MakeMyTrip (NASDAQ:MMYT), an online travel company, has surged by 144% in one year and these are big returns in any industry or market. After a phenomenal rally, there is always a probability of some correction in the near-term.
However, this article discusses the reasons why the long-term growth for MakeMyTrip has just started. Considering the factors discussed, it might be a good idea to consider long-term investment in this stock on any correction.
Leading Market Position And Strong Growth
In a highly underpenetrated online travel agency market of India, MakeMyTrip has a big market share of 47%. Cleartrip and Yatra are the second largest, but far behind MakeMyTrip with a market share of 20% each.
With a strong market position, MakeMyTrip’s revenue has grown at a robust CAGR of 27.5% in the last five years. The gross bookings have also grown at a CAGR of 28.3% over the last five years indicating that revenue growth has been driven by increased online activity and not through price increases. This growth is likely to continue for industry factors I will discuss later.
Strategic Growth Pattern
Robust revenue growth is one of the reasons for the company’s stock surging higher. A more important reason is the strategic growth pattern over the last 4-5 years.
In FY2010, 77% of the company’s revenue was derived from air ticketing and 20% from hotels & packages. In FY14, only 58% of the company’s revenue was derived from air ticketing while hotels & packages revenue shares has increased to 38%. This strategic shift has contributed largely to the company’s stock performance.
The reason is that air ticketing had a net margin of 6.6% as of FY14 as compared to a net margin of 12.6% for hotels & packages. As the company increasingly shifts its revenue towards hotels & packages the company’s EBITDA margin will become robust. Therefore, MakeMyTrip is headed towards even better times as the demand for hotels & packages picks up in India.
MakeMyTrip has continuously been on a look-out for good acquisitions and the company’s growth over the years has been aided by key strategic acquisitions.
In the most recent acquisition, MakeMyTrip acquired Easy to Book. The company provides online hotel reservations in Europe and North America. The acquisition helps MakeMyTrip expand its presence in international markets and is an indication of the company’s global growth ambition.
In November 2012, MakeMyTrip had acquired Hotel Travel, which is also an online booking platform for hotels with strong presence in South-East Asia. Both these acquisitions are aimed to make the company a global major.
Huge Industry Potential
A market leadership position has a strong meaning for MakeMyTrip and it implies that the company is catering to a population of 1.2 billion people with the advantage of being the leader in the industry.
A population of 1.2 billion is significant considering the fact that India is still growing at a decent pace, the country is the fourth largest economy in the world in terms of PPP and India’s middle-class population is swelling. From an expected 267 million people in 2016, India’s middle-class is expected to rise to 547 million people by 2026.
A rising middle class will create significant demand for the travel industry and MakeMyTrip is well positioned to cater to this demand.
Another big factor, which will change the company’s growth trajectory, is the rise in India’s broadband and smart phone penetration. Currently, India’s broadband and smart phone penetration is 7% and 6% respectively. With increasing urbanization, broadband penetration will surge over the next decade. This will be a big positive for the company.
Therefore, all data suggest that the industry is grossly under penetrated in India and the online travel and booking industry has a long way to go in terms of growth.
It will not be surprising to see the company matching the likes of Expedia (NASDAQ:EXPE) over the next few years. The Priceline Group (NASDAQ:PCLN) is a much bigger player in the industry, but MakeMyTrip can outperform the company in terms of stock upside.
Even after a strong upside in the last one year, I remain bullish on MakeMyTrip for the long-term. I believe that the stock might witness some correction after the major rally. However, any correction would be a great entry point for investors with a long-term investment horizon.
The online travel booking market in India is still a tip of the iceberg. As the country grows, the demand will be robust and MakeMyTrip has the potential to be a global major online travel company.