Unlock: MakeMyTrip (MMYT) Boom! Here is Why We Love the Growth Story
It pays to do fundamental research. MMYT is one of our Top 10 Picks for 2016. Note below was sent to clients around Christmas 2015. We started buying around $20, adding occasionally on weaknesses in teens through out the year.
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MakeMyTrip (MMYT) – I am taking a leap of faith with this but that’s what investing is all about. Having a vision with strong opinion and executing on it. I tried long MMYT idea once a year ago and it didn’t pan out. But my long term “theme investing” has not changed.
Theme Investing – There are “pillars of growth” globally, i.e. forces of infrastructure build outs with sharply accelerating investments by venture capitalists. Understanding where the money is looking for opportunities can give you significant competitive advantage by positioning early, but it also comes with higher investment risk profile. I believe one of those pillars of growth is internet infrastructure build out in India, no different than how we saw in the US in late 1990’s that gave rise to giants of today like Amazon, Google, Priceline, Facebook, Netflix, etc. No different than build out in China in 2000’s which gave rise to Alibaba, Baidu, Tencent, JD and countless of other emerging internet startups. Now it is India’s turn. There are millions to make following this theme, all comes down to positioning in right places.
Internet Infrastructure Build Out in India – I expect to see hyper growth in coming years led by improving smartphone penetration, evolving consumer behavior and an improving value proposition from online companies. Growth is only getting started. India’s internet sector is at an inflexion point. To make this a top priority, Prime Minister Modi, who won elections in 2014 by the widest margin over opponent in 30 years, announced “Digital India” initiative that calls for providing high speed internet in rural areas (no different that broadband build out in the US many years ago).
All it takes is simple Google search to see how the money is flocking into Indian internet startups:
- Angel and venture capital funding in India has hit its highest ever mark. Over $3.5 billion has been poured across 380 disclosed deals in the first of half of 2015. The deals in the first half of this year have surpassed the number of startup deals in all of 2014. The ecosystem is attracting savviest investors like Softbank and DST Global who were original seeders in Alibaba in China and many other startups. Softbank has committed to invest $10 billion over next 2-3 years in India and sees e-commerce market reaching $500 billion in next 10 years: http://goo.gl/FNu1lG
- Here is great website to see every venture capital funding for internet build out. Approaching 100 deals every month, in early 2015 the run rate used to be in ~60 deals per month and last year it was in ~30’s: http://goo.gl/LI8ZPa
- India is the second-largest internet users market in the world after China with ~300 million users. However only ~35 million internet users transact online which is less than 3% of country’s population. As the size of this market is expected to increase exponentially in coming years, we are seeing a lot of interest from foreign companies to invest. Here is fantastic file from BAML issued in April 2015 that tells you everything you need to know about improving India’s online value proposition. Save it and read it many times over. There are opportunities here to make millions in years to come: http://goo.gl/sTxXUW
Bullish Case for MMYT – MakeMyTrip dominates the Online Travel Agency (OTA) market with an estimated market share of 47%. The second and third player have roughly 20% market share. In addition, a high proportion of MMYT’s revenues (42%) come from the high-margin hotel/packaging business, unlike its competitors where the major portion of revenues still comes from air business. Last quarter the company closed books with gross bookings of approximately US$1.6 billion. In comparison, MMYT current market cap is only $641 million. It is small cap stock mostly off analyst radar.
Within domestic hotels segment it is amongst the top 2 OTAs in India in terms of volume and #1 in terms of value share. It was also ranked as one of the most preferred OTAs from hoteliers’ perspective. Research shows the market opportunity for domestic hotels is large at US$8 billion and online penetration remains low at ~10%. Consensus shows online penetration potentially could go >40% and OTAs could dominate a large pie of the online segment. MMYT is well placed within higher category hotels (4/5 star category) but faces stiff competition within the lower category hotels.
The company doesn’t make any profits yet and won’t turn profitable for another 1-2 years. That is key risk to bullish investment bias that could continue to keep money flows to sidelines. But that’s where also lies the opportunity in early stages. I believe MMYT right now is prioritizing market share over margins and has become aggressive over the last few months to gain market dominance – Sep 2015 quarter results showed domestic stand-alone hotel transaction growth at +168% yoy versus +78% yoy in the June 2015 quarter. Guidance for 2HFY16 is also robust at +175-200% yoy, which is unheard of in the US.
Aside from aggressive management style and dominant position in fast growing OTA market, MMYT sets itself apart from competition with a strong balance sheet with cash and cash equivalents of ~US$100mn (at end Sep 2015) which gives it an edge especially when some of the other domestic OTAs are starving for funds.
Catalysts – 1) MMYT has launched a beta version of its budget hotel product, Value Plus, and at the same time has discontinued listing of budget hotel aggregators like Oyo and Zo rooms from its website. The beta version will go live this quarter, with 1k hotels (out of total 26k portfolio) under this initiative, which will be scaled up to 2k hotels within the next couple of quarters. 2) MMYT continues to focus on its mobile product and believes that mobile will constitute 70-75% of visitor share in the next couple of quarters from roughly 50:50 current mobile/desktop split.
Valuation – EV/S multiple on FY16e of 4.8x for the stock is closer to historical trough levels and also lower than most of its global peers. I believe potential market share gains in the domestic hotel space should be positive for the business and EV/S multiples of the stock.
Key Risks to Investment – Biggest risks I see are: 1) macro level broad selling in emerging markets whether it is sparked by central policy mistake or sovereign debt problems, and 2) specific to MMYT just understand we are in very early phases of internet build out in India and the competitive landscape can change quickly. It could also extend the probability of turning a profit further out in time. Also note there are not any pure plays listed in US stock exchanges to benefit from rising India’s ecommerce. MMYT is the best one we got. I wish FlipKart was traded in the US, in which Softbank has made billions of seed investment. For now, FlipKart is going at the same growth trajectory as Amazon and Alibaba.
Fahad Khalid
Chief Investment Officer, JaguarAnalytics
