MakeMyTrip’s valuations continue to defy gravity

MakeMyTrip appears to be reaping the benefit of US investors’ fixation with high-growth stories

Graphic: Subrata Jana/Mint
Graphic: Subrata Jana/Mint

As if MakeMyTrip Ltd’s valuation wasn’t high enough, investors in the Nasdaq-listed company have taken it to far greater heights. The company reported higher-than-anticipated growth for the quarter ended December 2016, after which its stock rose by nearly 10%.

MakeMyTrip’s market capitalization is now nearly $3.6 billion, based on the expected increase in its share count post the Ibibo deal. This is about 10 times estimated annual revenues of the two companies in 2016.

Before the acquisition was announced in mid-October, MakeMyTrip’s market capitalization stood at around $850 million, or less than a fourth of current levels. Since Ibibo was one of its biggest and most aggressive competitors, investors seem to be assuming that the acquisition will result in a far better market structure.

But there are no signs of this happening anytime soon. The combined entity’s losses are expected to continue in the next fiscal year, and it may at best break-even in fiscal year 2018-19 (FY19), says an analyst at a multinational brokerage firm.

The management told analysts in a post-results call that it will continue its aggressive strategy of pursuing growth in under-penetrated segments such as domestic and international hotels, and international air ticketing. As such, margins can be expected to remain under pressure.

Also, in December, when the company disclosed Ibibo’s financial performance for FY16, it turned out that Ibibo’s revenues were lower and losses far higher than what analysts had anticipated. On a like-to-like basis, i.e. using MakeMyTrip’s style of accounting, Ibibo had revenues of $82.1 million in FY16 and losses at the Ebitda level were as high as $106.8 million. Ebitda stands for earnings before interest, tax, depreciation and amortization. In comparison, MakeMyTrip had Ebitda losses of $57 million in FY16.

It’s not clear how Ibibo has done this fiscal year, although it seems unlikely its profit margins would have improved materially.

MakeMyTrip’s performance improved materially in the December quarter, boosted to some extent by certain one-off revenues. But growth was impressive at 63.6% even after excluding these revenues; on a reported basis, revenues grew by 77% year-on-year. The commissions earned were higher than anticipated at 7.8% in the airlines segment and 19.4% in the hotels segment. Aided by incremental revenues, losses were lower at the net level, although it remains to be seen whether the trend can be sustained.

Coming back to valuations, MakeMyTrip appears to be reaping the benefit of US investors’ fixation with high-growth stories. The near- elimination of competition with the Ibibo acquisition has helped its cause too. Even so, it’s ironic that MakeMyTrip’s stock is reaching greater heights at a time when large companies such as Snapdeal are staring at the prospect of raising funds at a lower valuation compared to the previous price at which its shares were sold.

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