Description

Investment Summary

India is among fastest growing economies in the world

Thousands of listed companies make it an interesting place to fish for smaller mid cap companies that have a long-term growth prospect

I track hundreds of small, mid and sometimes (nano caps) in India and globally to build a portfolio of companies with growth potential

Indiamart is a $2 bn market cap business with profitable growth for the next decade and benefits from a negative working capital business model with upfront supplier subscription payments, net cash balance sheet (17% of market cap).

This is a business which has a large TAM and therefore long runway for potential growth. In addition, the company has the optionality to invest in new business lines complimentary to its core. Asset-light digital platforms are uniquely privileged in this respect able to ‘bolt on’ value-added services in order to monetize more stages of the customer journey

Business Description

India is India’s largest online B2B marketplace with roots in 1996, founded in 1999 and a 60% market share of B2B e-commerce. The company gets traffic of over 1 billion, through very limited advertising spend, this has grown from 250mm in FY 2016. IndiaMart is perhaps comparable to Alibaba’s 1688.com division, but at very nascent stages of growth

The company provides virtual storefronts to 7.5mm small & medium enterprises (SMEs). This has grown from 2.3mm in FY2016. These suppliers are diversified across 96,000 categories and 56 industries and 95 million product listings. See below image.

The growth strategy is to increase the adoption of IndiaMart platform for buyers and suppliers.

Out of the 7.5mm suppliers, 202,690 (~3%) are paying subscription suppliers (grown from 72k in FY2016) to access the 170 million registered buyers (grown from 83mm in FY 2019) looking for niche merchandise. 7.3 million small and medium businesses use the “freemium” version for free to post their lead requirements whereas suppliers are allowed to list for free but can pay to get more visibility and access to buyer leads

54% of paying subscription suppliers are from the top 8 metro cities in India, namely Delhi NCR, Mumbai, Bengaluru, Hyderabad, Kolkata, Ahmedabad, Pune and Chennai. 28% of paying subscription suppliers are in tier 2 cities in India (FY 2023)

31% of registered buyers from top 8 metro cities in India; 25% of registered buyers from tier 2 cities in India; 44% of registered buyers from smaller towns with less than 0.5mm population.

No single industry accounts for more than 10% of paying subscription suppliers

Suppliers benefit from business visibility, access to a large buyer base, lead generation and payments and more. Buyers get access to a large selection of products/services, price discovery, transparency in supplier ratings, payment options, and more

IndiaMART enjoys a first mover advantage. While there is no direct peer, JD Mart (Just Dial), TradeIndia and ExportersIndia have similar business models.

Strong network effects result in the dominant platform benefiting from a virtuous cycle with a disproportionate share of the industry profit pool with 55% repeat buyer. Buyers are attracted to a wide range of products and services. Sellers are attracted due to strong traffic and business enquiries. The app has a 4.4 rating on Google Play store.

How does IndiaMart make money?

FY 2023, revenues grew by 25% YoY primarily driven by 20% increase in number of paying subscription (highest-ever increase in paying subscribers) and 4% increase in ARPU

95% of revenue is derived through subscription as per below. The company reports revenue in 3 reportable segments as per below.

The platform is monetized via a subscription model which encourages repeat usage.

IndiaMart packages are classified under Silver, gold and platinum categories on a monthly, semi-annual, annual and multi-year basis. Most paying subscription suppliers first subscribe to a silver package and then upgrade to a higher value package and premium subscription of Gold and Platinum. Higher tier packages provide better visibility and more RFQs to suppliers leading to an increased number of business enquiries for them.

While the company recognizes revenue over the period of subscription, most of the subscription is received upfront in advance.

To the extent it is not recognized as revenue, it is identified as Deferred Revenue and shown under the head Contract liability in the Balance Sheet. This helps Indiamart have visibility of revenues in advance and negative working capital leading to higher cash flows and steady revenue.

The packages include providing a web storefront, cloud telephony services, priority listing, RFQ selection credits (BuyLeads), customer relationship management through a lead manager, facility for online payment and advanced profile information of the prospective buyers.

Upgrades to premium subscription packages improve the ARPU (Average Revenue Per User) of our overall business.

Advertising revenue: derived from web banner ads and sale of online advertisements. Revenue from banners is recognized pro rata over the period of display of advertisement as per contract

Investments

IndiaMART is incubating business lines that are adjacencies to its core business (Accounting logistics, payments/SME, commerce, other SaaS), needed by its core SME customer base.

Below is a Mint article on this topic: https://www.livemint.com/companies/news/inside-indiamart-s-100-mn-bet-on-nine-startups-in-fy22-11645814375136.html

Below are strategic investments by IndiaMart in the various categories:

Source: Company filings

Accounting is a new reportable line in the revenue line item as more businesses follow compliance under the India GST (taxation) framework in future. Customer stickiness is very high in accounting which results in high lifetime value

Accounting is a large industry growing at double digits as compliance requirements have become stringent post GST.  IndiaMart is participating across accounting software solutions (micro to large enterprises, on premise and cloud) via four investments listed above in this space

Management and Incentives

IndiaMART was started in 1996 by Dinesh and Brijesh Agarwal as an online exporter’s directory. Over time, it has evolved into the leading B2B listing platform in India that allows buyers to discover suppliers of products and services in India.

IndiaMart is rare in that they provide a weekly payout of salary regime across all levels in the organization. Over 20% of employees covered under ESOP/SAR (700 employees as of FY2023)

Below is a table of promoter stakes, remuneration, qualifications, age. As per below, several management staff have a small stake in the company, ensuring incentives aligned.

Financials

As of current market price, IndiaMart’s market cap is roughly $2bn and enterprise value is approx. $1.7bn

cash equivalents long term investments $345mm with the bulk in money market funds and index equities conservatively invested; cash accounts for 17% of market cap

short/long term borrowings approx. $7.5mm; i.e. negligible.

Below are some key business metrics

Source: Company filings

Below are high-level reported financials converted to $:

Source: Company filings

Free cash flow above includes acquisitions. In FY 2023, there was a acquisition of INR 5bn ($61bn). Excluding this free cash would be $55mm

IndiaMart founder has publicly stated the company’s goal to double revenue by FY2027. I expect the company to generate approx. $120mm in operating cash at this time. I envision operating cash growing 20% per year for a long time.

With a growth business that has a negative working capital cycle, ideally we buy this at 6x cash multiples, but businesses that trade at such multiples in India are poor quality businesses. Therefore, I believe the price to be reasonable given:

1. Growth being 15-20% over the next decade
2. Returns on capital around 30%
3. Net cash business
4. Strong operating cash conversion from revenue

For anyone on VIC complaining about how expensive IndiaMart is, a large cap like Nestle India was a 40x multiple 6 years ago and has 4x from there. There are many such examples for a high quality businesses, where unfortunately investors in India have to pay up. Investors can use any declines in the stock to build a larger position.

Financials

As of current market price, IndiaMart’s market cap is roughly $2bn and enterprise value is approx. $1.7bn

cash equivalents long term investments $345mm with the bulk in money market funds and index equities conservatively invested; cash accounts for 17% of market cap

short/long term borrowings approx. $7.5mm; i.e. negligible.

Below are some key business metrics

Source: Company filings

Below are high-level reported financials converted to $:

Source: Company filings

Free cash flow above includes acquisitions. In FY 2023, there was a acquisition of INR 5bn ($61bn). Excluding this free cash would be $55mm

IndiaMart founder has publicly stated the company’s goal to double revenue by FY2027. I expect the company to generate approx. $120mm in operating cash at this time. I envision operating cash growing 20% per year for a long time.

With a growth business that has a negative working capital cycle, ideally we buy this at 6x cash multiples, but businesses that trade at such multiples in India are poor quality businesses. Therefore, I believe the price to be reasonable given:

1. Growth being 15-20% over the next decade
2. Returns on capital around 30%
3. Net cash business
4. Strong operating cash conversion from revenue

For anyone on VIC complaining about how expensive IndiaMart is, a large cap like Nestle India was a 40x multiple 6 years ago and has 4x from there. There are many such examples for a high quality businesses, where unfortunately investors in India have to pay up. Investors can use any declines in the stock to build a larger position.

Historical financial metrics (per investor presentation)

The below is a high level version of Indiamart’s income statement in Indian Rupee (INR) in millions. For reference, 1 US$ = 83 INR

Catalyst

Revenue growth of 25%+ annually 

Bolt on investments