scorecardresearchA lowdown on IndiaMart's journey of digital transformation
In a time post the dot-com bubble collapse, when a number of internet firms failed, IndiaMart remained largely successful. Ambit Capital analyses the company's journey of digital transformation.

A lowdown on IndiaMart's journey of digital transformation

Updated: 18 Aug 2022, 01:00 PM IST
TL;DR.
In a time post the dot-com bubble collapse, when a number of internet firms failed, IndiaMart remained largely successful. Ambit Capital analyses the company's journey of digital transformation.

Internet company IndiaMart InterMesh remains among one of the very few surviving digital businesses post the 2000 Dot-com Bubble. In a time when a number of internet firms collapsed, IndiaMart was largely successful. In a recent report, Ambit Capital analyses the company's journey of digital transformation.

IndiaMart was founded in the late 1990s by Dinesh and Brijesh Agarwal and started out as an online directory of exporters. However, after the dot-com bubble collapsed, other challenges due to global events such as 9/11 and the 2008 global financial crisis compelled IndiaMart to focus mainly on the domestic market which was aided by improving internet access in India.

IndiaMart, thus, pivoted to a B2B (business-to-business) classifieds model, Ambit said.

About the firm

IndiaMart is a digital B2B marketplace that connects prospective buyers to sellers and vice-versa. Prospective buyers visit IndiaMart to fulfill their purchase requirements and IndiaMart helps them in getting the relevant suppliers, the brokerage noted.

"The monetization happens on the suppliers’ front where subscribers pay a subscription fee for access to leads. Due to the subscription-based revenue model, IndiaMart works on a negative working capital model. Over the years, IndiaMart has transitioned from primarily providing RFQs (Buy Leads) to suppliers to providing augmented services such as Price Discovery, Customer Relationship Management (CRM) and Order Management systems. The use of technology such as behavioral matchmaking for better fulfillment of leads, multi-language search and supplier reviews has also resulted in optimized matchmaking and user experience. This has helped IndiaMart become the largest B2B player in India with over 1 billion website hits in FY22," explained Ambit.

Source: Ambit Capital
Source: Ambit Capital

Success secrets of IndiaMart: The largest market shareholder

Building a robust marketplace: According to the brokerage, the onboarding of Buyers and Suppliers and seamless interaction between them is key to building a robust marketplace.

IndiaMart has been able to execute all of the same which makes it extremely difficult for competition to enter and replicate the same. This also results in IndiaMart enjoying economies of scale as their platform develops and evolves," said Ambit.

Network effect: It further noted that an average enterprise in India is present only across 2-3 online platforms, thus, an on-boarded supplier provides a great competitive advantage as newer competition will collectively find it difficult to get suppliers on their platform.

Large untapped supplier base: As per Ambit, IndiaMart has 7.1 million suppliers and has onboarded over 4.8 million suppliers over the last 6 years. Currently, India has 13 million GST-paying businesses which is the target market for most internet-based B2B players in India, it noted. There still lies a largely untapped market for MSMEs not having an internet presence, yet.

Buyers: Another leg of building a marketplace is getting buyers/users on the platform and buyers usually tend to flock where there is a larger number of suppliers as it tends to coincide with a higher fulfillment rate, noted Ambit. IndiaMart has the highest number of registered buyers and even on an active buyer basis the company has 37 million buyers, which is over 20 times higher than any competitor in the space, it pointed out. The higher number of buyers and sellers thus brings out a network effect which results in strengthening of the marketplace model, added Ambit.

Interaction between buyers and sellers: Once both buyers and sellers are on-boarded the interaction between them is paramount for monetizing the platform and Indiamart hits is a correct metric to assess the same, said Ambit.

"When compared to other internet companies both B2B and non-B2B, IndiaMart stacks up extremely well in terms of website hits which showcases the extent of activity on the platform. IndiaMart’s platform generates more traffic than most other B2B enterprises – domestic and globally – barring Alibaba," the brokerage further explained.

The brokerage believes that in the longer run, as the network and scale benefits grow stronger, IndiaMart should be further able to strengthen economic moats while incorporating operational efficiencies.

Source: Ambit Capital
Source: Ambit Capital

Risks

Inability to add and retain subscribers: Converting existing suppliers into paid subscribers and keeping them on the platform is essential for IndiaMart to scale its business, noted Ambit. Inability to add or retain subscribers is a key disruption point that can derail the business, it added.

Competitive intensity: The B2B ecosystem has seen a lot of capital being raised across various verticals which have resulted in rising competitive intensity for all B2B players, pointed out Ambit. Multiple B2B enterprises have reached unicorn status across a host of B2B areas, which increases the competitive intensity in the space, stated the brokerage.

Cyber and data security: A key threat for any internet company is cybercrime and data leakage. Cybercrime costs can include damage and destruction of data, stolen money, lost productivity, theft of intellectual property, theft of personal and financial data, embezzlement, fraud, post-attack disruption to the normal course of business, forensic investigation, restoration and deletion of hacked data and systems and reputational harm, cautioned the brokerage.

Outlook

However, Ambit noted that disruption risks for businesses especially in technology are very high. In a world where technologies are changing continuously, adapting and evolving is paramount for an internet-based business to succeed, it said, adding that a heavy level of disruption also brings out extensive competitive advantages for companies that have managed to adapt and evolve with the changing times.

Despite the headwinds, Ambit highlighted that IndiaMart has done extremely well in building a reliable platform with a range of products and suppliers.

"Pain points of transparent pricing along with supplier diversification of MSMEs are being addressed by IndiaMart. IndiaMart’s transformation journey which is to become an integrated solutions provider for MSMEs addressing further multiple pain points (accounting, logistics, etc.) will be rife with challenges," it cautions.

However, given the inherent strengths of the business, its impressive track record of the company and how it has been able to adapt to multiple changes in technology in the past, IndiaMart is extremely well placed to expand, evolve and cater to multiple solutions to MSME’s, believes the brokerage.

Other brokerages

HDFC Securities also likes IndiaMart in the internet space.

“Higher investment in sales channel will boost growth, targeting over 15 percent growth in paid suppliers. The churn has reduced and the quality of suppliers improving. Network effect and greater traffic will improve the RoI for a seller. Margins will be in the range of 30-35 percent, vs 25 percent pre-pandemic. We like the quality of the franchise/platform and have a DCF-based TP of 5,700," HDFC Securities said.

Stock price trend

The stock has not performed very well in the recent past, down nearly 40 percent in the last 1 year on the back of weak domestic and global trends. However, since July, recovery has been seen in the stock. It has added around 15 percent since then.

Indiamart stock price trend
Indiamart stock price trend

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.