has already seen an improvement in operating margins. EBIDTA margin has improved from -23 percent in FY16 to 28 percent in FY20. The company has started employing low cost outsourced sales representatives in its sales team thereby lowering employee cost as percentage to revenues. (41 percent of revenues of FY20 as compared to 65 percent in FY16). We expect further improvement in operating margin with higher revenue growth and greater operating leverage.
IndiaMart’s Q4FY20 earnings was above Street expectations despite the economic slowdown. However, the COVID-19 lockdown has hurt the bulk of its subscribers. Traffic on its website and app has dropped 50 percent and quite a few of its paying subscribers have not renewed subscriptions.
Currently IndiaMart plans to focus on retaining its paying subscriber base via discounts and relaxed payment terms. The management has cut salaries and discretionary expenses to maintain its margin due to a decline in paying subscribers. We expect FY21 to be a weak year for revenues and profits. We would again like to revisit FY21 numbers once we see the full impact in Q1FY21. In FY22, we expect the longer growth trend to be visible once normalcy returns. IndiaMart is currently trading at 33x FY22E. We recommend investors to buy IndiaMart on dips in a staggered manner as the near-term earnings outlook is extremely weak.
We like IndiaMart because of long-term accelerated adoption of internet by MSMEs, dominant market share in B2B online space, debt-free balance sheet and upfront collection of revenues from subscribers.
Risks: An extended economic slowdown can hurt revenues and profitability. Competition from other online players also significantly hurt IndiaMart’s profitability with subscribers shifting to other sites or apps.