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India's Peripatetic Middle Powers MakeMyTrip IPO

03 August, 2010

Woody Allen once said 80 percent of success comes from just showing up. In that regard, MakeMyTrip has shown up in the right place. The company commands half of Web travel-agency bookings in India, where a rising middle class is increasingly on the go. Moreover, MakeMyTrip is growing faster than the market. Though its $70 million U.S. IPO doesn’t come cheap, it should put buyers on the runway to gains.

Concerns about the price — and the fact that some insiders and early backers are selling stock — may have curtailed by $30 million the amount of money MakeMyTrip will harvest next week in its U.S. offering, which would be the first in four years for an Indian company. But the stock offers a unique opportunity for investors to gain exposure to India’s increasingly peripatetic consumer class.

The 10-year old company has its roots in selling travel to expatriate Indians. But it’s refocusing on the domestic market. And well it should: India’s bourgeoisie is set to explode 11-fold by 2025. So far the firm’s off to a good start. Its 65 percent bookings growth in the June quarter is six times the estimated growth of Indian online travel.

The company is also improving margins. Partly this is the natural effect of scale. Revenue reached $83.6 million in the year ending last March, and MakeMyTrip posted positive operating cash flow, though it lost $6.2 million. This also reflects the company’s shift towards selling more services to Indians travelling at home.

Selling more travel to a broader audience lets the group bargain harder for prices on hotel rooms, which are more profitable than airline tickets. MakeMyTrip’s key financial metric is the markup on each lodging bill it keeps. That has risen to 14 percent from 9 percent in the last two years, as MakeMyTrip’s expanding market power lets it extract better terms from hoteliers.

True, insiders — including CEO Deep Kalra — are selling some stock in the offering. So, too, are earlier backers such as Softbank’s Asian Infrastructure Fund. But hedge fund Tiger Global, another insider, is buying. Overall, sellers are recovering only part of their investment and letting their paper profits ride. Only about a quarter of the IPO consists of existing stock.

Moreover, the precedents for online travel agents in emerging markets are good. Consider Ctrip.com International, China’s online-travel leader. It’s been a 17-bagger since its 2003 debut. Today it’s worth $5.4 billion, or 17 times trailing 12-month sales.

At the top of its $12 to $14 offering range, MakeMyTrip would be valued at $478 million, or five times recent sales. That’s expensive relative to Expedia, a little higher than recent market darling Priceline.com, but cheap compared to Ctrip. If MakeMyTrip can close even a portion of the gap with its Chinese counterpart, shareholders will be in for a profitable journey.


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India's Peripatetic Middle Powers MakeMyTrip IPO

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