–       IndiaMART delivered strong operational performance during 3QFY21, led by robust increase in paid suppliers (at 7k v/s their target range of ~5k). Collections were up 9% sequentially but flat on a YoY basis.

–       Margin showed great resilience, with the company reporting the highest ever EBIT margin of 48.4% (v/s our estimate of 39.8%) on lower variable pay and stable employee count.

–       Leading indicators such as traffic and business inquiries are up 35% and 38% YoY, offering confidence on the sustenance of the current momentum.

–       While we concur that margin at current levels are not sustainable, the company will see a structural shift in operations from pre-COVID levels. Half of the savings, led by cost optimization, would continue to flow through on: 1] permanent optimization in G&A (reduction in offices to 40 from 80), 2] sales through channel partners are making cost more variable (would lead to reduction in total employees), 3] movement of BPO to cloud telephony system (would lead to 10% savings per seat), and 4] reduction in travel expenses by shifting some of the meetings to video conferencing. For 9MFY21, revenue/EBIT/PAT grew by 4.6%/128%/178%.

–       The company has taken Board’s approval to raise INR11b. The same would be majorly used to pursue inorganic opportunities around: 1] SaaS products, 2] fintech, and 3] vertical commerce. We view the business model diversification as a positive step to upscale into the SME value chain. 

–       We increase our FY22E/FY23E EPS estimate by 17%/16% as we anticipate greater resilience on the margin front over the longer term.

–       We value IndiaMART on a DCF basis at INR9,000 per share (+22% upside) assuming 11% WACC and 5% terminal growth rate, implying 62x FY23E EPS. Reiterate Buy.

Beat on all fronts! Board approves INR11b in fund raising

–       Revenue stood at INR1.7b (3% beat on our estimates), up 5.3% YoY and 6.4% QoQ. 

–       Total collections have now recovered back to pre COVID-19 levels at INR 1.8b, implying a sequential growth of 10%.

–       EBIT margin was the highest ever at 48.4% (v/s our estimate of 40%), +26pp YoY and +100bp QoQ. This was led by continued optimization across all cost items.

–       All traffic on the platform was organic in nature. The company has not incurred any advertisement expenses.

–       PAT rose 102% YoY to INR802m, implying a PAT margin of 46%.

–       The Board has approved raising of funds, not exceeding INR11b. An extraordinary general meeting is scheduled on 10 Feb’21 to seek approval of its members for the proposed fund raising.

–       Traffic grew 35% YoY to 253m in 3QFY21 v/s 188m in 3QFY20.

–       Total suppliers on the platform stood at 6.4m, an increase of 9% YoY.

–       Total paid suppliers stood at 148k (v/s our estimate of 147k), an increase of 4% YoY and 5% QoQ. ARPU increased by 3% YoY to INR 46.7k.

–       Deferred revenue stood at INR 6,330m, a marginal decline of 2% YoY, but an increase of 1% QoQ.

–       Total cash and Investments stood at INR 11.4B, an increase of 33% YoY.

–       OCF stood at INR 770m, up 9% YoY, implying an OCF-to-PAT ratio of 96%.

Highlights from the management commentary

–       During 3QFY21, IndiaMART added 7k suppliers. Of this, 1.5k were suppliers that returned due to the previous churn and the rest were new additions.

–       Business for 90% categories are back to pre-COVID levels. However, 10% are yet to recover.

–       EBIT margin in 9MFY21 more than doubled (47% in 9MFY21 v/s 22% in 9MFY20), led by: 1) reduction in employee expenses on non-payment of variable pay, 2) re-negotiation on pricing and reduction in outsourcing sales contracts, and 3) optimization in other expenses on closure of offices.

–       The management intends to make long-term investments, along with one or two acquisitions, and some minority investments. The latter could be a customer acquisition, payment facilitation (credit), API banking, or business insurance, where it can leverage IndiaMART.

–       It has changed the price of its base package to INR3k plus taxes from INR3k per month plus INR5k setup fees. This would help in reducing one-time higher upfront payment.

–       It has launched quarterly and six monthly premium plans to reduce higher payments up front and also introduced the concept of daily buying of leads.

Valuation and view

–       Apart from the strong recovery in paid suppliers, collections, and revenue growth, the company has shown higher resilience on the margin front. While we concur that margin at current levels are not sustainable, the company would see positive benefits from cost optimization and operating leverage. We increase our FY22E/FY23E EPS estimate by 17%/16% to factor in a robust operating performance.

–       We remain confident of strong fundamental growth in operations, led by: a) high growth in digitization among SMEs (~25%), b) the need for out-of-the-circle buyers, c) a strong network effect, d) over 70% market share in the underlying industry, e) the ability to increase ARPU on low price sensitivity, and f) high operating leverage.

–       We arrived at our DCF-based target price of INR9,000 per share assuming 11% WACC and 5% terminal growth rate. Our TP implies an upside of 22%. Reiterate Buy.