Following the company's June-quarter performance, global brokerage firm Goldman Sachs has maintained its positive outlook on TBO Tek, highlighting the company's potential for long-term growth. This optimism is based on TBO’s strategy of consolidating a fragmented market and pursuing mergers and acquisitions.
Goldman Sachs notes that the B2B travel sector has relatively low competition, with only a few large players. As TBO's platform expands, the brokerage expects the company to benefit from stronger network effects. Additionally, it said that the company has a strong execution track record, an asset-light balance sheet, strong FCF generation, and low regulatory risks.
Therefore, the brokerage continued with its 'buy' rating on the stock but lowered the target price slightly to ₹1,950 apiece from an earlier price of ₹1,970. This target suggests a 24% upside from the stock’s previous closing price of ₹1,576.
Maintaining its positive outlook on the company, the brokerage also identifies potential risks, including shifts to online platforms, a slowdown in global travel, changes in supplier terms, increased competition, non-value-accretive M&A, and potential impacts from pending litigations.
Several global online travel agencies (OTAs) reporting their June quarter results have indicated a softening in near-term travel demand. Despite experiencing a decelerating growth trend in 1QFY25, TBO managed to achieve healthy revenue growth of 21% YoY, reaching ₹418 crore. According to Goldman Sachs, TBO’s sector-leading revenue growth will continue in the near to medium term.
In 1QFY25, TBO’s revenue mix shifted towards higher gross margin hotels, contributing to a 25% year-over-year increase in gross profits. Both revenue and gross profits aligned with brokerage estimates. However, reported EBITDA growth of 18% year-over-year fell short due to higher one-time costs and non-cash charges. Excluding these, EBITDA performance was largely in line with brokerage estimates.
TBO’s India operations, which are heavily reliant on airlines, showed weakness with a 7% year-over-year decline in GTV, particularly in the domestic air segment. TBO's strategy of prioritising margins over growth led to slower revenue growth in the air segment compared to MMYT, the brokerage noted.
However, TBO’s hotel segment grew significantly faster, resulting in overall revenue growth comparable to MMYT and exceeding most global peers.
For 2QFY25 (September 2024), TBO anticipates an acceleration in GTV growth due to favorable seasonality in its international segment. TBO management has indicated limited signs of a slowdown in demand in the international hotels segment.
"We believe Buy-side expectations for TBO are in line with our own for revenue growth of 20%+ with improving margins, which we see the company as being able to comfortably deliver," says Goldman Sachs.
It views TBO as a steady earnings compounder, projecting a 29%/34% CAGR for EBITDA/net income during FY24–30E based on a 20% revenue CAGR.
The stock debuted on the Indian stock market in mid-May 2024, listing at ₹1,406 per share, compared to the IPO price of ₹920 per share. After its listing, the stock gained momentum over the next two months, rising 40% to reach a new all-time high of ₹1,933.
Following this peak, the stock experienced a decline, correcting by 17.5% from its highest point. Despite this drop, it remains 73% above its IPO price.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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