Verdict: Attractive for ST, under watch over LT

IPO Snapshot:

IndiaMart InterMesh has entered the primary market on Monday 24^th June 2019, to raise Rs. 475 crore via an offer for sale (OFS) of up to 49 lakh equity shares of Rs. 10 each, by 3 PE investors (comprising 68% of OFS), promoters (29% of OFS), and other individual shareholders (3% of OFS), in the price band of Rs.  970 to Rs. 973 per share. Discount of Rs. 97 per share is being offered to employees (no retail discount). Issue, representing 17% of the post issue paid-up share capital, closes on Wednesday 26^th June with listing likely on 4^th July.

Objects of Issue and Shareholding:

75% of the offer is reserved for QIB (unlike the usual 50%) with only 10% for retail (35% otherwise) and 15% for HNI category (allocation unchanged).

Since IPO is 100% OFS, no funds will flow into the company. Pre-issue promoter shareholding of 57.6% will contract to 52.6% post the OFS. 3 selling PE funds (Intel, Amadeus, Accion) will own 11.8% post IPO, from current combined 23.4% holding. 4^th PE investor Westbridge, with its 5.4% shareholding, is not participating in the OFS.  

Company Background:

IndiaMart InterMesh is India’s largest online B2B (business to business) marketplace, with ~60% market share in FY17. With 5.6 million sellers and 83 million buyers on its web and mobile platforms, company’s primary source of income is seller listing fee, enquiry fee from buyer and payment facilitation between them, which clocked revenue of Rs. 507 crore in FY19. Services like advertising and marketing hardly yield meaningful revenue (~ Rs 5 cr), indicating company’s presence is limited to listing of products and businesses, without diversification into other verticals, despite being a market leader and enjoying first mover advantage. Payment facilitation service was started in April 2017 and since then no ‘new’ revenue stream has been added. Thus, company needs to keep pace with rapidly evolving technology or rather be ahead of the curve in terms of innovation, which will be a key monitorable for investors going forward.

Industry Profile:

Company primarily caters to the unorganised SME sector, where there is a large untapped industry opportunity. Given this, competitive activity has intensified with many players such as Udaan, Alibaba India (limited presence), Power2SME, ShopX (Nandan Nilekani funded), BigTrade, TradeKosh etc. in the game. Udaan, a 3 year old startup founded by 3 ex-Flipkart execs, is already a unicorn (private company commanding USD 1 billion or Rs. 7,000 crore valuation) with over 1.5 lakh seller listings a year ago. Many of these new age shops offer a gamut of services like listing, sourcing, logistics, financing etc. whereas IndiaMart seems to be limited to listing. As per some industry estimates, Udaan’s revenue has already reached 1/5^th of IndiaMart, given its comprehensive product offering and higher growth rates. Thus, it remains to be seen how IndiaMart will catch up to these younger and more-aggressive rivals in times to come.

Financials:

IndiaMart broke even on core PAT in FY18 with adjusted PAT of about Rs. 63 crore on revenue of Rs. 410 crore, as against reported PAT of Rs. 55 crore for FY18, adjusting for deferred tax and net loss on financial liability of buy-back. In FY19, paying subscription suppliers increase 20% YoY to 1.3 lakh (as of 31-3-19) leading to annual revenue rising 24% YoY to Rs. 507 crore, while adjusted PAT stood at Rs. 85 crore, up 36% YoY, vis-à-vis reported PAT of Rs. 20 crore. Thus, on an equity of Rs.28.59 crore, adjusted EPS for FY19 is close to Rs.30, significantly higher than reported EPS of Rs. 7.61. 

Due to conversion of cumulative convertible preference shares (CCPS) into equity shares in FY19, net worth, which was negative Rs.321 crore as of 31-3-18 due to accumulate losses, has become positive Rs. 160 crore as of 31-3-19. Thus, company operations now seem to have stabilized with initial investments bearing fruits, as also, one-time exception behind it, strengthening both profitability and balance sheet.

Being a negative working capital business, due to sums received for sellers listing in advance (Rs. 586 crore as of 31-3-19), surplus cash on hand stands at Rs. 685 crore or Rs. 240 per share. Of these deferred revenue items of Rs. 586 crore, Rs.356 crore is current i.e. to accrue in FY20, providing a very healthy revenue visibility. For the past few years, topline has been nearly twice the current deferred revenue, which is a bullish indication, resulting in an estimated revenue growth of over 25% for FY20.

Valuation:

At Rs. 973 per share, company’s market cap will be Rs. 2,800 crore, leading to historic PE multiple of 33x on adjusted FY19 EPS of Rs. 30. On FY20E EPS of Rs. 35, PE multiple works out to approximately 28x, which is seen attractive over the short term, given asset light model, negative working capital nature of business and operations reaching a critical mass leading to benefits of operating leverage kicking in. Having said that, company’s quarterly performance must be closely monitored as, after 6 consecutive quarterly rise in total traffic, it declined 13% and 1% QoQ in Dec 2018 and March 2019 quarters respectively. Secondly, total business enquiries delivered by the company dropped 6% QoQ in March 2019 quarter.

Over the long term, key monitorable remains company’s ability to keep up with the changing times. The highly disruptive nature of the industry increases risk substantially. Moreover, unpleasant experience of investors on the bourses with new-age/ internet companies such as Matrimony (down 40% in 2 years of IPO), Just Dial (PE contraction to 25x from over 65x earlier), Infibeam (80% value erosion from peak) extends some caution on the ‘technology’ companies operating in the domestic listed space. Info Edge however, was an exception, with multiple assets, ruling at a market cap of Rs. 26,000 crore and PE multiple of 44x. Just Dial currently trades at PE multiple of 23x with market cap of Rs. 4,700 crore. IndiaMart’s PE multiple lies somewhere in between these two. 

Current risk-averse nature of secondary markets may also be a dampener to the issue, to some extent. However, small issue size of less than Rs. 500 crore, along with higher institutional reservation may see it sail through.

Conclusion:

For the short term, one can apply in the IPO given strong core performance in FY19 and healthy revenue visibility for FY20.

Over the medium term, quarterly result and operational parameters need to be tracked, while over the long term, close monitoring for 2 key risks is warranted - competitive behavior and evolving industry trends to gauge the inherent strength of the company.

For now, one can apply in the IPO with the short term view. 

Grey Market Premium (GMP) of IndiaMart: Grey Market Premium of IndiaMart is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No Interest.