MakeMyTrip: Cautiously Optimistic On This Travel Stock (NASDAQ:MMYT)

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Investment Thesis: While MakeMyTrip (NASDAQ:MMYT) might see modest growth in the short to medium-term as volatility across the travel industry continues, I take the view that this company is in a good financial position to further grow its dominant position as India’s leading OTA.

In a previous article back in October, I made the argument that MakeMyTrip could see some upside heading into 2022, as the peak season for travel in India spurs higher demand for online travel services.

While the stock saw some upside last November, price has reverted back to a level of just above $24 at the time of writing.

MMYT price sourced from investing.com

investing.com

With the spread of the omicron variant having coincided with the peak season for tourism in India – this may have affected travel propensity and might be reflected in the subsequent earnings quarter.

That being said, I wish to assess more fundamentally whether MakeMyTrip has prospects of significant long-term upside in spite of recent pandemic pressures on travel.

Recent Earnings Performance

Revenue

MakeMyTrip: Fiscal 2022 Third Quarter Results

MakeMyTrip: Fiscal 2022 Third Quarter Results

MakeMyTrip: Fiscal 2022 Third Quarter Results

MakeMyTrip: Fiscal 2022 Third Quarter Results

On a percentage basis, we can see that for the nine months ended December 31, Hotels and Packages showed the largest growth in percentage terms from the previous year. In addition, this segment also showed the highest adjusted margin in percentage terms.

With that being said, gross bookings as a whole still remain significantly below 2019 levels.

Here is a graph illustrating gross booking fluctuations for Air Ticketing and Hotels and Packages from Q3 2015 until now. Figures are expressed in logarithmic terms for comparison purposes and to observe the rate of change from quarter to quarter more clearly.

Figures sourced from MakeMyTrip Q3 Earnings Reports (2015-2021), graph created by author

Figures sourced from MakeMyTrip Q3 Earnings Reports (2015-2021), graph created by author

In this regard, we can see that while recent performance is encouraging – gross bookings still have some way to grow before we start to see levels witnessed from 2017 to 2019.

Balance sheet

From a balance sheet standpoint, it is encouraging that in spite of the pandemic, MakeMyTrip has continued to maintain a steady supply of cash and cash equivalents as compared to previous years, and has not needed to dip significantly into cash reserves to sustain its business. Again, the graph is provided in logarithmic format to illustrate rate of change across quarters.

Figures sourced from MakeMyTrip Q3 Earnings Reports (2015-2021), graph created by author

Figures sourced from MakeMyTrip Q3 Earnings Reports (2015-2021), graph created by author

With that being said, the company’s non-current liabilities – which represent long-term financial obligations – have risen significantly since 2020. As a result, a significant portion of the company’s rebound in revenue growth will need to go towards servicing these obligations over the longer-term.

Balance sheet figures sourced from Q3 2019-2021 Earnings Reports, ratios calculated by author

Balance sheet figures sourced from Q3 2019-2021 Earnings Reports, ratios calculated by author

The current ratio has increased significantly from 2019 – indicating that MakeMyTrip is in a relatively stronger position to meet short-term debt obligations. While non-current liabilities have increased strongly – the overall debt to asset ratio still remains substantially below 1 – indicating that the company has sufficient assets to finance long-term debt obligations if needed.

Looking Forward

During what has been a rough time for the travel industry in general, MakeMyTrip has shown resilience in bolstering revenue levels from prior lows across its main segments of Air Ticketing and Hotels and Packages.

Additionally, while the company has had to incur significant long-term debt loads in order to finance its operations, the fact that current assets have grown significantly and the company is comfortably meeting its short-term debt obligations is quite encouraging.

From a market standpoint, the emergence of the omicron variant towards the end of 2021 as well as recent market contagion over inflation fears has understandably made investors cautious of travel stocks more generally. This is particularly the case, given that the prior investor enthusiasm we saw for the sector back in 2020 has faded, as investors increasingly demand a rebound in earnings and a recovery in financial position.

In this regard, I take the view that while it is quite possible for MakeMyTrip to rebound to its prior $30-35 range once again, this is likely to be seen over a longer-term period, as investors take time to become comfortable with travel stocks more broadly.

From a competitive standpoint, while I had recently cautioned that competition is intensifying in the Indian OTA market (with smaller companies such as ClearTrip having been acquired by Indian e-commerce giant Flipkart (FPKT) thus leading to significant industry consolidation), there have been no particular signs as of yet that competition is hindering MakeMyTrip. The rebound in gross bookings in the last quarter was quite impressive, and while international OTAs such as Expedia (EXPE) do compete in the Indian market, customers continue to show a strong preference for domestic OTA companies, of which MakeMyTrip remains the largest.

Conclusion

While we could see some volatility in the stock over the short to medium-term given the uncertainty in the travel industry more generally, MakeMyTrip remains a fundamentally strong company with a strong position in the Indian OTA market.

I anticipate that it will take a couple of years before we see gross bookings solidly at pre-pandemic levels. However, the company is managing its financial position quite well in the meantime, and this puts it in a good position to grow further.

Notwithstanding the broader challenges for the industry going forward, I remain cautiously optimistic on MakeMyTrip’s longer-term prospects.

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