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Business News/ Market / Mark-to-market/  MakeMyTrip’s woes prove market share doesn’t equal online success
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MakeMyTrip’s woes prove market share doesn’t equal online success

MakeMyTrip says it enjoys a 40% market share in the hotels and packages segment. Why, then, aren't investors excited about its prospects?

MakeMyTrip’s market capitalization of $625 million amounts to less than 0.4 times the value of its gross revenues. Photo: Sneha Srivastava/MintPremium
MakeMyTrip’s market capitalization of $625 million amounts to less than 0.4 times the value of its gross revenues. Photo: Sneha Srivastava/Mint

MakeMyTrip Ltd has all the ingredients for online success. First and foremost, it has market leadership in both of its major business segments—online booking of air tickets and hotels and packages, each of which accounts for 48% of net revenue. It continues to ride the online wave well, and has tapped effectively into the growing use of mobile devices. The upshot: the gross value of its bookings has jumped 62% to $1.68 billion on a trailing 12-month basis.

There’s much more to the company, but just these two facts would have had private equity funds drooling. Alas, MakeMyTrip is a listed company. And here’s the nub: its shares have more than halved in the past one year. And its market capitalization of $625 million amounts to less than 0.4 times the value of its gross revenues. Privately-held e-commerce companies enjoy valuations of up to four times gross merchandise value, especially when they have market leadership, since private equity investors tend to believe that the winner takes it all in the online space.

Of course, e-commerce firms and online travel agents don’t make for an apples-to-apples comparison. But there’s much in common. For instance, in the hotels and packages space, online travel agents account for only 7-8% of the total market, leaving enormous room for growth.

Citing a recent third-party study, MakeMyTrip told analysts in a recent call that it enjoys a 40% market share in the hotels and packages segment. Why, then, aren’t investors in public markets excited about its prospects? Although the company’s leadership position isn’t under immediate threat, relatively new entrants such as Goibibo.com have become extremely aggressive on pricing, forcing the company to change its strategy.

The company told analysts that it will pursue transactions and market share at the cost of revenues and margins. As a result, its net revenue growth guidance for the year till March 2016 has been revised from the earlier 22-26% (given in mid-May) to 10-15% (in July). In the quarter ended June 2015, hotels and packages transactions rose 14.4% year-on-year, but net revenues of the segment grew just 2.8%, because of increased discounts.

In the last financial year, the company had generated cash worth $10.8 million from operations, but there could well be some cash burn with the hyper competition in the online travel space.

There are other changes afoot in the segment as well, with TripAdvisor Llc, the world’s largest travel portal, planning to allow users to book hotels without leaving its website. Clearly, the winner-takes-it-all argument is falling flat in the online travel segment.

Against this backdrop, it makes sense for investors to be a tad apprehensive about growth prospects. Meanwhile, in the non-listed space, e-commerce leader Flipkart’s valuations have continued to skyrocket. But for some others, valuations are easing off a bit. Snapdeal’s talks with Alibaba reportedly fell through this March because the former was expecting a valuation of $6-7 billion. Last month, it settled for a much lower valuation of $4.8 billion for its latest fundraising. According to an analyst tracking the Indian Internet sector, there has been increased tightness in the third and fourth round of funding in recent months.

The gradual return to sanity should aid companies such as MakeMyTrip, although it looks like it will be quite a while before the company can breathe easy.

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Published: 17 Sep 2015, 10:36 AM IST
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