Indiamart Intermesh - why is it struggling, and is there light at the end of the tunnel? ??
Before we begin, two announcements:
disc: this is a purely educational thread and NOT intended as a recommendation. please do you own diligence
Beginnings: Started in '96, just as internet was beginning in India. Technocrat founder: Dinesh Agarwal (ex CMC, HCL) decided to move back to India a day after the PM gave the speech on internet introduction on 15th Aug '95. Brother joined the business when he was just 19!
Business has had many pivots over the years to keep pace with the times
'96-'01: Microsites for monetization, 75%+ travel focus; 9/11 biz takes hit, stressing need to diversify
'01-'07: Exporter oriented; '08 exports dented, china threat emerges; '08: Pivots to domestic B2B
The crisis and pivots are critical to the thesis, but more on that later.
About the biz: Indiamart today has 4.1cr buyers and 81 lakh suppliers on its platform, and is a dominant market leader in the b2b marketplace sector. For context there are ~2cr digitally enabled MSMEs in India, so 40% of them are active sellers on the Indiamart platform!
The business is relatively well diversified across sectors with construction raw material, industrial machinery, packaging, consumer electronics, electrical equipment, food and veggies and multiple other categories driving 4-8% of the business.
The business earns money via subscription tiers for its suppliers - the higher your tier the more leads your business gets every week. Of the 81 lakh suppliers on the platform just around ~2.5% are paid. (~218K paid suppliers)
The paid suppliers are split across tiers. The lowest (silver) tier brings in nearly half of the paid suppliers but contributes around 25% of the revenue. The gold and platinum tiers, which have the much more sticky clientele bring in 75% of the revenue.
Churn rates by tier:
Gold/platinum: 1%, Silver(annual): 4%, Silver(monthly): 6-7%
The business has three levers of growth
+ grow suppliers (~17%); increase arpu (~6%); monetize more suppliers (flat)
In a relatively under-tapped market, the business was able to grow suppliers fast, and increase arpu broadly inline with inflation, building a 25% growth engine.
However the traditional growth levers are now slowing down. The business now covers 40%+ of digitally enabled MSMEs making incremental growth in incremental suppliers challenging.
On ARPU - till silver churn comes down the ability to exert pricing has come down. The business has been over stressing it's proverbial golden goose (stickier gold and platinum clients) growing their ARPUs materially faster- but now risks overdoing it.
The third lever of increasing the % of suppliers who can pay hasn't been too successful in the past, and with the management's focus on staying in the lower churn segments is unlikely to be a material growth driver.
The combination of these factors has been stressing collections, a good forward looking indicator for the business which grew just 5% in the previous quarter. Deferred revenue has stagnated at ~1400cr for three quarters now.
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Value or value trap: The business does look attractive on valuation, but there is nuance here that needs to be understood.
Reinvestment: As the business transitions from high growth to maturity, there are limited places where the funds can be deployed. The best case is returning to shareholders which will make it a good dividend play, but this is hard for most managements to do.
The likely path will be investments. The bulls have been seeing as a potential naukri, but unlike Mr. Bikhchandani the mgmt hasn't demonstrated any notable skill in picking great investments. In their defence, the strategy has been different as well - picking logistics and accounting plays to integrate/cross sell with the core business.
Inflated PAT: The current margins are also extremely inflated, benefitting from past deferred revenue and a low current cost base (as the business slows growth spends). The steady state margins are atleast 500-600bps below current levels.
More importantly as and when the management does attempt to put the foot on the gas, we'll have a period of weak topline (flowing from weak defrev) and high expenses driving a sharp fall in margins.
A good part of PAT (35-40%), comes from investment income of the cash the business has on its books. If you want to get a good idea of 'cheapness' it is best to do it on core FY26 PAT (normalised margins, no other income padding).
Businesses that transition from high growth (20%+) to mature growth (~10%), generally go through a (long) period of time correction as the market adjusts to the new growth realities of the business.
Competition: India typically only had horizontal marketplaces. As key segments grow large (construction material, industrial components) - focussed and profitable marketplaces for these will emerge. Competition has already come up in two - more will likely emerge.
Contra views:
+ Resilience: Management does have a long history of resilience and pivoting
+ TAM can grow as more SMEs get created and digitized
+ Gold/Platinum PMF exists: good pricing power exists here
+ Marwadi mindset: Unlikely to do anything too stupid with cash on books
Co-founder, Smart Sync Services | Co-Founder & Director Synconic Fintech Solutions Pvt Ltd
1 个月Good one, Ganesh. As always. Keep them coming. Enjoy reading your notes.