Indiamart Intermesh: Jefferies initiates coverage with 'buy' rating, sees 26% upside – 6 key reasons why

Global brokerage firm Jefferies has initiated coverage on Indiamart Intermesh, an online B2B marketplace, with a 'buy' tag, setting a target price of ₹3,400 apiece, which implies a 26% upside from the stock's current trading price. 

Additionally, in a bull case scenario, the brokerage sets an even higher target price of ₹3,820 for the stock. The brokerage's bullish outlook stems from the company's strong position in the online B2B classified segment, potential revenue growth driven by the rise in digital penetration among SMEs, and reasonable valuations.

Dominant player in B2B classified in India: Indiamart is the largest online B2B classified in India, having over 60% traffic market share. The platform connects SME suppliers and buyers across 95k+ product categories. Monetisation is done through a freemium model where suppliers pay subscription fees for premium services. The platform has over 185 million registered buyers, and 7.8 million supplier storefronts, of which 212k are paid suppliers. 

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The platform is mobile-centric, with 80% of traffic on mobile. In addition, Indiamart has invested in a portfolio of SaaS products over the last three years.

Well-placed against competition: Indiamart's strong community and network effects, higher value to suppliers, and diversified listings are key moats against competitors. The platform also looks well positioned against horizontal platforms.

Strong revenue growth prospects: The brokerage anticipates robust revenue growth for the company, driven by several factors.  Firstly, it believes that the company operates in a predominantly untapped market, which provides structural growth opportunities as digital awareness among SMEs continues to rise.

Additionally, revenue growth is expected from the conversion of free to paid subscribers, expanding penetration beyond top-tier cities into large enterprises, and benefiting from average revenue per user (ARPU) improvements through up-tiering, price increases, and location-based pricing. 

Furthermore, revenue growth is anticipated from cross-selling software-as-a-service (SaaS) offerings. As a result, the brokerage forecasts a 19% compound CAGR over FY24–26E.

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Steady margin expansion: Jefferies expects margins to expand by 200 basis points over FY24–26 with the benefits of operating leverage, even amidst elevated employee costs due to growth investments. Indiamart has a negative WC cycle and a capex light model driving strong FCF. It anticipates cash & investments to rise to ₹40 billion ( ₹660 per share) by FY26.

Strong cash generation; healthy balance sheet: The company has a robust cash-rich balance sheet with ₹23 billion of cash as of 3QFY24. Jefferies anticipates Indiamart to utilise more cash for investments in SaaS platforms and expects a 20% dividend payout.

Valuation: According to the brokerage, Indiamart has historically traded between 33 and 75 times its one-year forward standalone earnings since its listing. Valuations reached their peak in 2021 during the tech rally, driven by expectations of higher subscriber additions due to COVID-induced digitalisation among SMEs. 

However, lower-than-expected subscriber additions in the second half of 2021 led to a derating of the stock, resulting in a drop to 35 times earnings by June 2022. Subsequent improvements in subscriber additions in the first half of 2022 prompted a re-rating of the stock in anticipation of continued growth.

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Nevertheless, lower-than-expected subscriber additions in the first quarter of FY24, followed by two consecutive quarters of weaker additions, further contributed to the stock's derating, due to which it currently trades at a 14% discount to its historical average.

Based on the brokerage's projections of increased subscriber additions in FY25/26, reaching 25,000 compared to 12,000 in FY24, there is limited potential for further PE multiples to decrease. Additionally, the brokerage believes that the inherent operating leverage in the business will allow for margin expansion, supporting a projected 22% CAGR in earnings per share (EPS) over FY24–26 and sustaining premium multiples.

Jefferies values Indiamart's standalone business at 37 times the one-year forward price-to-earnings (P/E) ratio, resulting in a standalone fair value of ₹3,255 per share.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.