Will Indiamart’s Share Price Surge Sustain?
When India’s small businesses are facing stress, investors are betting on the nation’s largest online marketplace that lets such enterprises buy and sell in bulk.
Share prices of Indiamart Intermesh Ltd. have surged 45 percent since market debut three months ago to trade at Rs 1,893 apiece. The stock, which listed on July 4, has doubled from its issue price of Rs 973.
Indiamart offers everything from construction material and power tools to apparel and food in bulk—an online business-to-business model that helped Alibaba Group, in part, to become a powerhouse. Yet, the Indian bulk-buying platform’s initial public offering and subsequent surge came even as small businesses, contributing 29 percent to the nation’s GDP, struggle.
Following the twin shocks of demonetisation and implementation of goods and services tax, a liquidity crunch after the IL&FS crisis last year and an economy growing at its slowest in six years have soured sentiment. That even prompted Finance Minister Nirmala Sitharaman to nudge banks to use central bank’s easier bad-loan rules for micro, small and medium enterprises struggling to find capital.
For investors, Indiamart’s dominant business with no close challengers and a guaranteed revenue stream offer value. It has a 60 percent market share, according to KPMG, connecting manufacturers, suppliers and exporters to buyers. The company generates 99 percent of its revenues from subscriptions purchased by sellers, while the portal is free for buyers.
According to Indiamart’s red-herring prospectus, India’s digital classifieds market is expected to nearly double to Rs 7,710 crore in five years ending March 2022, growing at an annualised rate of 14 percent.
As of March 2019, Indiamart provided nearly 8.3 crore registered buyers with access to 55.5 lakh suppliers, listing over 6 crore products and services across 54 industries, according to ICICI Direct. The company has strong brand recognition, a dominant market position, a strong network and a community of buyers and sellers, it said.
Yet, there’s a huge untapped potential.
Only about 17 percent of SMEs in India use internet for business purposes, indicating low penetration especially when compared to economies like China, Brijesh Agrawal, co-founder and director at Indiamart, told BloombergQuint in a recent interview. There is great scope for growth as more SMEs use internet, increasing the number of paying suppliers, he said.
Building A Moat
According to Agrawal, Indiamart doesn’t directly compete with Alibaba or Amazon.com Inc. in India because of their business-to-customer focus. The traffic that Indiamart received in 2019 is 16 times its next competitor, he said. That gap stood at four times in 2016, indicating the pace of growth.
Competition will find it hard to make inroads into Indiamart’s territory, according to Edelweiss Securities. The B2B model involves much more sophisticated decision-making systems which will keep retail-focused platforms from replicating that success in the bulk-buying segment, it said. Moreover, another contrast from the consumer-focused online retailers is that Indiamart largely deals in long-tail products that are usually hard-to-find and have significant profits but low volumes, it said.
Steady Financial Outlook
Indiamart’s revenue grew at an annualised rate of 30.2 percent in five years through March as the number of paying suppliers rose. But the company turned operationally profitable only in 2017-18 as revenues grew and costs stabilised.
Dinesh Agarwal, founder and chief executive officer at Indiamart, told BloombergQuint in August that he expects the company to post an operational profit of Rs 25-30 crore a quarter in the near term.
Edelweiss Capital, the lone brokerage to cover the stock, is also optimistic. Given negative working capital—upfront collections—and an asset-light model, and not to mention that the investment phase is largely behind, Indiamart can expect a healthy cash flow, it said.
What Valuations Suggest
Indiamart is on the cusp of strong profit growth momentum led by revenue growth and high operating leverage, Edelweiss said in a report. “We see value in the stock owing to high entry barriers, network effect-driven pricing power, and negative working capital.”
The brokerage forecast Indiamart’s earnings per share for 2019-20 at Rs 48. At the prevailing share price, it is trading at 39 times its one-year forward earnings, according to BloombergQuint’s calculations. At these multiples, Edelweiss derived a price target of Rs 1,900 apiece. That, going by Edelweiss target, suggests the current price of Rs 1,893 has fully priced in the positives.