MakeMyTrip: Major India Opportunity

Since 2010, MakeMyTrip (MMYT) has been trading in a range, and currently it is at its IPO price. It has performed very poorly over the past 10 years, far underperforming the S&P 500. However, as the leader in Indian online travel, and with a massive investment by Trip.com (NASDAQ:TCOM), we believe now is the time for MMYT to shine.

Source: Seekingalpha

What is MMYT?

MMYT is a leading online travel agency in the Indian travel market; it provides air ticketing, hotels and package bookings. It owns the MakeMyTrip, goibibo and redBus brands. Its mission is to provide customers a one-stop shop for all their travel needs. Apps from MMYT have been downloaded over 203 million times.

Strong growth potential

MMYT operates in one of the fastest growing countries in the world - India. India's population is projected to surpass China by 2050, and internet penetration is forecasted to grow to over 60% by 2030 from 40% currently, meaning there would be over 800 million internet users within a few years, most of whom will be quite young and will be on mobile.

Source: Investor presentation

The online travel market is also very underpenetrated, especially in the hotels segment. 90% of India's hotels are independent and therefore are hard to reach for most travel agencies. Many customers are also reluctant to book hotels online as they are scared images may be photoshopped. This is why while 55% of air tickets and 48% of bus tickets have moved online, only 20% of hotels have moved online.

MMYT, being the largest OTA in India and with its deep understanding of the India consumer, is the best positioned to benefit from this growing market. As the graph below shows, MMYT is the most well known and well liked brand in India, with each of its 3 brands far surpassing competitors.

Source: Investor presentation

MMYT has also been incredibly innovative. For example, to persuade consumers to book hotels online, they have gotten videos of hotels to upload online, which give consumers a lot more confidence regarding their hotel choice. MMYT has also been very enthusiastic about adopting technologies like AI and data science to grow and become more efficient.

Recently, Trip.com transferred 5.6% of its company to Naspers in exchange for Naspers' stake in MMYT. Trip.com is now the largest shareholder in MMYT following this transaction, which is really beneficial for MMYT.

As the largest Chinese OTA and a major travel player across the world, Trip.com would be able to help out MMYT with its outbound travel efforts significantly. MMYT would benefit from getting to partner with all of Trip.com's hotel and airline partners, and would get strategic help about the future evolution of the India travel market (which is quite similar to China's). Management also mentioned that MMYT and Trip.com would work with the Chinese government to encourage travel between China and India, which would definitely be a very exciting initiative.

Overall, MMYT has one of the best growth runways we've ever seen, and we believe management will be able to take advantage of this and grow revenues strongly over the long term, especially with help from Trip.com.

Q3 and financials

MMYT had a solid Q3, with bookings growing 20% YOY and revenue growing 14% despite a travel slowdown caused last quarter by the shutdown of Jet Airways. While this has resulted in a short-term growth decline, we continue to be optimistic about the long-term growth runway of MMYT, especially with the government announcing tax cuts and marketing initiatives surrounding India.

More encouragingly, our government has also demonstrated willingness to support travel and tourism as a means to drive economic growth. Recent cuts to the GST, goods and services tax, on hotels, which took effect on October 1, was a welcome move and should have positive impact on growth in times to come.

At the same time, the government's Incredible India 2.0 marketing campaign should help drive greater awareness for travel and tourism in India.

Source: Q2 2020 call

More encouragingly, though, MMYT management hasn't wasted capital fighting these short-term headwinds, instead tightening marketing spending and reducing operating losses.

Without this one-time cost, we estimated adjusted operating loss at $17 million, a significantly lower than the previous quarter's loss of $29 million as well as significantly lower than the $25.4 million loss reported in the same quarter last year.

This improvement came from increased efficiency in our marketing and promotional expense, which as a percentage of gross bookings came down to 9 percentage points compared to 10.8 percentage during the same quarter last year as well as down from the 9.5% reported in the previous quarter.

Source: Q2 2020 call

This helps to demonstrate that MMYT has substantial operating leverage and gives us a clearer path to longer-term profitability.

While Q3 was a challenging quarter, we believe the long-term future of MMYT is still quite bright and that investors should not judge a company based on a few quarters of results.

Valuation

Despite the long growth runway MMYT currently has, it trades at a paltry $2.7 billion valuation, which is miles behind the $20 billion valuation of Trip.com or the $80 billion valuation of Booking Holdings (NASDAQ:BKNG). While this can be justified somewhat based on the losses MMYT is generating and the fact that it is a smaller company than BKNG or CTRP, it is likely undervalued if you consider the massive opportunity ahead and the underpenetration of the current market.

We must also note that MMYT has an interesting share repurchase plan that only allows share repurchases under a certain price in an amount not exceeding $150 million in total. We believe this represents prudent capital allocation by management and is another reason to buy the company.

Takeaway

Overall, MMYT has incredible potential as the largest OTA in one of the fastest growing travel markets in the world. The investment by Trip.com will likely help accelerate MMYT's inevitable future. While near-term challenges do exist, we think looking at the long-term picture is the better move for this company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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