How the IndiaMART stock managed to soar despite the slowdown

IndiaMART, the second listings business after Just Dial and the second e-commerce business after Infibeam to list on the bourses, is seeing its stock value skyrocket even during the pandemic. The past six months have been the toughest for small businesses. Despite the excellent stock-market response and over 70% segment share, even IndiaMART was not immune to it. “Many industries such as hospitality and fashion have seen severe demand deterioration. We have seen a decline of 10% in the paying-customer base. Having said that, it was surprising that one-third of our categories on the buyer’s side has given us a very good demand and that led to traffic being higher by 6% on a quarter-to-quarter basis,” Dinesh Agarwal, CEO of IndiaMART, said in a recent earnings call. “On one side, buyer traffic is at an all-time high on a weekly basis. Whereas, on the supplier side, one-third of the category is facing a severe crunch and may churn out.” Over the past few months, confined to their homes, people have generally been browsing more than buying, and in a listings business, it is difficult to determine how many leads actually converted to transactions. Yet, the IndiaMART stock rose almost 100% in just two months, when the bourses, too, were in a tumult. Investors are taking note. 78391962The company has consistently performed well in the one year since its listing, but what explains the rally during the past six months? The first port of call As businesses were forced to go digital owing to the pandemic, IndiaMART became the first option that allowed B2B buyers and sellers to connect with each other. Within B2B wholesale buying, there can be three types of operations: Purely offline transactions — where buyer and seller discover each other through offline intermediaries. Online connections, but offline transactions — where buyer and seller discover each other through an online platform, but the actual transaction happens offline. This is where IndiaMART fits. Fully online model — where both discovery and transaction happen online. Most new-age platforms such as Udaan and Moglix fall into this category. Various industry experts estimate almost 80% of transactions to be of the first nature, while the second commands a mere 15%. The rest would fall into the full-stack category. In a situation of forced digitisation, as has happened during the pandemic, it is likely that a large chunk of the first category would move to the second, with some from the second category upgrading to the third. “Wholesale business has recovered to almost 70% of pre-Covid-19 levels. Many suppliers and buyers have been able to negotiate better pricing, too. Tier I, because it is still affected by the virus, is showing less demand. But things are back to normal in tier II and beyond. Shops in these places are not as panicked as in the cities, so it is business as normal,” says Rohit Dangayach, CEO of B2B e-tailer Wholesalebox. The past six months have seen new categories come up, with demand rising almost 500%. These include surgical equipment, packaging material, PPE, confectionaries, bottles, sanitisers, and chemicals. For that, businesses have had to pivot their existing models to cater to the emerging needs and find new buyers. “Businesses are not seeing enough volumes. So many would want to pivot to something else and would be researching what else can be done, and IndiaMART is best for this,” says Dangayach. Because of the huge supplier and buyer base of the platform, IndiaMART is also great for price discovery and figuring out which businesses are gaining traction. 78392035Building for one versus building for all This brings us to the often-discussed debate of what suits SMEs the most — transaction-led or listing-led business. “We were in a situation where some sectors were not performing while some were working very well. In such a scenario, a horizontal player like IndiaMART is of value,” said Dangayach. For example, apparel and footwear are one of the worst affected segments, with intermittent lockdowns and low demand forcing shops to buy less. Meanwhile, laptops are in demand with work from home become the new normal. Here’s how diversified IndiaMART is, according to broking house Motilal Oswal: No industry accounts for more than 9% of the supplier base. Revenues are well-diversified over 54 industries, 100k categories, and 68m+ products. Two-thirds of the buyer base is from tier-II, tier-III, and tier-IV towns. 35% of buyers are from tier-I cities, while 60% of suppliers come from the top eight metros (where the paying-supplier percentage is higher than 2%). IndiaMART remained resilient because of its wide diversification. As certain industries were severely hit, uptick from other industries were able to absorb the shock. This had not been the case with the competitors, who were largely focused on one or two industries for their business. However, in a cash-strapped SME ecosystem suffering from a broken supply chain, there are redeeming factors, too. Hence, there is a trickle-down effect for transaction-led businesses. “We see that consumers and businesses prefer a single-window solution. It reduces the friction that comes from using multiple platforms and software. For Moglix, in our SME segment, we have seen 50%-plus growth, as more and more customers are coming online to buy industrial supplies,” said Rahul Garg, founder at full-stack B2B etailer Moglix. There is the lure of credit, too. Most end-to-end models have the option of credit based on an SME’s buying history. In an earlier earnings call, IndiaMART had hinted at exploring the credit route, but the plan was shelved. “Credit requirements are different for every industry. It will be different to scale it to the many categories that IndiaMART has,” says Sanjay Ladha, research analyst at Concept Investwell. Scaling to multiple categories is also a problem for logistics, which is why IndiaMART has stayed away from fulfilment since the beginning. Every single industry requires a different network to be built. Pushkar Singh, CEO and co-founder of logistics company LetsTransport, enumerates some differences in logistics used by different industries: Capacities of trucks used: depends on volumes and frequency at which movements happen.Variabilities of demand: FMCG companies have larger volumes moving in the end of the month and have seasonal variabilities, too (like higher sales for beverage companies during summer).Service levels: for e-commerce or grocery players, a delay of even five minutes for customer deliveries can lead to the customer having a bad experience. Hence, service levels are very critical. “IndiaMart is fairly diversified whereas Udaan is concentrated in few specific verticals. Logistics channel is very different for different industries therefore it will be complicated for IndiaMart to establish the same.,” said Anmol Garg, analyst at Motilal Oswal Financial Services. Moreover, B2B transactions are unique because they are highly contingent on the buyer and seller talking and establishing trust before money or goods change hands. In the case of older businesses, they would have already established relationships with logistics players over the years and would go back to using that network when they get a lead. “The first priority is demand. More local trade is happening now, and they have overcome all the logistics challenges. So, the problem is of demand,” says Sandip Chhettri, COO of Trade India. The platform has seen an increase of over 56% in lead flow in the past three months. Trade India is now also working on providing invoicing and accounting facilities, besides payment collection. “The kind of products and categories that we deal in are very different from theirs. We have mostly manufacturers, wholesale traders, custom products, and truckload products. For comparison, if Udaan has an average order value of about USD60, at IndiaMART it would be around USD600 and at Amazon it may be around USD16,” Agarwal said in the earnings call. Ecosystem enabler IndiaMART recently invested in Mobisy, which runs a sales enablement and distribution-management platform called Bizom. Early this year, it had launched Pooraa.com, a catalogue and analytics management platform for businesses. This business is run by Tolexo Online, which ran a B2C online business-goods platform, but was shut in March 2017. In fact, even the company’s earnings call happened using one of its in-house products. It used “Floor”, built by one of its subsidiaries called Ten Times Online. “We have seen that Vyapar continues to do extremely well despite the lockdown. In fact, when we look at some of the KPIs (key performance indicators), revenues, for example, they show almost 260% plus year-on-year growth in FY20 as compared to FY19,” said Brijesh Agarwal, director at IndiaMART, in an earnings call. Since the customer base and target market is similar, there is scope in the future to upsell or cross-sell other products. ET Prime had written about IndiaMART’s ambitions of going beyond listings earlier. Then there is also the network effect. More number of subscribers attract more buyers, and it has both big and small brands. In fact, more than one-third of its customer base is more than three years old. “That has been the generic premise — once you have benefited, you don’t want to let go of that platform and relationship. Plus, there are re-entry barriers,” Agarwal said in a May earnings call. “The company has the ability to offer around 60 leads to every paid supplier, providing enough leeway to add suppliers even on the current RFQ (request for quote) scale. The lowest cost of marketing (around 0.2%) in any digital marketplace further creates confidence among suppliers,” says a Motilal Oswal report. According to it, 20%-30% of the leads convert to purchases. 78392077There is also a change in how IndiaMART does business. Earlier, two-thirds of the payments were collected from the customer’s premises and meetings happened face to face. Half of them used to pay online or by cheque. Only one-third of the business happened by phone or online. “Two-third of the payments came online and two-third of the business happened offline. Now that we are in 55% of the overall quarter collection, it will be safe to assume that over 90% of the payments happened online,” Agarwal said in the earnings call. This has bearing on employee expenditure as well as the payments vertical, run by Pay with IndiaMART. Churning challenges However, the coming months will be critical, which will show how many SMEs end up renewing their subscription packages. IndiaMART has three types of subscribers — Platinum, Gold, and Silver. Platinum accounts for 10% of the customer base, but 40% of the revenue and about 5%-6% annual churn. Gold accounts for 30%-35% of the base and about 10% to 12% of the churn. Silver, accounting for the remaining revenue, has two parts — monthly and annual. The annual churn is at 20%-25% while monthly is at 5%-6%. Almost one-third of its monthly Silver customer base is up for renewal. The company’s paying-subscriber base stands at 133,000. “Another one-third are in the annual mode and will probably be due for renewal in the next six to nine months or maximum of 12 months. Many of them would probably look for a moratorium of two to three months if their business was severely impacted and probably won’t churn out,” according to Agarwal. The company has seen a churn of 15,000 in paying customers and almost 80% of the loss had been from the monthly customer base. 78392084The silver lining lies in businesses that have managed to adapt to the new demands. “If they have changed the line of their business, they can simply update their catalogue or websites and start consuming leads from different segments. We will know about how this is behaving in next three months for sure,” says Agarwal. He does not expect churn to the tune of 10% again, as he believes the worst is over now. However, he does not rule out a loss of 1%-2% here and there. 78392096There is also a setback to the average revenue per customer. Agarwal expects a 5% reduction in the current average revenue per customer of INR45,000 if the situation does not improve. “It is being maintained because 10% of the customer base has been wiped out from the denominator. As the customer base starts to increase, we will see a slight decline in the average revenue per customer because collection has fallen by almost 50% in this quarter. Expect a decline of up to 5% in the average revenue per user over the next two to three quarters, depending upon how the situation pans out,” says Agarwal. However, he hopes the SMEs continue to stay solvent enough to keep paying for the platform, even if it means a short term hit to the average revenue per customer. “It’s not a risk for the top 10% because the hit is spread among approximately 15,000 customers and is very diversified. Even if I end up losing 100 customers, my overall revenue would be affected by maybe 1% or 2%. The bigger risk is the reduction in the overall customer base, where the bottom-of-the-pyramid customer may go out of business or may not be able to afford the B2B marketing,” Agarwal adds. (Graphics by Abdul Shafiq)

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