IndiaMart InterMesh IPO opens; should you subscribe?

IndiaMart InterMesh, the first mainboard IPO in last two months, opened for subscription on June 24 with a price band of Rs 970-973 per share.

The company, which is the largest online B2B marketplace for business products and services, aims to raise Rs 475 crore through the public issue that will close on June 26.

It is an offer for sale of 48,87,862 shares by its promoters and investors, so company will not get any proceeds from public issue.

A day before the issue opened, IndiaMart already raised more than Rs 213 crore from 15 anchor investors including ICICI Mutual Fund, HDFC Mutual Fund, SBI Mutual Fund, Birla Mutual Fund, Hornbill Capital Advisers LLP, etc.

The response to anchor book was quite strong but brokerages are mixed in their opinion while recommending the issue.

Brokerages said valuations are expensive but they are divided on future prospects of the company. The key reason for subscribing the issue is the company's strong business model that has to be judged on future market potential. But the likely intense competition from emerging players along with steep valuation is a reason to avoid.

ICICI Securities has not rated the issue but has highlighted investment rationale like strong network effects & brand recognition, deep understanding of online trade and commerce in India, etc.

However, key risks which are being pointed out by the brokerage are high dependence on Indian suppliers purchasing paid services, losses in the preceding financial years, risk of technological advancement and higher employee costs.

The company primarily operates through its product and supplier discovery marketplace, indiamart.com or IndiaMART. Its online marketplace provides a platform to discover products and services and contact the suppliers of such business products and services.

Here is what brokerages recommend:

Choice Broking: Subscribe

At the higher price band, the company is demanding a TTM P/E valuation of 139.7x (to its TTM EPS of Rs 7), which at a premium to its peer average of 23.8x. Excluding the negative impact of non-cash item, the demanded P/E is around 32.8x (to its adjusted EPS of Rs 29.6). Based on FY20E and FY21E EPS, the stock is valued at P/E multiple of 35.1x and 25.9x, respectively, which again is at a premium to the peer average of 21.5x and 15.3x.

Considering the growth outlook coupled with dominant market position and expected benefit from the operating leverage, we feel that the future benefits outweigh the target share price derived from various traditional valuation multiples.

Such type of technological and scalable business model companies should not be valued merely on the profitability but also on the future market potential and the capabilities of the management to work towards achieving the potential. Thus, we assign a subscribe rating for the issue.

BP Equities: Avoid

IndiaMart is India's largest online B2B market places for business products and services with approximately 60 percent market share. The company earns revenues from the sale of subscription packages, sale of request for quote or 'RFQ' credits, advertising from India MART's digital platforms and payment facilitation services.

On valuation front, at the upper end of the price band, IIL is valued at a P/E of 140x to its FY19 earnings, which is aggressively priced, given the intense competition from emerging players and new entrants. Considering the overall industry environment, we give an avoid rating on this issue.