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MOSL: INDIAMART (Buy)-Blip on collections; expect faster recovery

INDIAMART: Blip on collections; expect faster recovery

(INMART IN, Mkt Cap USD3b, CMP INR7251, TP INR8610, 19% Upside, Buy)

 

• IndiaMART delivered in-line revenue performance in 1QFY22. The number of paid suppliers fell by 6k, impacted by lockdowns amid the second COVID wave. On the other hand, ARPU surged 8% QoQ on higher churn in low-paying silver monthly suppliers. The decline in collections was restricted to 38% QoQ v/s a 53% QoQ drop in 1QFY21. The sharp rebound in FY21 collections (post the drop in 1QFY21) reassures us of a quick rebound in collections over the next two quarters despite the second COVID wave impact on 1QFY22.
• Margins remained resilient, with the EBIT margin at 47% (v/s our estimate of 45.1%). Sequentially, margins increased 140bps on higher ARPU and lower variable payouts to sales employees due to a drop in collections. The company reduced its outsourcing of sales executives significantly; channel sales partners are now acting as partial substitutes for those involved in acquiring new accounts.
• We expect some moderation in net additions for FY22 from the company’s long-term guidance – given the pressures from the regional lockdowns in India. That said, paid supplier additions should remain modest (+12k for FY22E). However, we expect a higher momentum for paid suppliers in FY23 on economic recovery, which should drive a 21% revenue CAGR over FY21–23E.
• While we concur that margins at current levels are unsustainable, IndiaMART should see a structural shift in operations from pre-COVID levels. Half of the savings, led by cost optimization, would continue to flow through on account of 1) permanent optimization in G&A, 2) sales through channel partners rendering costs variable (and leading to a reduction in total employees), 3) higher productivity benefits, and 4) a reduction in travel expenses (achieved by shifting some face-to-face meetings onto video conferencing).