MakeMyTrip: Lofty Valuation And Insider Selling

Investment Thesis

MakeMyTrip (NASDAQ:MMYT) has witnessed staggering growth, up over a third of its value in the last 3 months itself, compared to smaller peer Yatra (YTRA) driven by strong operating earnings.

India's travel industry has significant secular tailwinds as a result of the young population driving digital adoption and the rising middle-class population with growing discretionary spending wanting to travel. In addition, the ongoing cricket world cup is also likely to provide a significant boost to tourism in this cricket-frenzied nation. However, we believe the lofty valuation does not comprehend the downside risks and we initiate with a Sell rating. Insiders have been aggressively selling the stock since it peaked in late August, having sold to the tune of $43 mn during the past three months.

Company Background

MakeMyTrip is the largest OTA player in India with a dominant market share of 53.8%. It offers a wide range of travel services including air ticketing, hotels and packages, bus tickets, rail tickets, car hire, tours and other ancillary activities through its brands 'MakeMytrip', 'GoIbibo' and 'Redbus'. It has access to 70,000+ properties across India as well as ~650,000 properties outside India. It has about 74 mn+ monthly active users (MAUs) having sold 73 mn bus tickets and over 26 mn hotel room nights in FY23.

Historical Track Record

The company has recorded strong growth in its Gross Booking Value (GBV) primarily driven by strong recovery in travel demand amongst the users as well as market share gains. Its GBV has surpassed the pre-COVID levels and has reported strong gains across segments including air ticketing, tours and hotel booking.

Its air ticketing, room nights as well as bus tickets have surpassed the pre-pandemic levels driven by its strong brand resonance.

Note: Data in '000. Pre-pandemic levels are compared to the March 2019 level.

It has reported strong improvement in profitability as a result of operating leverage, improving take rates and lower advertising and promotion spending as a result of strong growth in its organic traffic and leadership brand positioning within the overall travel market.

Robust Industry Tailwinds

As discussed in my previous article on Yatra, Indian economy is the fastest growing economy in the G20 countries with rising travel and tourism demand, double the rate of GDP in 2023 according to WTC. Indian travel industry has significant tailwinds benefitted from a burgeoning middle-class population with rising disposable incomes, a younger population, and the second largest digital user base with significant potential to improve.

Population Demographics

In addition, according to data from DGCA, the number of air travel passengers is now above the pre-pandemic levels as a result of robust recovery in travel demand.

The travel industry is also expected to witness a surge in demand as a result of the ongoing ICC Cricket World Cup within the cricket-frenzy country as direct and indirect spending during the month-long period is expected to boost consumption by $1.6 bn. According to data from Booking.com, top searched destinations in India are cities like New Delhi, Mumbai, Ahmedabad and Dharamshala where the ICC Men's Cricket World Cup is taking place. Room rates have soared eight to fifteen-fold for bookings in Ahmedabad with searches in Airbnb for accommodations growing 4000% according to Airbnb.

Strong Q1 Earnings

MMYT delivered solid set of results with a GBV growing 23% YoY to $2.0 bn driven by strong growth across categories. Net revenues jumped 27% YoY primarily as a result of improving take rates within the bus ticketing segment. MMYT gained market share in Q1 driven by strong growth in its GBV with domestic air ticketing market share remaining above 30% and also having gained market share in hotels and packages, as well as rail reservations.

Airfares remain elevated due to supply-side constraints as a result of the grounding of GoAir, which we believe is expected to normalize entering into H2. Room nights remain above pre-pandemic levels with the management maintaining that budget hotels have witnessed 80-85% recovery vs pre-pandemic levels. Adjusted margin improved within the Bus ticketing segment while remaining stable within the air ticketing and hotels and packages segment.

Sales and marketing expenses declined sharply to 4.6% of GBV below the management's guide of 5 - 5.5% as a result of benign competitive environment and MakeMyTrip's brand position driving organic traffic. This enabled the company to deliver its highest Adj. quarterly operating profit at $30 mn, a staggering growth of 83% YoY.

We expect GBV to grow by 30% for the remainder of the year driven by continued recovery in travel demand as well as tailwinds on the back of cricket world cup. We expect Adj. EBIT margin to be 1.5% of the GBV at the top end of management guidance, assuming sales and marketing expenses to be around 5.2% of GBV (in line with management guidance of 5 - 5.5%) and stable take rates.

Balance sheet position remains strong with the company ending up with cash and deposits worth $522 mn as well as available credit facility of $119 mn. It has a debt outstanding of $235 mn which implies a net cash position. MMYT has about $136 mn in authorization for repurchase of its shares and convertible notes each, however, the company noted that it may well use the cash for investments or repurchase of 0% convertible notes.

Valuation

MMYT trades at lofty valuations with Seeking Alpha's valuation grade rating of 'F'. It trades at 45x Fwd P/E as well as 32x Fwd EV/ EBITDA.

In addition, if we compare it with its other listed peer, Yatra, it still trades at significantly higher valuation. While the relative premium could be adjudged to the market leadership as well as better growth and profitability metrics as well as potential for upward revisions, we do not ascribe any reason for that to be significantly higher to Yatra's 19x EV/ Fwd EBITDA.

We Initiate with a Sell rating as we are positive on the secular growth story of Indian travel industry but believe the lofty valuations do not justify the current price. In addition, since the stock peaked in August, Insiders have been aggressively selling the stock to the tune of ~$43 mn over the past three months.

Risks to Rating

1) Higher than expected growth in its GBV due to market share gains as well as strong travel demand in India catapulted by ongoing Cricket World Cup

2) Strong growth in organic traffic can lead to decline in marketing spending which can boost operating margins

3) Company can leverage its brand positioning and demand higher take rates which will boost its gross margin

Conclusion

MMYT has been a phenomenal story on India's rising tourism and travel demand and its strong brand positioning has been able to gain market share. We are positive on the overall MMYT story with secular tailwinds from the industry, however, we believe the current lofty valuation does not accurately reflect the downside risks and ascribe a Sell rating.