Anand Rathi has reiterated its Buy recommendation on IndiaMart InterMesh, with a revised 12-month target price of Rs 3,100, down from an earlier target of Rs 3,800. Despite weaker-than-expected collections growth of 5.6% YoY, IndiaMart’s revenue grew by 18% YoY in Q2FY25, driven by higher ARPU (average revenue per user) and cost efficiencies. The EBITDA margin surged to 38.7%, indicating strong operational efficiency. While the company faces challenges with customer churn in the Silver category, it expects steady improvement in collections growth and stable margins in the upcoming quarters.

Key Financial Performance in Q2FY25

Revenue Growth in Line with Expectations
IndiaMart reported revenues of Rs 3,477 million, up 18% YoY and 5% QoQ, meeting market expectations. This growth was primarily fueled by higher ARPU growth of 13.6% YoY, reaching Rs 60,800. However, collections growth at 5.6% YoY, totaling Rs 3.6 billion, remained a key concern for the quarter. Management attributed the weaker collections to continued churn in the Silver category and structural issues, including decentralization of customer support.

EBITDA Margins and Operational Efficiencies
IndiaMart’s EBITDA margin expanded significantly to 38.7%, compared to 27.1% in Q2FY24, and 36.1% in the prior quarter. This improvement was primarily due to lower outsourcing costs, which fell from 12.6% of revenue a year ago to 6.2% in Q2FY25. Lower collection costs and a focus on higher-value customers also supported this margin expansion. The company's net profit increased by 94.6% YoY to Rs 1,351 million, reflecting its strong ability to manage costs efficiently.

ARPU Growth and Subscriber Additions

Growth in Paid Suppliers and ARPU
IndiaMart saw its paid supplier base grow to 218,165, up from 209,747 in the previous year. Despite this, the quarter saw net supplier additions of only 2,390, as churn in the Silver annual and monthly plans continued to drag overall growth. This led to lower customer additions, resulting in moderated growth in collections. The company’s ARPU increased by 13.6% YoY, supported by a shift towards higher-tier Gold and Platinum plans, which contributed 70-80% of collections.

Churn in Silver Category and Future Growth Projections
The company continues to face higher churn rates, particularly in the Silver category, where churn rates stand at 6-7% monthly. However, management expects collections to grow at 10-15% YoY over the next few quarters, aided by its focus on improving the conversion rate of its core supplier base. IndiaMart's expansion into newer sales categories, particularly the Platinum tier, is also expected to drive higher ARPU and improved collections.

Cost Structure and Future Margin Outlook

Employee Costs and Future Expectations
In Q3FY25, IndiaMart is expected to see an increase in employee costs due to salary appraisals, which currently account for 42.4% of revenue. However, the company expects EBITDA margins to stabilize at around 34-35% in the near term, supported by operational efficiency and lower collection costs.

Cost Efficiencies Drive Profitability
IndiaMart’s cost-saving measures, particularly a reduction in outsourced sales costs and a focus on higher-value customer segments, have driven substantial margin expansion. The company expects to maintain its focus on controlling costs while expanding its premium customer base, which will help sustain profitability.

Valuation and Future Financial Projections

Revenue and Profit Projections
Anand Rathi projects 18.5% revenue growth for FY25, followed by 15.7% and 18.9% growth in FY26 and FY27 respectively. EBITDA margins are expected to remain robust, at 36.3% in FY25, declining slightly to 34.2% in FY26. The company's EPS is forecast to grow at a 23.4% CAGR over FY24-27, with net profit reaching Rs 6,264 million by FY27.

Target Price and Valuation Metrics
At the current price of Rs 2,509, IndiaMart is trading at a P/E multiple of 46x FY24E EPS, and 31.4x FY25E EPS. With Anand Rathi’s revised target price of Rs 3,100, the stock presents a potential upside of 23.6%. IndiaMart’s robust fundamentals, strong growth in ARPU, and expanding customer base make it an attractive long-term investment, despite short-term challenges in collections growth.

Investor Recommendations

Short-Term Volatility but Long-Term Potential
While IndiaMart faces short-term volatility due to weak collections growth and structural issues, the company’s long-term outlook remains positive. With strong margin expansion and consistent ARPU growth, the stock offers compelling value for investors with a long-term horizon. Investors should consider accumulating the stock during market corrections to benefit from its growth trajectory.

Focus on Premium Segments to Drive Growth
IndiaMart’s focus on expanding its premium customer base through the Gold and Platinum plans, coupled with its cost-cutting measures, positions the company well for sustained profitability in the coming years. The company’s ability to manage churn and improve customer conversion rates will be key to unlocking further value for shareholders.

Conclusion

IndiaMart’s Q2FY25 performance, while challenged by lower-than-expected collections, showcased its ability to maintain high margins and improve profitability. Anand Rathi’s Buy rating and target price of Rs 3,100 reflect confidence in IndiaMart’s ability to navigate short-term hurdles and deliver strong long-term growth. Investors should monitor the company's ability to manage churn and expand its premium customer base, as these will be critical factors in determining future success.