City Insider: What MakeMyTrip tells us about travel firm valuations

Is Indian powerhouse MakeMyTrip’s ‘reverse evolution’ from online player to a package holiday provider the secret to its success?

This week I’d like to introduce you to a fast growing Indian online travel company called MakeMyTrip.

I stumbled upon this New York listed outfit a few weeks back as a result of one my favourite hobbies, which is to monitor initial public offerings (IPO) both here in the UK and on the US market.

I’m constantly fascinated by these IPOs, if only because they tell you so much about the market’s mood – they also help me gauge the market’s appetite for shiny new stuff and all that is perceived as ‘fast growing’.

The fuel for this worrying obsession with IPOs is my amazement at the utterly ridiculous prices attached these newly listed entities. Anyway, back to the plot and MakeMyTrop.

Plenty of companies IPO’d on the US markets in the last twelve months (rather less so here in the UK – congratulations to FlyBe for pulling off its float) yet most have seen their share price plummet back down to earth just a few months later.

One of the few exceptions is Indian online travel king MakeMyTrip. Its shares are currently trading stateside at about $30, with a market cap of $1 billion. Yes that’s 1,000 times $1 million, all for a company that hasn’t made an actual annual profit in the last three years. Even its maiden second quarter results were a bit of disappointment.

Yet I wouldn’t want to seem too hard on this Indian answer to Expedia. It’s a smart outfit which is clearly grabbing a big market share in the fast growing internet space. Its market share is about 48% currently against competitors such as Yatra, Cleartrip and TravelGuru. Also its quarterly numbers showed some seriously impressive top line numbers.

Gross bookings were up 48.8% on the same quarter last year, and revenues were up 41%. Crucially net revenue margins in air ticketing were around 7.4% while in holiday packages that number was closer to 11.9%.

What’s fascinating about MakeMyTrip is how it is broadening out the definition of online travel to a huge domestic audience.  The Indian travel sector is already worth about $26bn, and like China, is fast expanding.

Already an astonishing 27% of all travel transactions are online but what’s especially compelling is that much of the new value is being created off line for outfits like MakeMyTrip.

The hotels and package tours business was up 64% in gross bookings terms and the Indian press is buzzing about the company’s newly developed package tours to places like the Indian Ocean or Sri Lanka.

The group is also launching a range of escorted tours around Europe to appeal to the wealthier Indian consumer. The key for MakeMyTrip is to move its business franchise into a brand which can then be moved back into an off line business which actually involves packaging those holidays.

Here in the UK, of course, the process seems to be happening in reverse – big names like Thomas Cook have built their reputation on their off line reputation and are now trying to reverse into online.

Maybe we should learn from outfits like MakeMyTrip and watch out for the internet brand that moves in the opposite direction.

Then again it’s also worth noting that margins at MakeMyTrip’s package business fell by 2% over the last year as the economy rebounded and competition intensified.

The other key observation is that successful sites like MakeMyTrip and C-Trip – the $5.3 billion giant of Chinese direct travel – are moving aggressively into a comprehensive transport service, offering not only the obvious flights, but also bus and train tickets.

In the UK major online brands have failed to offer a comprehensive product range and currently if you use the web you’re forced to visit different outfits for rail and bus tickets.

All of these innovations shouldn’t blind us to a darker reality, namely that the big internet travel brands quoted on the US market are experiencing a vicious backlash from growth orientated institutional investors.

Chinese firm C-Trip and MakeMyTrip may be extravagantly over-valued (or perhaps not if you believe the analysts who predict astonishing year on year growth numbers, extrapolated out into infinity) but outfits like Expedia are increasingly cheap.

The travel giant currently trades at just 12-times forward earnings, even though it is still experiencing double digit growth in revenues and earnings.

The decision by AMR American airlines to pull their tickets off the Orbitz platform – Expedia has backed its rival in a show of sympathy – has unnerved the financial markets, resulting in big share price falls across nearly all the sector.

Arguably smaller companies like NASDAQ-quoted Travelzoo look even better value when compared to MakeMyTrip.