Rally in IndiaMART's stock has more legs despite 50% jump in two months

Analysts see more gains on inorganic expansion plans, better-than-expected Q3 show and firm's return to pre-Covid growth level

Return to pre-Covid growth levels, plans to expand business through the inorganic route, increasing trend of digitisation among medium, small and micro enterprises (MSMEs), and better-than-expected December quarter (Q3) results have strengthened the Street’s confidence in growth prospects for India’s online business-to-business (B2B) marketplace IndiaMART InterMESH.

On Monday evening, IndiaMART reported its Q3 performance, which was higher than analyst estimates on all the key parameters. The operational performance was aided by a sharp rebound in paid suppliers and cost optimisation initiatives. The company added around 7,000 paying subscribers in Q3 -- against the expectation of 5,000 — of which 5,500 were new additions, while the remaining were those that had churned during the Covid-19 crisis.

Analysts expect the business momentum to sustain on the back of healthy growth in traffic and unique business enquiries. “Leading indicators, such as traffic and business inquiries, are up 35 per cent and 38 per cent year-on-year (YoY), offering confidence in the sustenance of the current momentum,” said Anmol Garg, research analyst at Motilal Oswal Securities, which has a “buy” rating on the stock with a target price of Rs 9,000. These trends would likely attract more paid suppliers to its platform and the management is confident of adding 5,000-6,000 net paid suppliers per quarter. 

Cash collections, though flat YoY, increased 9 per cent sequentially to Rs 178 crore and are now at pre-Covid levels. Operating profit margins hit an all-time high led by continued optimisation across all cost items. Going forward, the company believes that of the Rs 40 crore worth of quarterly cost savings achieved versus pre-Covid levels, around Rs 15 crore is sustainable. So, while the number may come off a bit, it is likely that operating margins remain at elevated levels (47 to 50 per cent versus 28 per cent in FY20), said analysts at JM Financial.

The company also approved raising of Rs 1,100 crore to grow its business through a mix of organic, as well as inorganic opportunities. Similar to its existing strategy, it plans to make one or two acquisitions, in addition to some minor investments.

Against this backdrop, brokerages have revised upwards their earnings estimates between 4 per cent and 17 per cent over FY21 to FY23. Though the stock has seen some correction in the past few days after over 50 per cent rise since mid-November, analysts believe that IndiaMART’s leadership position in the online B2B classified industry, a robust business model, and increasing trend of digitisation among MSMEs offer a long runway of growth.