MMYT’s Q1 results again highlighted its near-term trade-off between growth and profitability as slight beat in net revenue came at cost of higher losses. We upgrade the stock to Buy as (i) it remains well positioned to gain from significant growth opportunity in Indian OTA given its dominant market share of 50%+ and funding from Ctrip/Naspers; (ii) its recent progress in reducing losses; (iii) stock price is back at levels of Jan-17 making valuations more reasonable. Higher revenue/losses in Q1 as growth vs. profit plays out again: MMYT’s Q1 results yet again confirmed its near-term trade-off between growth and profitability as slightly better net revenue — $170 mn vs. estimate of $165 mn — resulted in higher losses — $39 mn Ebitda loss vs. $25 mn estimate.
Beat in net revenue was driven by stronger than expected gross booking growth in both air ticketing and hotels & packages, partly offset by weaker take rates. Takeaways from earnings call: (i) Reported revenue/net revenue declined y-o-y due to adoption of IFRS15 which requires a higher share of marketing and promotion expenses to be netted off from revenue with no impact on Ebitda; (ii) management indicated possible headwinds in domestic air ticketing in the near-term due to stress on financials of many airlines; (iii) MMYT indicated strong momentum in bus ticketing led by Redbus. It is a $3.5-bn market with less than 10% online penetration; (iv) management plans to continue driving operating efficiency gains in H1FY19 with acceleration in growth likely in H2.
Long-term story intact: The Indian travel market remains a significant long-term growth opportunity with air travel still under-penetrated due to low income levels and online booking of hotels & packages still much below global averages. MMYT is the dominant player with 60% market share in air ticketing and over 50% in hotel booking. With Ctrip and Naspers as its key investors, it is very well positioned on access to funding. Over the last few quarters, it has made some progress in reducing losses which we expect will continue helped by economies of scale benefits and further optimisation of promotion expenses – we model Ebitda break-even by FY21e.
Upgrade to Buy; price target of $34.2: We raise our net revenue estimates mainly due to shift to non-IFRS accounting; we now build in slightly lower Ebitda losses and introduce FY21e. Our DCF-based price target increases to $34.2 (prev. $29.7) to reflect these changes as well as effect of roll forward and implies 4.5x EV to FY20e net revenue. We upgrade the stock to Buy.