Rising Internet Access, Disposable Incomes In India - Profit Through MakeMyTrip

JPMorgan (JPM) recently shook the Indian parliament by saying that the changes in the recent immigration bill could actually reduce India's GDP by some 0.3-0.4%. The sector impacted is IT outsourcing, which has quite a few listed ADRs. However, the impact on the sector could in turn have a multiplier effect on other sectors, such as travel - a key clause in the new bill effectively doubles the visa fees for H1B visa applicants to close to $5,000.

Travel is a sector in India which is seeing significant investment interest. South African private equity giant Naspers recently bought online bus ticketing company Redbus.in for a rumoured >$100 million payment. The acquisition is significant for two reasons: (a) it underscores the rising interest in e-commerce in India, considering Naspers purchased a 10% stake in e-retail giant Flipkart for $100 million only last year; and (b) it highlights the fact that bus bookings are more profitable than airline bookings in India.

Capital investment into India's travel and tourism industry grew at 26.5% annually over 2005-2011. The country's domestic tourism and hospitality industry grew at 13% annually for the same period, and foreign tourists coming to India grew at 6.6%. This is a fairly low figure, because the opportunity is in fact in domestic tourism. Domestic travellers make up 83% of the total revenues of the tourism industry in India, and spending by them was estimated to be $73 million in 2011. Furthermore, over 70% of all air tickets in India are now being booked online, and online travel is growing at 35%. The aviation sector in India is, however, in turmoil, and airline operators in the country are struggling to stay afloat. There have been several major deals in the space, and international giants like Etihad are picking up local players like Jet Airways at throwaway valuations. Consequently margins/commissions on air travel are fairly low, and declining. The opportunity for players in the space is in other business, such as bus travel, as we can see for Redbus.in.

With so much travel being booked online, travel may finally be the sector where we see e-commerce successes in India. Flipkart.com has done well enough, but it operates in retail and is not listed. A travel company that IS listed on Nasdaq is Makemytrip.com (MMYT). The company offers pretty much everything you need as far as travel is concerned, including airline tickets, hotel booking, domestic and foreign packaged tours, bus tickets, corporate travels, visa assistance, foreign exchange, travel insurance, and more. In May 2013 the company counted all major domestic airlines as partners, along with over 10,000 hotels and guesthouses in India and more than 80,000 hotels internationally.

Revenues expanded at a Compounded Annual Growth Rate (CAGR) of a whopping 48% from FY2008 to reach $124 mn in FY2011, and grew some more to cross $228.8 mn in FY13, up 29.7% y-o-y. However, the rise in revenues was not enough to keep the company in the green, and it reported a net loss for the year. This was despite all segments rising except the low-margin air travel segment, which decreased by 20% y-o-y. India's air travel industry is struggling, valuations are low and foreign majors including Japan's Air Asia and the Middle Eastern Etihad have taken the opportunity to enter the market recently. MMYT has been coping by increasing focus on other segments, which are delivering. Hotel and packages bookings rose more than 50% y-o-y (constant currency) in FY13 to reach $164 mn, and while the margin on air bookings for the company dropped by 1.9% as Indian air companies dropped the commissions they offered, the margins for the hotel business rose marginally. The company's business mix has reflected the better profitability in the hotels segment, and the contribution of hotels to MMYT's revenues rose from 15% in FY08 to 20% in FY12, and in FY13 it was even higher at 30%. Clearly, the company is focusing more on higher margin segments, and it expects hotels to make up 50% of revenue in two years time. MMYT has been fairly acquisitive towards that end; it acquired a hotel booking operator in both 2011 and 2012, expanding its global hotel inventory.

The company's P/E is negative (most likely artificially suppressed, especially since the industry trades several hundred times earnings), and expected earnings growth is above industry averages. I have seen several big investors agonize over ways to capitalize on the rising internet penetration in India, including through listed Indian internet ADRS like SIFY and REDF. But both those have declined sharply since their heydays, and offer little return in the current ranges. Here is the perfect opportunity, with the number of internet users in India expected to double from 2012 to 2015. Online travel is riding the wave, and the internet's share of total travel bookings has risen from 23% in 2009 to 30% in 2012. MMYT's ADR allows us to capitalize on this trend, as well as on the rising middle class which is expected to rise by 67% between 2011 and 2016. Considering how large our (India's) population is (1.25 bn people at last count), 67% of the 2011 size of 20% is a significant number of people entering the middle class. Not only is MMYT still an early-stage company because of its online nature (which allows us to get in early), it already enjoys a dominant position in the market. It is currently the largest online travel booking company in India, with a market share of over 50%, despite international majors like Travelocity and Expedia spending the big bucks. I'm not surprised, considering I used it on my last travel. What did I use it for? You guessed it: hotel booking.

Investments in American Depository Receipts (ADRs) offer American retail investors the opportunity to benefit from trends in emerging markets. As emerging economies follow the economic paths already travelled by more mature (and stagnant) economies, investors from these markets can use the benefit of experience to capitalize on trends that have faded in their home markets but are only now emerging in growing economies, such as the rise in e-commerce and the rapid growth of internet connectivity. MakeMyTrip is one such opportunity.

ADRs, of course, benefit the listing company greatly, offering it access to a wider investor base. RenRen, China's most prominent social network, lifted over $700 mn from U.S. markets, even though the American Facebook is banned in China.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Alpha Stockman 4 years ago Member's comment

Good read, thanks.