As investors of high-quality growth stocks in emerging markets, through the first half of 2023 we have been bemoaning the late arrival of the green shoots of Spring in our corner of the world. In January and March, we wrote of our continued experience that earnings (the driver of returns for our holdings) were being delivered and market shares were being gained for our dominant companies, but share prices were remaining stubbornly unresponsive.
In June, at last, some definite green shoots began to appear. The conspicuous recoupling between fundamentals and share prices has been most evident in India. This market has been an enduring ‘overweight’ since Arisaig started investing in emerging markets in 1997, thanks more to the unrivalled bottom-up appeal of its opportunity set rather than Prime Minister Modi’s shepherding of the economy.
If we were to select a company that has really hit the ground running since the easing of the pandemic, it would be Indiamart. This is a B2B online platform that is helping millions of small and medium enterprises (SMEs) – which make anything from bricks and agricultural components to hats and scarfs – to access customers across India rather than just the local villages on their doorstep.
Given that it is a digital platform business, it might seem odd that Indiamart’s success has been driven by the post-pandemic return of its ‘feet on street’ sales force. However, this sales force performs critical in-person work, by educating SME business owners with nascent digital literacy how to use the platform most effectively. During the pandemic, restrictions hampered this engagement. In FY23, IndiaMart increased the number of paying suppliers (i.e., vendors subscribed to the platform) by 20%. This supported the acceleration of revenue growth to 34% in Q423 (January to March of this year). More importantly, collections (a leading indicator of sales growth) have also continued to expand, at a healthy 31% clip in Q423.
Back in 2022, our view was that the company was about to hit two significant turning points in terms of its metrics. First, that sales growth would climb back above 25% following a period of COVID-induced sluggishness; second, that margins would recover from a recent trough which coincided with reinvestment in expansion of the sales force. The first has already happened in FY23; the second we expect to play out over the coming 12-18 months, with EBITDA margins gradually building back to above 30%, from the 27% low observed during FY23.
The first was a contrarian view at the time though. Indiamart’s paid supplier base had stagnated since the onset of covid-19 despite it apparently being a ‘digital’ business, and hence there were questions emerging on whether the platform was losing relevance. To test this, our team on the ground in Mumbai spent dozens of hours engaging with stakeholders in the B2B ecosystem, including enterprises and other B2B platforms. Our analysis yielded that whilst SMEs were increasingly adopting digitalisation, their balance sheets had eroded in the pandemic due to a combination of reduced demand, supply chain disruptions and/or lack of access to credit. So, either they couldn’t afford to pay for Indiamart anymore or there was minimal demand/supply in their industry which reduced their ability to gain from the subscription. However, their feedback on Indiamart continued to remain positive during this period which convinced us that when macro factors were more benign and Indiamart was able to redeploy its sales force, enterprises would return to the platform to grow their business.
The timing of our deep research on the business coincided with it being punished in the ‘global tech sell off’ of 2022 despite being a profitable, subscription-driven platform helping ‘analogue’ SMEs seek new sources of revenue.
Our recent conversations with management have reinforced our confidence in the long-term mindedness of the company – we have engaged recently on the need to improve the quality of the board, as well as the diversity and attrition levels of its workforce. More on the positive impact outcomes from this investment can be found here.
