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Indiamart Intermesh Ltd. looks strong for further growth with increasing number of new user and increasing ARPU.
Deeper penetration of the internet among businesses and increasing number of user along with increasing ARPU will give strong up move to Indiamart Intermesh Ltd.
IndiaMART InterMESH (IndiaMART) commenced its business in 1996 as a small business for creating websites which later, in 1999, was re-established as an online directory for Indian exporters. Constant pivoting has resulted in IndiaMART becoming the largest online B2B marketplace for business products and services, with ~60% market share of India’s online B2B classified space which has become the Company’s core focus since 2008. IndiaMART provides an effective and trusted platform to help businesses leverage the power of the internet to increase their market reach and conduct commerce. The users conduct their businesses online using various tools provided by IndiaMART, which include a CRM-Lead manager, chat messaging, unique phone numbers, and payment gateways, enabling buyers and sellers to engage efficiently.
IndiaMART InterMESH (IndiaMART) is the largest online B2B marketplace for Indian business products and services and holds approximately 60% market share in the online B2B classified space. The Company operates on a strong network effect where more buyers attract more sellers and vice versa. IndiaMART is creating an ecosystem of web-based services that will empower businesses across the country.
Out of 60 Mn+ MSMEs in India, ~35% are already registered on IndiaMART as suppliers. Of these registered suppliers, only ~2.5% have subscribed to IndiaMART’s paid service leaving a massive growth opportunity for IndiaMART. On the buyer side, the Company has already built suitable capacities which attract enormous traffic on its platform. This helps IndiaMART offer quality leads to its suppliers at the lowest cost in the industry and strengthen its network further. The Registered Buyer/Paid Supplier ratio stands at 224. Based on this capacity itself, the management has adopted an aggressive stance to go after seller acquisition. IndiaMART’s strength and quality of its network will further improve as the Company adds business enablement services to its offerings.
IndiaMART is the strong player in the B2B e-commerce industry that has managed to constantly operate its platform profitably. While most players (including players more mature than IndiaMART) are merely making any profits. This ability to generate constant profits and positive cash flows allows IndiaMART to sustain difficult times and turn aggressive when other players have to focus on survival. To reduce its attrition rate, IndiaMART doesn’t charge higher fees from its matured customers. This strategy is contrary to how companies are chasing growth at the cost of profitability. B2B E-commerce platforms create an ecosystem that enables smoother transactions, procuring raw materials and industrial goods, and establishing a better connection between brands and small shop owners. The increasing B2C e-commerce market has made enterprises easily discoverable online, leading to B2B e-commerce market gaining size traction.
MSME segment contributes ~33% to India’s total manufacturing output. Online B2B platforms have set themselves up in such a way that they can be helpful to MSMEs as well as large established businesses. The Indian B2B digital classified market is estimated to be ~Rs 12Bn as of FY22 and has grown at a CAGR of ~18% in the last five years. The market is a combination of horizontal and vertical players. Horizontal B2B e-commerce platforms grow by expanding into any industry, adjacent or not. For example, on one hand, a customer can find medicines on IndiaMART but can also find construction machinery. On the other side, Vertical businesses grow by expanding into the same or adjacent industries in the supply chain. For example, Of Business facilitates raw material procurement and credit for SMEs, focusing only on the manufacturing and infrastructure sectors.
Like any other industry, players in the B2B industry generate revenue in multiple ways. Some businesses operate on a subscription model where they charge the seller for giving a buyer reference. In contrast, others either operate on a commission-based model where they charge a % commission of the amount of transaction taken place over the platform, or they operate as a reseller of goods or services produced by the seller. Apart from this, the platforms also provide numerous value-added services to their customers, including logistics, payment gateways, CRM, invoicing, financing, etc., which helps them to generate additional revenue.
Industry Research:
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 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 to 25-30% of the country’s GDP along with the creation of up to 90 million domestic jobs in the manufacturing sector by 2025.
India is the world’s seventh-largest economy and has shown consistent growth, which compared favorably to GDP growth across other developed economies. While the US economy has been showing strength recently, nearly all of Europe as well as Japan, Canada, and Australia are growing at less than 2%, and many others at around 1%. India, on the other hand, has been experiencing growth rates in the 5-8% range over the last 5 years. Currently, USA is the largest contributor to global economy at 24.32% followed by China (14.84%), Japan (5.91%), Germany (4.54%), UK (3.85%), France (3.26%) and India (2.83%).36 By 2030, India’s economy is projected to be the world’s third-largest, behind only China and USA.37 38 India is projected to be the fastest growing economy amongst the top 10 economies of the world by GDP, growing around 7-8 percent CAGR from 2018-2023. On the other hand, China and USA are expected to grow at slower rates of ~6 percent and ~2 percent respectively.
The growth in internet penetration throughout India along with increased accessibility and affordability of smartphones, will act as a catalyst in helping SMEs adopt web based and mobile based technologies. The same is helping SMEs move their businesses online reaching out to a larger customer base, helping theme expand their presence and being able to compete against larger enterprises. As per the KPMG Google report on ‘Impact of internet and digitization of SMBs in India’, just 32 percent of SMEs in India were digitally connected in 2017 and 17 percent used internet for business purposes. On the other hand, 54 percent of small businesses in USA used e-mail for business in 2017 and 51 percent had their own website.
The government has launched several initiatives under the Digital India umbrella to improve digital connectivity and enhance digital skills and awareness in the country which is likely to aid the digitization of SMEs in the near to long term. Some important initiatives undertaken by the government include:
Investment Rationale:
Network Driven Business Model:
The term ‘Network Effect’ describes the phenomenon in which a product/service becomes more valuable to existing users as more users join in. IndiaMART has been a big beneficiary of the ‘Network Effect.’ A virtuous cycle kicks in as more buyers/sellers join the platform. This cycle does two things, a) it increases the number of new buyers and suppliers coming to the platform and the stickiness of both parties, and b) it decreases the customer acquisition costs as operating leverage kicks in. After being operational for over two decades, IndiaMART has created a massive self-fueling network, which is benefiting them immensely.
From listing on the platform to receiving payments, a supplier goes through several steps to find potential buyers and interact with them to conduct commerce via the internet on IndiaMART. Suppliers are thoroughly assisted by the representatives of the Company to help them smoothly navigate through their journey on the platform. The supplier can either opt for the Freemium package, which is mostly free or select one of the premium packages. The Company offers basic and premium subscription models, including a predefined number of BuyLeads and other features depending on the package chosen by a supplier. The subscription packages can be divided into Silver, Gold, and Platinum and are available for various periods (monthly, annually, or for multiple years). Longer- duration subscription packages are sold at discounts compared to shorter- duration packages. Besides facilitating commerce, IndiaMART also provides essential value-added services that empower business owners to conduct business efficiently. These services include tax compliance, invoicing, payroll management, etc., enabling a business owner to focus on other important aspects and bring more business to the table by devoting the same amount of time.
Strong Credentials leading to strong growth:
IndiaMART has built a solid network, leading to exponential growth and significant traffic attraction. Traffic on IndiaMART’s platform has compounded at a healthy rate of ~28% during FY17-FY23, which is in line with the revolution of internet penetration India has seen. ~82% of the traffic has come through IndiaMART’s mobile application. Also, the users that the platform has managed to attract is not ‘fly-by-the-night’. Many of these visitors are potential buyers and eventually indulge in e- commerce on the platform. The Company has converted users into buyers at a compounded rate of ~35% over the last five years. Although buyers don’t directly contribute to IndiaMART’s revenue, they form a crucial part of the network on which the Company thrives.
Due to the network effect, growth in buyers has led to a healthy increase in registered suppliers at a CAGR of ~19%. Even the paid suppliers (revenue source for IndiaMART) have almost doubled during FY17-FY23. The conversion rate has remained rangebound from 2.4%-2.7%, indicating IndiaMART’s ability to convert a Freemium supplier to a paid supplier is intact. IndiaMART introduced an algorithm that matches relevant buyers and suppliers, facilitating commerce. The platform prioritizes suppliers who respond to BuyLeads properly and promptly, satisfying business inquiries on time. IndiaMART has managed to compound inquiry deliveries at a healthy ~29% over five years despite the disruption caused due to pandemic. This is aptly demonstrated by 58% of users revisiting to transact again within 90 days.
Strong Workforce:
Employees are a vital driving force behind IndiaMART’s success, and it duly appreciates this fact and acts in the best interest of its workforce. The sales and service team is divided into client acquisition and client servicing. Employees either operate on the field or the telephone. On the client acquisition side, post- pandemic, the Company has started outsourcing its workforce to staffing companies like team-lease and telecall centers. Apart from this, IndiaMART also gives out franchises. Now, the outsourced team acquires ~51% of the new clients for IndiaMART. Almost 99% of the client servicing team performs tasks like renewals, servicing, and upsells on IndiaMART’s payroll. These employees bring in ~82% of the revenue for the Company. And a dedicated team of 700+ supervisors are responsible for looking after the outsourced employees. Employees with tech expertise also form an inevitable part of the Company as they look after the platform’s smooth functioning and add value-added services to attract and retain customers. IndiaMART now requires one employee for every 70-75 suppliers, which was ~51 suppliers earlier. The Company dedicates lesser but trained resources to the suppliers as they upgrade their packages. After spending some time on the platform, the supplier becomes aware of how the platform works and hence, requires lesser handholding with resources. Employee costs decreased in FY21 and FY23 as IndiaMART did not hire aggressively and abstained from salary hikes during the Pandemic period. Now, after the business revival, the Company plans to turn aggressive, doubling down on growth momentum. Thus, IndiaMART started expanding its workforce bringing back employee costs to pre-pandemic levels. IndiaMART has also done well when it comes to retaining its employees. As on March 2023, ~32% of IndiaMART’s workforce has been with the Company for more than five years. In response to pandemic, IndiaMART shifted from a monthly salary payout model to a weekly one to ensure that employees get regular cash flow. Now, 100% of the workforce receives their salary weekly.
Strong Future Outlook:
Constant evolution is in the DNA of good businesses. IndiaMART, which started as a directory of online Indian exports, has been under the weather multiple times, like the tech meltdown in 2000 and the global financial crisis in 2008. However, it has managed to find its way out successfully by evolving its business into the most helpful version for its users. IndiaMART, in the upcoming avatar, sees itself as a B2B SaaS company and aims to build a fully integrated ecosystem helping buyers and sellers in various areas of their businesses. Through its acquisitions of various small start-ups, the Company plans to add a bouquet of SaaS services to its offering. These include logistics (support), accounting, procurement, order & inventory management, and many more.
The Company has already done 14 acquisitions (predominantly in the accounting space), spending ~Rs. 10 Bn in the last two years. The pace and the valuation at which some of these acquisitions may have been made are uncomfortable. How the Company consolidates and integrates all these businesses on a single platform will be something to watch out for. After acquiring four companies in the accounting space, IndiaMART is now ready to cater to the accounting software requirements of all businesses, irrespective of their size. The Company has started cross-selling VYAPAR by giving a free first- year subscription with IndiaMART’s subscription packages.
IndiaMART’s plan for BUSY (largest acquisition) is to first focus on retaining people & partners through integration, post which the Company will aim for growth to be present across various mediums like mobile and cloud, besides its current “On Desktop” offering. IndiaMART’s top-level management and the Board consist of the right mix of professionals. The team is well diversified in terms of qualifications and industry experience. Promoters hold a decent stake showing significant skin in the game. We believe that the salary of top-level management (Excl-Perquisites) is not a point of concern.
Advantage Of Adequate Capacity:
MSMEs form an integral part of the Indian economy, contributing ~27% to India’s GDP, ~35% to total manufacturing output, and ~49.5% to total exports in FY21. Increasing internet penetration among MSMEs will create immense opportunities for B2B e-commerce players. A player like IndiaMART (~60% market share) is poised to benefit significantly from this adoption. Also, if we take cues from 1688.com, it benefitted immensely from the internet penetration in tier 3-4 cities in China. 1688.com currently stands at ~1 Mn paid subscribers. IndiaMART is capable enough to achieve this kind of scale. In 2000, IndiaMART had ~0.1 Mn registered suppliers, out of which only 10,000 were paying suppliers. Fast forwarding to 2020, the Company took the number of registered suppliers to ~6 Mn and paid supplier count to ~0.15 Mn. A similar kind of progression can play out given the capabilities of the Company. Out of 20.3 Mn digitally engaged MSMEs, ~7.2 Mn suppliers are already registered on IndiaMART. Therefore, ~35% of MSMEs are already a part of the IndiaMART ecosystem. Out of this, a minuscule ~2.5% of suppliers have subscribed to IndiaMART’s service. This leaves a massive opportunity for IndiaMART.
IndiaMART is extremely capable of benefiting from this opportunity having built the right kind of capacities in terms of having the right platform, healthy traffic, a plethora of registered buyers, etc. The Company attracts enormous traffic on its platform, which is yet to be monetized. This helps IndiaMART offer many quality leads to its suppliers at the lowest cost in the industry and strengthen its network further. This strength will only increase as the Company adds business enablement services to its offerings.
IndiaMART’s immense capacity to satisfy its suppliers is also visible in the Active Buyers/Paid Subscriber ratio. The Company has doubled the number since 2017, which stands at a significant 224 buyers per paid supplier. In the context of this number, management’s decision to go aggressive with seller acquisition looks sensible and well within the service reach of IndiaMART. IndiaMART is the only player in the B2B e-commerce industry that has managed to operate the platform profitably consistently. There are many players present, but only a handful are profitable. While most players (including players mature than IndiaMART) are thinly profitable, IndiaMART is the only incumbent that stands out in generating healthy profits.
Almost all the players have shown growth ahead of IndiaMART, but no one has been posting decent profits consistently except IndiaMART. This ability to generate constant profits and hence positive free cash flows gives IndiaMART the ability to sustain difficult times and turn aggressive when its peers might be focusing on survival. IndiaMART has been working on a differential pricing model – a category-city combination based pricing model. The Company plans to introduce this model for platinum or a premium listing in a particular category.
Management Profile:
Dinesh Chandra Agarwal, aged 49 years, is the Managing Director of Company. He holds a bachelor’s degree in technology (computer science and engineering) from Harcourt Butler Technological Institute, Kanpur University. He has experience in the field of internet, networking and systems development and consulting. He was previously the proprietor of InterMESH Systems, which was subsequently acquired by Company, and has worked with Hindustan Management and Technical Services Private Limited, HCL America, Inc., HCL Limited, HCL Hewlett-Packard Limited, Centre for Development of Telematics (C-Dot) and CMC Limited. He is a charter member of The Indus Entrepreneurs (TiE), a global network of entrepreneurs and professionals. He is also a member of the governing council of the Indian And Mobile Association of India. He has been a Director on Board since incorporation of the Company.
Brijesh Agrawal, aged 41 years, is a whole-time Director of Company. He holds a master’s degree in management science from University of Lucknow and a post graduate diploma in business management from Northern Institute for Integrated Learning in Management, New Delhi. He has experience in the field of internet, business management and supply chain. Previously, he worked with H N Miebach Logistics India Private Limited. He is a charter member of The Indus Entrepreneurs (TiE), a global network of entrepreneurs and professionals. He has been a Director on Board since incorporation of the Company.
Dhruv Prakash, aged 66 years, is a non-executive Director of Company. He holds a master’s degree in science (chemistry) from Meerut University and a post graduate diploma in business management from Indian Institute of Management, Ahmedabad. He has experience in the field of management consulting, finance, manufacturing and chemicals. He has previously worked at Korn/Ferry International Private Limited, Helion Ventures Private Limited, Hewitt Associates (India) Private Limited, Amar Dye-Chem Limited, DCM Toyota Limited, Hindustan Reprographics Limited and Escorts Limited. He was first appointed to Board on May 11, 2012 and resigned from Board on January 27, 2015 and was subsequently re-appointed on September 1, 2016.
Rajesh Sawhney, aged 52 years, is an Independent Director of Company. He holds a bachelor’s degree in engineering (electronics and communication) from University of Delhi and a master’s degree in management studies from University of Bombay. He has experience in the field of media, entertainment, telecommunications and internet industry. He has worked with Reliance Capital Limited and Reliance Entertainment Limited. He has been a Director on Board since January 27, 2011.
Elizabeth Lucy Chapman, aged 37 years, is an Independent Director of Company. She holds a bachelor’s degree in science from Edinburgh University, United Kingdom and is a chartered financial analyst. She has experience in the field of adoption of digital technology in financial services. She has previously worked with DBS Bank Limited, Goldman Sachs International, The Wellcome Trust Limited and Nahar Credits Private Limited. She has been a Director on Board since January 27, 2015.
Vivek Narayan Gour, aged 55 years, is an Independent Director of Company. He holds a bachelor’s degree in commerce from University of Bombay and a master’s degree in business administration from University of Delhi. He has also completed owner/president management programme from Harvard Business School. He has experience in the field of finance, consultancy and management. He has worked with First Leasing Company of India Limited, Infrastructure Leasing & Financial Services Limited, Tata Finance Limited, Genpact India and GE Capital Services India and has been the managing director of Air Works India (Engineering) Private Limited. He has been a Director on Board since April 30, 2018.
Financials:
Valuation & Opinion:
Considering IndiaMART’s current aggressive stance on supplier acquisition, penetration of the internet among businesses, and the strength of IndiaMART’s network, we believe that the Company will be able to add a significant number of paying suppliers in the next two years. We believe that the Company will be able to add 35,000-40,000 paying suppliers each year to its bank and will keep growing its Average Revenue per Paying User (ARPU) at the rate of inflation which has historically been ~5-6%. Operating margins will be under pressure in FY23 as the cost burden will significantly rise on account of the Company’s decision to pursue growth. We believe these costs will be absorbed, and operating leverage will kick in from FY24, which will lead to margin normalization and improving CAGR.
Key Risks:
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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