MakeMyTrip’s revenues power ahead, but investors unimpressed
MakeMyTrip Ltd’s shares have declined by around 23% from their highs in early September. While valuations have been stretched for some time now and a correction was overdue, investor concerns about competitive intensity have also increased after OYO Rooms announced a fundraise two months ago.
The company’s September quarter results give credence to some of these worries. On the positive side, revenue continued to power ahead—it stood at $139.2 million in a seasonally weak quarter, not much lower than the $141.2 million revenue generated in the better-off June quarter.
But like in the preceding quarter, marketing and sales promotion expenses kept pace with revenue once again. They stood at $135.8 million last quarter, compared to $142.3 million in the June quarter. The fact that MakeMytrip has had to spend nearly as much on promotions as it earns in revenues is clearly disconcerting.
Analysts at Jefferies India Pvt. Ltd say in a note to clients, “MakeMyTrip’s 2Q net revenue was 11% ahead of our estimate... However Ebtida loss was in line with expectation, as marketing and sales promotion expenses were also higher by the same extent. This reaffirms our concern on growth-profitability trade-off for MakeMyTrip in the near term, i.e. a beat in either will come at the expense of the other.” Ebtida is short for earnings before interest, tax, depreciation and amortization.
In the key domestic hotels bookings space, the company said in a call with analysts that OYO Rooms has been aggressive in the budget hotels space, while it faces competition from Booking.com in the premium segment. As such, despite the consolidation in the industry after the company’s acquisition of Ibibo Group’s travel business in India last year, competition levels remain high. In the ticketing business, Paytm has been very active, and although it has maintained a low profile in the hotels segment so far, some analysts are telling investors it can play a disruptive role in the hotels segment as well.
Overall, expenses and losses have remained at high levels, negating the increase in revenues. As Jefferies’ analysts put it, “We raise our net revenue estimates for MakeMyTrip slightly but also build in higher losses and a lower steady state margin than before. As a result, our DCF (discounted cash flow)-based fair value declines to $28/share.” The company’s shares trade at around $27 apiece.
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