MakeMyTrip: on the cusp of a second wave?

Intense price wars in India are holding the country’s biggest online travel agency back from showing its metal. Sally White reports

MakeMyTrip has all the ingredients for success. What’s more, India’s online travel leader is delivering on them. So why have investors suffered the misery over the last year of seeing the shares tank from $30.50 to less than half that? Only in the last couple of weeks have MakeMyTrip’s stock market fortunes taken a turn for the better, the price rising by 15% to $16.90.

The answer seems to be that the analysts have stopped looking at the words from MakeMyTrip. Instead they’ve focused (for now at least) on what is happening behind the numbers.

MakeMyTrip’s recent announcements have certainly been dire. Not what would be expected at a time when India’s economy is booming and its internet usage and growth in domestic flights are both exploding. But, while the fluctuating currency is adding to the group’s troubles, the figures have been reflecting the fierce price war going on in India’s online travel market.

Management has been pulling down profit expectations. It (fatally for the share price) told analysts that MakeMyTrip was relegating revenue and margins from being the priority. Instead, with an eye to the extremely aggressive pricing policies of newcomers such as Goibibo, it announced that it was changing strategy and prioritising acquisitions and market share.

In its Q1 statement it said: “We expect this would entail additional marketing investments and pricing tradeoffs for aggressive acquisition of hotel customers. This, combined with margin pressure in the air ticketing business, could lead to modest year-on-year net revenue growth.”

Indeed, while hotels and packaging transactions rose by over 14%, net revenues were hit by discounting and grew just 2.8%. MakeMyTrip’s overall loss in the quarter was up 72% at $6.9 million on revenue of $93.7 million, a fall of 1.2%.

So, management indicated, the company’s growth for the 12 months to March 2016 would not be the earlier 22-26% (guidance given in May) but more like 10-15%. Hardly surprisingly, investors were more than a little worried. There even seemed to be a rush to exit!

However, that rush made MakeMyTrip so irresistibly cheap for the analysts that they changed their tune. The US firm Analyst Ratings Network reported this month that four of the six brokerages covering the company had now assigned it a ‘BUY’ rating.Their average 12-month share price objective is $26.30.

A positive story

There is plenty to turn the analysts on. For a start, MakeMyTrip has won market leadership in both air-ticketing and in hotels and packages. Then it has shown itself to be extremely good in the rapidly expanding mobile phone segment.

Describing the group’s tactics Deep Kalra, the chairman and CEO, explained at the Q1 analysts’ briefing: “As we begin the new fiscal 2016, we believe we are on the cusp of a second wave of internet penetration driven by unprecedented smartphone penetration which is helping drive online booking behaviour in the strategic India standalone hotels segment.

“We were able to leverage our investments on the mobile channel and in the hotels segment to drive 78% transaction growth in India standalone online hotels fuelled by over 200% growth on transactions coming from mobile channel during this quarter.”

Gross bookings in Q 1 reached $467.9 million, a year-on-year rise of 15.6% and an increase of 17.7% on the previous quarter. Analysis of the Q1 statement shows the number of transactions for airline tickets up 45.6%. For hotels and packages the number of transactions grew 27.6% on a like-for-like basis.

India’s story remains a highly positive one. GDP is now rising at almost 8% annually, the fastest in the world. The World Travel & Tourism Council  (WTTC) expects India’s travel industry to grow by 7.5% this year.

“India has an excellent opportunity to benefit from visa reforms and infrastructure improvements under the new government,” David Scowsill, president and chief executive of WTTC, has told a press conference. 

India’s projected tourism growth, he pointed out, was the highest for any major economy. “But the overall contribution of India’s travel and tourism sector to the overall economy is still relatively low (6.7% of GDP, against a global average of 9.8%).”

India has introduced an E-tourist visa scheme which allows applications to be made without the need to go to Indian Embassy. The effect has been drastic with a reported 1,209% increase in tourists from January 2014 to January 2015. Also helping the rise is an increase from 12 to 43 in the nationalities qualifying for the visa-on-arrival scheme. It is in process of rolling out a similar facility for 150 countries.

And investment in the sector is likely to rise by 9.3% in 2015 over 2014, according to the WTTC. In 2014 the travel and tourism industry accounted for 6.2% of India’s total investments.

The demographics are excellent. More than 50% of the population is below the age of 25 and more than 65% is below the age of 35.

And so it goes on! Internet penetration rates have been increasing substantially, although they are still at only 19% of the total population. According to international consultants KPMG, at the end of 2014, there were 82 million 3G subscribers in India, but that number is expected to almost triple to 284 million by the end of 2017.

Forecasts for air travel are remarkable, driven by the rapid growth of India’s middle class and the country’s urbanisation. The International Air Transport Association (IATA) prediction is for India’s domestic airline industry to show the second highest growth rate globally over 2012-16.

So, India’s travel market looks great and its prospects can only get better. Yet, for MakeMyTrip and its competitors it all depends on whether they allow each other to make any money!

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