We initiate on Indiamart with a ‘buy’ rating and price target of `2,500. It is the dominant B2B classified platform in India with strong moats to defend it against competition. We expect 20% revenue CAGR over FY20-22E despite macro headwinds related to economic slowdown; this in turn should drive sharp margin expansion to 28% by FY22E vs. 16% in FY19 given strong economies of scale.
Indiamart has 137k subscribers which is 2.4% of its listing base, who pay `45k per annum on average.
We see multiple growth drivers for Indiamart which should help drive 20% revenue CAGR over FY20-22E, continued rise in number of paid suppliers with increased shift towards digital advertising, greater penetration outside of top tier cities, shift to category & location specific pricing should drive ARPU growth.
However, we factor in some deceleration near term (22% in 2H & 15% in FY21E) to reflect overall economic slowdown. Large upfront collection leads to good revenue visibility for the company. High customer churn rate is a risk.
Indiamart’s EBITDA margin has expanded sharply over the last few quarters from 11% in Jun-18 to 24% in 1HFY20, helped by significant economies of scale given low variable costs. We expect margins to expand to 28% by FY22E vs. 16% in FY19 and stabilize at 33% in the medium to long run. The business is in a negative working capital cycle owing to large proportion of upfront collections. This has led to positive FCF & significant cash generation with `780 crore (`270/share) of cash & investments as of 1HFY20, which is likely to expand to `17.3bn (`600/share) by FY22E end. We initiate on Indiamart with a Buy rating & price target of `2,500, which implies 25% upside to CMP. Our DCF-based valuation implies 28x FY22E P/E.