What makes IndiaMART a new-age business with old-age values?

But before answering this question, let me ask a simple question.

What is a new-age business?

A new-age business refers to a modern, innovative enterprise that thrives on leveraging contemporary trends, technologies, and business models. These businesses focus on agility, innovation, and customer-centricity. 

Traditional businesses are just the opposite of new-age.

I have a quick hack for you to determine if a business is new-age or old-age. It’s simple. New-age businesses scale way faster than old-age businesses.

The table below explains the same.

Old-Age Businesses		New-Age Businesses
Name	Time to have 1 mn users/unit sold	Name	Time to have 1 mn users/unit sold
Coca Cola	50 years	Facebook	10 months
Telephone (AT&T)	35 years	Spotify	5 months
Ford (Model T)	10 years	ChatGPT (OpenAI)	5 days

Looking at the 3 examples, on the right side, you would have already identified a few more attributes in the new-age businesses.

They use the internet as their medium.

They have online distribution models

They are asset-light business

They are highly scalable

Another thing that almost all these new-age businesses have in common is CASH BURN!

This is where IndiaMART comes in with not a new-age value but an old-age value. It does not have any cash burn. On the contrary, it is a highly profitable and cash-generating business. 

To put some context, the revenues and the profits of IndiaMART have grown at a CAGR of 19% and 76% respectively in the last 5 years. In FY24, the business generated 500Cr+ of operating cash flows. Debt is almost non-existent, whereas lots of cash and liquid investment can be found on the balance sheet. And if that was not enough, know that the company’s shares trade today at 20 times Free Cash Flow (FCF).

Now you are interested.

Right? 🙂

So let’s start from the start. It all started with Mr. Dinesh Agarwal, the CEO and MD. You need to know about him before IndiaMART as it was his brainchild.

Early Life, Education, & Career

 “I come from a family of businessmen, but I had no plans of becoming one,” says Dinesh Agarwal. 

After completing his BTech in Computer Science from HBTI (Harcourt Butler Technological Institute) in Kanpur, Mr. Dinesh’s first job was at CMC (now part of TCS) where he worked on the first Railway reservation system. His tryst with technology led him to the US, where he worked at HCL Technologies. In August 1995, when VSNL (Videsh Sanchar Nigam Limited) launched public internet access in India, Dinesh knew he wanted to go back home. He resigned a year later and returned to become an internet entrepreneur.

Early Days of IndiaMART 

In August 1995, Dinesh resigned from HCL, returned to India with his wife and child, and started looking for internet-related opportunities to become an internet entrepreneur.

Dinesh had a saving of Rs 40,000 and it was invested in the business. He faced several challenges. The computers were costly and few businesses used them. So, convincing customers to first buy computers, which, in turn, would help in the promotion of their business was quite a task. 

Agarwal decided to make a website that would be an online marketplace for exporters and importers. India had around 15,000 internet users at that time. When he did not receive government permission to get the directories of exporters and sellers online, he decided to have a free listing form and sent it to all the sellers in the directories. 

This is what Dishesh says about the situation at that time. “My whole family, including my mother and wife, would help with the mailers.” 

IndiaMART’s first tagline was: ‘The global gateway to Indian marketplace’.

The first big order, the first-year revenue, & the start of the many firsts 

The fast-food chain, Nirulas, was their first client. The deal was to develop and manage their website for an annual fee of just Rs 32,000. 

By the end of the first year, FY96-97, Indiamart had a staff of nine and a turnover of just 6 lac rupees. 

Here is the chronology of the first 1 Cr, 10 Cr, 100 Cr, and 1000 Cr annual revenue milestones.

First 1 Cr	FY2001
First 10 Cr	FY2005
First 100 Cr	FY2011
First 1000 Cr	FY2023

That is how compounding works in the long run. A 1000X in over two decades. 

Surviving the Dotcom Bust

Dinesh during the second half of the 90s started scanning directory books of the Federation of Indian Exporters and government data to get the names of businesses in sectors like garments, handicrafts, spices, gems, and jewelry.

“Everyone was opening a dot-com. And there was a heavy flush of money through venture capital, a game we did not understand,” says Dinesh

Meanwhile, Jack Ma had already started Alibaba in China.

Soon, the bubble burst and a lot of dot-coms around the world shut down. Dinesh is known in India as one of the few survivors. ”Dot-com became a bad word. And we became untouchables by prospective clients, employees, even media,” he says.

The September 11 attacks made things worse. Global exporters shrunk, leading some clients to stop renewing their pricey subscriptions to the store.

“We did not fire even one person. And about 50 early employees still work with us,” Dinesh says. 

That tells you a lot about the DNA of the company. Taking good care of the employees when they need it the most. It again brings me back to the old-age values that are rare to find in new-age companies that are surviving and thriving in this cut-throat competitive world of business.

Indiamart evolved from simple listings to become a business supply store – like Ma’s Alibaba in China. It survived the crashes and busts and managed to reach 1,000 paying customers in 2001, which paid about US$1,000 per listing. He also cut a lot of costs and froze salary hikes for some months to get past the downturn.

First 13 years: Export focussed

Dinesh explains it wonderfully in an interview here: 

“So our suppliers were here and buyers were in the US, Europe, Middle East and those places. There, it was lesser of a network effect, lesser of a flywheel. It was a very basic flywheel or a network effect because there was a directory and since there was a directory, when a buyer wanted to search for something, say, ceramic cup from India, they could at one single place find 10 ceramic cups exporters. And as the 11th got added, the 11th buyer found it more more useful.”

Sometime around 2008-09, they started to think and realise that one, that India export story, which started from 1991-92 until 2007, 2008, was plateauing. They were sure that nothing new has happened from 2004 to 2009 timeframe, which could re-propel exports for a 30%, 40% growth.

Also, it was the time when smartphones were just coming in. And the Google searches became more local, and the search responses became more local. India, by 2008 had enough number of internet connections and reliable internet connections.

It was very difficult for them to keep the Indian audience away from IndiaMART because the exporters did not like them and the Indian audience kept coming to them for Indian inquiries.

First Funding and the first period of loss 

In 2008, Indiamart took the first outside investment money from Intel Capital to the tune of about US$10 million. And it opened 16 new offices. “For the first time we were spending money and in the next quarter we posted a loss,” Dinesh says, indicating the current models of e-commerce which run on losses and external money.

In 2009, the company crossed 14,000 paying customers. Since then Indiamart has remained cash-positive.

Pivot from Export to the Indian market. Tailwinds! 

Domestic B2B had one big advantage. Because it’s a domestic and B2B every buyer is a possible seller and every seller is a buyer, that’s good. Because if you are selling something, you are a buyer of something. That leads to community effect.

For the next 3-4 years, they pumped money heavily into the Indian market. And they built the whole domestic supply side. They found few more innovations around the product, whether it was virtual numbers through number masking or whether it was RFQs, which were generally used by large corporations and governments to enable them on the platform, or whether it was prices on the B2B to become transparent, which was very opaque.

Nobody wants B2B prices to be upfront. Just like general consumer goods. So a few things that Dinesh & Indiamart did made it much easier for them to create this whole better community and network effect. Network effect. Ring a bell? 🙂

First, any new buyer or any new seller joins the platform, he not only finds it interesting and useful for the rest of the already accumulated buyers and sellers who were there for a while. As more check-ins happen, more of your linkages keep happening and the network goes deeper and deeper. 

So, this level of flywheel and network effect was very important to understand at that juncture.

2015 to 2023: The spectacular rise of the Enterprise Business 

Till 2015, the enterprise business in IndiaMART was in a nascent stage with Somany Ceramics and Jindal Steel being the initial customers. The enterprise business team in IndiaMART had a small team of people who used to approach large enterprises and pitch the benefits of the IndiaMART platform. However, there were not many active/successful conversations. 

The biggest challenge for IndiaMART was the brand image. Most of these target companies have considered IndiaMART as only SME/MSME player.

In the beginning of 2015, the management took a call to increase the penetration in the enterprise business, considering the platform was already servicing smaller clients and could rope in larger enterprises with similar business propositions. However, the paying capacity and thus the ticket size (subscription price) for these large enterprises would be materially higher compared to that of SME/MSME players. 

Result: Fast forward 2024: 

Management in the Q3FY24 concall says this:

“So, as I said last time also, close to 50% of our customer base, around 48%, 49% and close to 75% of the revenue which is 72%, 73% exactly I checked yesterday, is coming from gold and platinum and their ARPU is also increasing quarter-on-quarter and their churn is also almost running near the best ever since even from preCOVID level. So, effectively, the top 10% customer, while the overall ARPU has grown 11%, top 10% customer ARPU has grown by almost 13%. “

The gold and platinum customers are large enterprises. They were non-existent in 2015 and today they are the frontrunners of their performance.

Phew! 

Pretty long story. 

But I guess if you are still reading, probably you enjoyed it. 🙂

So, we are done with the history. What is the current state of the company? And what else you should know about IndiaMART?

IndiaMART’s Business Proposition

A picture is worth a thousand words. So I will save a few thousand words by simply sharing a few slides from their recent presentation to get a sense of what they do and how deep is their moat.

How Buyers get Suppliers and vice-versa in IndiaMART

Just in case you are still clueless how it all works, let me make it simpler for you.

Step1: Buyer submits an industry-specific RFQ [Request for Quotation]

Step2: IndiaMART does an AI-driven enrichment and matchmaking

Step3: RFQ selection by suppliers

Step4: Buyer-Supplier interaction through CRM-Lead Manager

Now understand this. 

IndiaMART has 200 million registered buyers and 8 million registered suppliers. So from a matchmaking perspective, there is a gap. You may think at this point that why do we need all the buyers? The active buyers are the ones that count. Ok. Fair enough. The active buyer count at the moment is around 40 million. Even this number is 5 times the number of suppliers. 

Now, here comes the twist. 

Out of these 8 million suppliers, only 2.18 lac are paid suppliers. That’s less than 3%. Paid subscribers have a big advantage over free subscribers when it comes to RFQs that we have discussed above. 

RFQ Quota 

The RFQ Quota is designed as follows for the paid subsribers:- 

Subscription Plan	Daily RFQ Quota	Weekly RFQ Quota
Silver Monthly	1	7
Silver Annually/MYR*	1	10
Gold	2	20-30
Platinum	2-4	30-100

*MYR: Multi-year

Subscription Plans & Key Offerings

This is the best part about their model. As more and more buyers and sellers join the platform, the paid suppliers get more benefits. And hence, the ones who are not paid subscribers yet get incentivized to become paid subscribers to achieve better sales growth.

Key Operating Metrics & Recent Performance

The next two snippets from the corporate presentation highlights all the key metrics and the financial performance.

As you can see, despite slowing growth in member additions and collections, all the financial metrics still point to healthy double-digit growth. The moat in the business gives the management a little more time to fix the inefficiencies in the business and get back on track. But if slowing paid-member additions persist for a little more time, the revenue growth rate, EBITDA margins, and cash flow from the operation will start reflecting that.

The good news is that the management is aware of the same. And this is not something that has happened for the first time. The management has a track record of addressing a similar issue multiple times in the past. 

And this short term lowering of growth in the key metric of customer additon and customer collections is probably one of the main reasons for the stock to be available at such an attractive valuation (20 times FCF of FY24).

So, we have covered the history. We have covered the present. Now what about the future?

Optionalities!

The B2B business engine has fired all cylinders over the last 15 years. And their focus on advance collection, margins, and profitability bodes well for them in the long run. But another lever of growth for Indiamart in the future could be the flurry of investments they have done in the last few years across their value chain. Here are a few.

While it is difficult to put a number to the above start-up investments and include them in the valuation exercise of IndiaMART, always remember that all it needed was just one Zomato for Info Edge (Naukri.com) to make a fortune.

That’s a 1000X!

I am not saying that IndiaMART will also get a 1000-bagger. You may not be able to  precisely put optionality into valuation. But can you ignore it?

Now that the history the present and the future is covered. If you want to understand the competitive landscape I will again show you a snippet that covers it all.

Competition

If you have read the above snippet slowly you would understand how IndiaMART is head and shoulder above the rest. In fact, if you ask me, I think their major competitor is probably Google. And as of now, IndiaMART wins hands down.

First Principles 

But before I wrap up, I would like to leave you with this commentary by Mr. Dinesh Agarwal where he talks about First Principles in one of the recent interviews. A must read to get a sense of how he has evolved over the years. 

“So I think I did whatever I did was from the first principles and trying to do this and trying to do that, when I look back, a lot of that is actually now found in the books, what we ended up doing, and it’s well researched and written, and especially in the network effect or SaaS kind of businesses, when do you press the pedal and when do you press the break? Especially in the subscription kind of businesses. When do you find that there is enough product market fit and then you go into a loss-making knowingly that the CAC versus LTV is going to improve over some time? And then the mistake most people have made is that the initial thought was that it is 18 months to break even then it became 36 months and then it became unlimited.

So I think that’s when you have to course correct and it says very clearly in various articles written by different people when to press the pedal and when you can go for growth and leave the profitability and when to revert especially in a subscription CAC LTV kind of business.”

While the analyst community is busy reducing their price target for the stock and the financial media/social media is busy judging IndiaMART because of the less-than-expected performance over the last few quarters, I believe, odds are high that they are “missing the forest for the trees.”  

Thank You for reading.

Happy Investing!

SEBI Disclosure: I have recently bought the shares of the company, and recommended my Stock SIP investors to also initiate buying the stock. Hence, my views can be biased. Please do not consider it as a recommendation. Consider it for educational purposes only.

Sources:

1. https://blume.vc/podcasts/blume-podcast/dinesh-agarwal-of-indiamart-on-starting-a-business-in-india-during-the-internet-boom
2. https://www.techinasia.com/dinesh-agarwal-indiamart-story
3. https://thepositiveindian.wordpress.com/stories/the-entrepreneurs/success-story-of-dinesh-agarwal-founder-of-indiamart/
4. https://yourstory.com/people/dinesh-agarwal
5. https://dineshagarwal.com/
6. https://en.wikipedia.org/wiki/IndiaMART
7. https://en.wikipedia.org/wiki/Dinesh_Agarwal
8. https://techcrunch.com/2019/07/05/indiamart-ipo/
9. Last 3 years ARs, corporate presentation, and concall transcripts
10. Spark Capital Report Sep 2020
11. Dolat Capital Report Feb 2023
12. Philip Capital Report 2024
13. https://www.solidarity.in/investment-thesis-on-indiamart-intermesh/