IndiaMart:

IndiaMart is India’s largest Online B2B marketplace. It is a pure play platform company primarily engaged in facilitating trade between MSME Buyers & MSME Suppliers.

IndiaMart’s primary source of revenue (95%) comes from subscription fees that it collects from its users who wish to avail the wide outreach and excellent visibility of its platform.

Overview:

India’s economy has been highly fragmented for decades and the backbone of this economy has been the ‘Micro, Small, and Medium Enterprises’ (MSME). The advent of the internet, and the rise of e-commerce platforms has slowly started de-fragmenting the economy. IndiaMart has facilitated this by connecting MSMEs from rural areas to urban areas and vice-versa.

B2B and B2C Model:

B2C Model: A simple flowchart of how goods are delivered to you as an end Customer. For simplicity we have taken Amazon as our example. (Note: We are only talking about the e-commerce business of Amazon)

B2B Model (IndiaMart): A simple flowchart of how goods are exchanged across IndiaMart

Statistics for MSME: Micro, Small, & Medium Enterprises – Backbone of the Economy

Classification of MSMEs based on Investment and Turnover:

(This distribution is as per the old classification 2020, bold red numbers in the table indicate the older classification)

ClassificationInvestment Made (Cr)Turnover (Cr)Number of MSMEs
MicroLess than 1 Cr / 25 LacsLess than 5 Cr630.52 Lakhs (99.47%)
SmallLess than 10 Cr / 5 CrLess than 50 Cr3.31 Lakhs (0.52%)
MediumLess than 50 Cr / 10 CrLess than 250 Cr0.05 Lakhs (0.01%)

IndiaMart’s Competitive Advantages (CA):

CA1-First Mover Advantage-

IndiaMart entered the B2B platform space in 1996 and was one of the first companies to do so. It allowed them to capture substantial market share early on. The company has tried and tested several business models over time and have finally found one that works. Hence, there could be a gestation period of a few years before any new entrant can start competing in this market. Furthermore, several companies which entered the B2B space were unable to find the right business model and had to move to providing supplementary services / change their line of business entirely.

Examples of companies that failed to break into the market – BIZONGO, mSupply, POWER2SME, industrybuying, and many more..

The First Mover advantage tends to get weaker over time. However, the company has used it to attain strong networking benefits as described below.

CA2-Strong Networking Effects-

The company commands a market share of over 60% in India. The number of buyers and sellers on their platform are substantially higher than any of their direct competitors. The large number of MSME Suppliers (Sellers) on their platform draw Buyers, who in turn, attract even more Suppliers. This cycle continues and the networking effects get broader, stronger, and denser.

However, to identify whether the company truly has a defendable ‘networking’ moat, we must understand the market structure and their competition.

We make use of the concept of ‘Multihoming’ to get a better grasp of (if) the (there is a) moat.

Multihoming simply means whether a consumer can afford to subscribe to multiple competing platforms at the same time. Hence, in simple words, can a consumer afford to have membership with Facebook and Twitter at the same time? Yes, they surely can.

Can an MSME afford to subscribe to another platform that is competing with IndiaMart?

Probably not. Here’s why..

Hence, one can conclude that IndiaMart offers the best value for money today. We do see high multihoming costs in this business and it is unlikely that Micro enterprises (99% of all MSMEs) would have multiple memberships on competing platforms. Hence, I do believe that there is a ‘Networking Effect’ moat for IndiaMart.

However, going forward, I expect the moat to get weaker due to competition.

Features of IndiaMart:

Plans Offered by IndiaMart:

Buyer and Supplier Trends:

Hope you have enjoyed my ideation of IndiaMart! We now cover the Valuation aspect of IndiaMart which is technical in nature.


Valuation:

We will use a 3-stage DCF FCFF Model to value IndiaMart.

Revenue:

Today, IndiaMart has a 60% market share in the ‘listing market’ – Discovery of Products space. However, it will lose market share in this sector as competition enters.

The company has now entered the downstream sectors of ‘Marketplace’ & ‘Business Enablement’. Hence, combining these two effects; a larger market & increased competition, I believe that IndiaMart will capture a smaller chunk of a larger market (BPEM – Business Process Enabling Marketplaces) in the future


Initial Market Size is larger due to inclusion of Listing Market, Marketplace, & Business Enablement sector

Customer addition & ARPU:

*Base (LTM) Adjusted Numbers

Operating Margins:

The company has only recently turned profitable and has improved margins from 9% to 30% in the last 2 years.

Pure platform companies (unlike Amazon which also invests heavily into physical assets such as warehouses etc), tend to have high operating margins. I expect margins to contract in the first 2 years due to the impact of Covid-19. At the end of our valuation, the stable margin will be 25%.

Tax Rate:

The company paid a tax rate close to 30% in its most recent year. Going forward, I expect them to pay the applicable marginal tax rate of 25.17%.

Reinvestment:

Reinvestment in this sector tends to be low as is evident from the Sales to Capital ratios of industry peers.The company currently has a Sales to Capital ratio of 5.9 which is roughly the 75th percentile of comparable firms. I expect the company to gradually improve its Sales to Capital to 7 (80th percentile of comparable firms) as economies of scale come into play and incremental fixed costs shrink.

Cost of Capital:

The company’s beta will move towards 1 in the Terminal Year and the company will not change its capital structure.

Terminal Year (Stable Growth):

The stable growth will be set at the Risk free rate of 3.45%.

Terminal year ROIC is 10.26% (equal to the Cost of Capital in terminal year). I expect competition to intensify in the stable phase and hence there will be no excess returns.

Hence, the reinvestment rate in the stable period will be 33.63%.

DCF:

Today (as of 27th October 2020) IndiaMart trades at a price of 4946 INR. When compared to my DCF value of 1181 INR, the stock seems significantly overvalued.

I believe that despite being optimistic in my valuation, the underlying fundamentals today do not justify the price. However, it would be wiser to be cautious since platform companies globally have been receiving positive financial appraisal from the investor community (IndiaMart has seen FPIs and MFs raising their stake by around 8% in this quarter).

Many are hoping that this sector will become the ‘sector of tomorrow!’.

I hope you have enjoyed this article! I would appreciate hearing your thoughts in the comment section below!  

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