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Maintaining My Bullish View on MakeMyTrip

Huge potential in Indian markets to drive growth; inorganic growth strategy is a further catalyst

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Feb 02, 2017
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It’s been exactly one year since I wrote about MakeMyTrip Ltd. (

MMYT, Financial) with a “Buy” recommendation; during this period the stock has surged by 133%.

I must admit that I didn’t expect these returns, but I did expect the stock to move higher, and the company has significant upside potential in the future.

As a brief overview on the company, MakeMyTrip is India’s leading online travel company. The company's services and products include air tickets, customized holiday packages, hotel bookings, railway tickets, bus tickets, car hire and facilitating access to travel insurance. It provides access to all major domestic full-service and low-cost airlines, all major airlines operating to and from India, over 34,000 hotels and guesthouses in India and more than 240,000 hotels outside India.

Key investment positives

The Indian markets

One of the biggest advantages for MakeMyTrip is that the company is operating in Indian markets that have immense long-term potential. India is likely to be one of the fastest-growing economies in the Asian region for years to come and with one of the best demographics in the world; the Indian markets have huge potential.

Just to put things into perspective, total air ticket booking is likely to grow at a CAGR of 12% between 2015 and 2020. During the same period, online ticketing is likely to grow at a CAGR of 14%. Also, for the period in discussion, online hotel booking is likely to grow aggressively at a CAGR of 21%.

With these numbers in consideration and with the point that India is home to 1.2 billion, the opportunity is huge as standards of living improve. India’s internet penetration is also just at 25% compared to 50% for China and 87% for the U.S. As internet penetration grows along with rising use of smartphones, MakeMyTrip is well positioned to benefit.

Sustained focus on hotels and packages

In the last few years, one of the major developments for MakeMyTrip has been sustained focus on the hotels and package segment as compared to the air ticketing segment. This is an important point to discuss as the hotel and packages segment commands higher margins and improves the company’s consolidated margin and cash flow profile.

To elaborate on this point, gross bookings related to the hotels and packages segment was $95 million in fiscal 2011, and it surged to $566 million for fiscal 2016. During the same period, gross bookings in the air ticketing segment have increased from $648 million to $1.276 billion.

With net revenue margin of 15.3% in the hotels and packages segment as compared to net revenue margin of 6% for the air ticketing segment, MakeMyTrip is moving in the right direction, and I expect the company’s key margins to continue improving in the future.

Acquisition and strategic investments

One of the growth strategies of MakeMyTrip has been inorganic growth, and that has delivered positive results in the past. MakeMyTrip announced the acquisition of ibibo Group. The combination will bring together leading consumer travel brands including MakeMyTrip, goibibo, redBus, Ryde and Rightstay. These brands have together processed 34.1 million transactions in fiscal 2016.

Overall, the acquisition cements a strong position that MakeMyTrip already has in the Indian markets. Besides this acquisition, the graphic below shows some of the investments made by MakeMyTrip to expand the hotels and packages segment of the business.

02May2017135028.jpg

The key point is that MakeMyTrip has an aggressive growth strategy, and the company is continuing to focus on the hotels and packages segment that will deliver even better net margins in the coming years.

Strong balance sheet

With MakeMyTrip being aggressive on the inorganic growth front, a strong balance sheet will support further growth. As of Dec. 31, 2016, MakeMyTrip had total liquidity of $154 million that includes cash and term deposits.

With no borrowings as of Dec. 31, 2016, MakeMyTrip is well positioned with strong financial muscles to continue pursuing aggressive growth.

In the recent past, mobile ticketing and booking of hotels through mobile applications has gained momentum in India, and I would not be surprised to see increasing investments on that front.

Conclusion

MakeMyTrip has surged in the last year, but that does not imply that the rally is over for the stock. With huge potential to grow in the Indian markets, the company will continue to deliver strong numbers, and I expect the stock to move higher in sync with strong fundamentals and growth.

Inorganic growth will further serve as a catalyst for upside and will help MakeMyTrip gain further market share in a fast growing market.

Disclosure: No positions in the stock.

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