Private Client Research

Rating

Buy

Sector

Ecommerce - Online Classifieds

Company

Indiamart Intermesh Ltd

Ecommerce - Online Classifieds

July 23, 2020

Sensex: 38140.47

CNX Nifty: 11215.45

NSE: INDIAMART

BSE: 542726

Reco Price

Rs. 2437

3 years to get optimum return

Date

July 23, 2020

Sensex

38140.47

CNX Nifty

11215.45

Exchange

Code

NSE

INDIAMART

BSE

542726

Stock Data

CMP (Rs)

2437.15

Face value (Rs)

52 Week Range (Rs)

2862.50 - 1102.95

Market cap (Rs Crores)

7090.71

Price To Book Value (x)

19.91

P/E Ratio (x)

36.81

EV/EBIDTA (x)

23.45

One Year indexed Stock Performance

Indiamart Intermesh Ltd Sensex

Return (%)

12m

36m

Absolute

3.57

9.48

103.15

Sensex

7.65

19.70

0.42

18.28

Shareholders

(in %)

30-Jun

Promoter

52.34

Public

47.51

Others

0.15

Total

100

+91 22 6639 3000

research@stockaxis.com

Profile

Indiamart Intermesh Limited (IIL), incorporated in 1999, is India’s largest online B2B marketplace for business products and services with approximately 60% market share of the online B2B classifieds space in India. The company provides 10.2 crore+ registered buyers with access to 60 lakh supplier storefronts in India, which list 6.7 crore products and services across 56 industries as on March 2020. It provides a robust two-way discovery marketplace connecting buyers and suppliers. Buyers locate suppliers on its marketplace, including both Indian small and medium enterprises (SMEs) and large corporate, through a webpage containing the suppliers’ product listings. The company has limited capex requirements, improving fundamentals and growth in subscription revenue making it an attractive investment prospect. Brijesh Agrawal and Dinesh Chandra Agarwal are the promoters of the company.

The company earns revenues primarily by selling its subscription packages namely Platinum, Gold and Silver packages which are available for a month, year and multi-year. These packages offer the following benefits to suppliers: Listing of suppliers’ storefronts on the online marketplace based on priority, enhancement in business visibility, access to lead management system, integrated access to online payment gateway, and access to ‘Request for quotations’ (RFQs includes description of the product or service that a buyer seeks to purchase, its intended use, estimated purchase quantity and an indicative price). If a supplier is interested in fulfilling the order under the terms of the buyer’s RFQ, it can utilise RFQ credit and obtain the buyer’s contact information. In addition, the company also generates revenues by advertising on their website, sales of ‘Request for quotation ‘credits and payment facilitation service. It also allows sellers to list without subscribing and is free for buyers.

The company is India’s largest B2B online marketplace with robust execution skills

Rationale for Investment

India’s largest B2B online marketplace
The company is India’s largest online B2B marketplace with around 60% market share in online B2B classifieds. The company operates a product and price discovery platform, facilitating interactions between suppliers and buyers. The platform is unique as it enables two-way interactions—suppliers can post their listings and buyers can request for quotations. Their market leading position creates strong network effects as a large number of buyers on their online marketplace results in more enquiries for suppliers, which in turn attracts more suppliers to register and list products and services, consequently attracting more buyers.

Caters to diversified industry and product categories
The company offers a comprehensive breadth of listing products across a wide range of industries. Its products and services are well diversified and spread across 56 industries rather than relying on a single target industry. As on March 2020, the company’s online market place had a total of 6.7 crore listed products. The wide assortment of industry, product and service categories enables the company to secure a diversified revenue stream, which in turn, results in further growth of its marketplace and provides a broad range of products and services for buyers.

Technological competence
The company has a reservoir of supplier/buyer behaviour and preferences data, which enables it to deploy analytics to implement behavioural data, based algorithmic matchmaking on its platform, thereby ensuring much more relevant discovery of products and services. This leads to an increase in repeat buyers on its platform; the company had 55% repeat buyers as on March 2020.

Continuously improving its mobile platform and capabilities
Mobile platforms will continue to drive the growth of online commerce in India. As of March 2020, 76% of traffic (number of visits on the website) comprised of mobile traffic. Since the company’s mobile website and app are largely do-it-yourself tools, increased usage of its mobile platforms helps to increase operating efficiency. The company intends to continue investing in its mobile platform by further developing and integrating lead management system applications and user interface and notifications. The company encourages use of its mobile platform through targeted marketing initiatives such as integrated voice search, and by encouraging buyers to use the mobile platform to upload their RFQs.

Asset-light model
The company, being a mere intermediary, does not require huge capital expenditure, hence, costs associated with up gradation of technological infrastructure and employees are the primary costs expensed. In the last three years, at a consolidated level, the company had no debts in its books. The company foresees no major advertisement spends lined up in the near future and its cash flows have also been improving.

Limited competition
The company has no direct listed peer in India. It, however, faces competition from unlisted entities such as Tradeindia.com and Alibaba India, besides indirect peers like Just Dial Ltd., Google and other search engines, which allow buyers to locate suppliers, also pose as a risk for IIL. Besides, traditional trading channels such as trade show organisers, trade magazine publishers, yellow pages, classified advertisements and outdoor advertising are other competitors.

Provides effective tools for communication
The company allows buyers to easily connect with its database of suppliers by posting RFQs, which gives buyers access to many suppliers that they would not have reached through traditional methods. IIL aims to maximize the visibility of buyer RFQs through its automated systems that match buyers’ customized quotes with potential suppliers and a search feature that allows interested suppliers to locate and seek further details about quotations.

COVID-19 Impact
The company will have near term impact in its business operations specifically on its paying subscriber base, but we expect its strong balance sheet and a resilient business model will aid them in navigating through this business disruption and get back to growth soon.

Key risks
The company’s inflexible pricing strategy and economic slowdown may act as a dampener to its business operations.

Industry

The Indian economy is primarily service based with the service sector contributing more than 62% to the GDP. This contribution has been gradually increasing over the past 5 years while the contribution of the manufacturing sector to the GDP has remained constant at around 17-18% over the same period. As per the national manufacturing policy, while the share of manufacturing in India’s GDP has stagnated at 17-18%, the share of comparable Asian economies is much higher at 25-35%. There is potential for this contribution to increase its share of the country’s GDP along with the creation of up to 90 million domestic jobs in the manufacturing sector by 2025. There is increasing adoption of internet laying the groundwork due to Digital India programme. There are affordable cellular rates which are leading to deeper penetration of technology & improved internet connectivity. There is higher use of digital advertising and online classifieds by businesses. Digitization imparts wide ranging benefits to SMEs, ranging from increased online visibility to improve bottom-line. Some of the important benefits due to this would be increase in customer reach, improved revenue & profitability and increase in employment.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

DESCRIPTION	Mar-17	Mar-18	Mar-19	Mar-20	Mar-21E	Mar-22E
Net sales	317.76	410.51	507.42	638.90	640.80	775.40
Employee Cost	209.67	194.86	229.98	266.70	222.32	275.98
Other Expenses	181.77	291.88	260.36	203.30	185.36	216.84
Total Expenditure	391.45	486.74	490.34	470.00	407.68	492.82
EBITDA	-73.69	-76.23	17.08	168.90	233.20	282.60
Depreciation	4.63	2.89	4.13	21.10	20.50	20.50
EBIT	-78.32	-79.12	12.95	147.80	212.66	262.10
Other Income	14.17	19.02	40.97	68.60	81.65	75.20
Interest	0.31	0.31	0.31	3.30	3.50	3.50
Profit before tax	-64.46	-60.41	53.61	213.10	290.81	333.80
Provision for Tax	0.20	-114.86	33.88	64.10	73.28	84.12
Profit After Tax	-64.35	54.76	20.04	149.00	217.53	249.68
Earnings Per Share	-70.20	54.87	7.01	50.24	75.27	86.40

Source: Stockaxis Research, Company Data

Valuation

We believe the company can sustain higher growth in revenues which will help improve margins on account of operating leverage. The company is primarily directed towards the B2B segment and enjoys a dominant position in India. We further believe the B2B segment is more specialized and has got miniscule competition from other large marketplaces. The company has presence in different verticals and geographies; thus, we believe that it will capture the rising opportunity in the industry. The stock is currently trading at a valuation multiple of 28.2x FY22E EPS and we expect 80-100% returns in next 2-3 years

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