Credit: Shutterstock photoBy Jonathan Verenger :
Mary Meeker recently highlighted India in her latest State of the Internet 2015 report, and Jeff Gundlach was recently interviewed on CNBC where he talked at length about India. Here is a portion of his comments:
India has seen a significant ramp in GDP growth recently due to new leadership coming in that is pro business,Internet penetration rates rising substantially (yet still at only 19% of total population), excellent demographics (More than 50% of its population is below the age of 25 and more than 65% is below the age of 35), and low oil (India imports about 80% of its supply). So lots of positives working for India in the longer term. Here is a look at recent growth in GDP in India:
Inflation had been pretty aggressive the past few years, but that has fallen quite a bit as its currency has stabilized and oil prices have gone down, and as a result, GDP is now rising about 8% annually, the fastest in the world amongst countries with a GDP above $1 trillion.
Per a report from KPMG , 905 million Indians live in rural areas and only 6.7 percent, or 61 million, currently use theInternet on a regular basis. The urban areas have seen pretty highInternet usage rates, but the majority ofInternet users are on 2G networks with very slow connections (think AOL dialup in the mid-1990s in the US). At the end of 2014, there were 82 million 3G subscribers in India, but that number is expected to almost triple to 284 million by the end of 2017. If you put this into context, only 6% of its population is using 3G. Compare this to a nearly 50% penetration rate of 3G or 4G users in China.
Below is a great chart from Mary Meeker's report highlighting the inflection point that India is at with regards toInternet penetration, comparing where it is now with where China was in 2008 and where the US was in 1996. She makes the point that now is the time to be looking for those catalyst companies in India being shaped by this inflection point, much like Tencent (TCEHY) and BABA in China and AMZN, eBay (EBAY) and Yahoo! (YHOO) in the US at their respective inflection points.
Anyway, you get the point: India is growing fast, its middle class is growing rapidly,Internet penetration rates are exploding and yet it still has a ton of room to grow. Great long-term tailwinds for investors in India. With this in mind, I took a look at the companies that are most likely to benefit from growing trends in India. My strategy is to avoid 2nd tier companies like Rediff (REDF) because of how difficult it is to compete against market leaders, and to focus on areas that would see direct benefit from a rapidly growing middle class with extra disposable income and that would benefit directly from increasing mobile usage. The obvious play in my mind is MakeMyTrip (MMYT), the Expedia (EXPE) of India.
MakeMyTrip
MMYT came public in 2011 and has seen dismal performance for its stock. It IPO'd at $22 and ran up to $42 within the first few months. The stock is currently trading at $15.59, down 19% today on a weak Fiscal 2016 Q1 earnings report. The report was pretty ugly...marginal top-line revenue growth below forecast, with an earnings miss and a below estimate guidance for the year. Not exactly what you would expect when you seeInternet usage and growth in domestic flights exploding.
I think the headline numbers mask what is really going on, though. The problem it is dealing with is three-fold:
(1) There's a mad scramble right now to gain market share as new competitors are coming into the market, at the expense of revenues and earnings.
(2) Currency fluctuations are impacting net revenues.
(3) Net transaction values have been decreasing on flights as airlines have been engaged in pricing wars to acquire customers, which reduces total revenues to MMYT.
Here is a look at the ugly headlinenumbers:
Revenue less service costs (i.e. the margin it makes on each transaction) only grew 7.5% (made up of 10.8% growth in air travel and 2.8% growth in hotels and packages). Not exactly explosive growth. But if you drill down a little more to the actual transactions occurring on its network (i.e., makemytrip.com and on its mobile app), growth looks much better and more in line with growth in IndianInternet usage and Indian domestic travel.
The number of transactions for airline tickets grew 45.6% and for hotels and packages the number of transactions grew 27.6% when excluding an acquisition it made last year. And if you drill the latter figure down to just hotels (I'll explain later), then you will see 78.1% growth year on year.
I believe the discrepancy between the headlinenumbers and these transaction figures is due to MMYT's decision to gain market share at all costs...i.e. getting as many hotels as possible on its network so the company can increase the # of offerings to its customers, even if it means charging lower prices to customers. This is the exact same game that AMZN has played for the past 20 years as it gains market share at the expense of profits. MMYT confirmed on its Fiscal Q1 2016 conference call that supplier fees have not gone down; rather, it is charging customers less.
I'm not sure if this decision is a reaction to competitors coming in and offering lower prices to customers or if MMYT is proactively trying to squeeze out competitors. Given MMYT management's recent comments, my guess is it's more of the latter.
Unfortunately, MMYT hasn't released data on the standalone hotel transactions until this past quarter, so I can't see the trends in those numbers. The growth in hotels and packages transactions has been decelerating in recent quarters, as shown below:
Growth in the H&P segment has gone from 106% > 70.9% > 46.6% > 32.2% > 27.6% over the past 5 quarters. Still very solidnumbers, but the trend is slowing down. To get a sense of what's going on, management's disclosure that hotel transaction growth this quarter was 78% implied that customers are booking less packages. On its Q1 2016 call, management made some comments about seeing customers' preferences to only book hotels versus packages recently, which has resulted in lower gross bookings and thus lower revenues per transaction.
Conversely, airline transactions growth has been accelerating, from 16.1% > 45.6% over the past 5 quarters. The net revenue coming from this segment was up 10.8% (+17.6% on constant-currency basis). In addition to currency fluctuations, the discrepancy between the 45% transaction growth and 11% revenue growth was the result of lower average transaction values as airlines are engaging in price wars to gain customers.
Airline Traffic in India
Growth in domestic travel in India has been a major catalyst for growth in air ticketing transactions as they are directly correlated. MMYT's air ticketing transaction growth has been roughly doubling the domestic travel growth for the past 3 years:
2013: Indian domestic travel growth: +4.45%, MMYT transaction growth +9.3%
2014: Indian domestic travel growth: +9.24%, MMYT transaction growth +15.24%
Q1 2015: Indian domestic travel growth: +20.9%, MMYT transaction growth +39.8%
Q2 2015: Indian domestic travel growth: 18.5%, MMYT transaction growth 45.6%
With transaction growth nearly double the growth of domestic travel growth in India, MMYT is expanding its already 40% market share of online travel (latter figure disclosed by MMYT last quarter).
To get a sense for what kind of growth the travel market might have in store in India, it's best to look at China and the US as guides. In the US, the average person flies roughly 1 time every 5 months. In China, the average person flies roughly 1 time every 3.5 years. In India, the average person flies 1 time every 20 years. In order to get to the current averages in China, India would see its travel market grow 6-fold and to get to current averages in the US, it would see its travel market grow 48-fold .
Conclusion
This reminds me a lot of Ctrip.com (CTRP), the leading online travel agent in China. In 2005, CTRP had a market cap of about $600 million. 10 years later, CTRP's revenues are up 20-fold from $65 million to $1.3 billion while domestic flights in China are up from 70-80 million to over 400 million annually. CTRP's stock is up 1,300%.
Right now, India is on pace for about 75 to 80 million domestic flights (i.e. same that China was at 10 years ago), up from about 25 million in 2006, and growing about 20% annually right now. India's travel industry has the potential to grow similar to that of China over the past 10 years and MakeMyTrip should be a direct beneficiary of this. In the past quarter alone, India had roughly 19.9 million domestic flights and MMYT alone captured 1.6 million of those. That is a tremendous market share given relatively lowInternet penetration rate in India and this share is growing. Below is a comparison of the volume of transactions on MMYT relative to the total volume of domestic passengers in India from 2011 to the first 6 months of 2015.
As you can see, MMYT's volume relative to the domestic passenger market in India has grown from 5.99% to 7.93%. Imagine the volume of transactions MMYT could be doing when India has 400 to 500 million domestic flights annually.
I believe MMYT is going through the same thing CTRP went through in 2012 as China was experiencing rapidInternet growth and CTRP was battling more competitors. In 2011/2012 CTRP's stock dropped from $50 to $12-13 on fears of competition impacting revenues and earnings. At its low, the stock traded at around 3.5-4x Trailing Twelve Months Revenues, and CTRP was only forecasting 15% to 20% revenue growth. CTRP shifted its focus to maintaining/gaining market share at the expense of profits and investors punished the stock severely. While operating income dropped from $203 million in 2011 to -$27 million over the past 12 months, the stock has soared from $13 to $70+ as growth has reaccelerated and investors see the long-term potential in the Chinese OTA market.
I believe MMYT is going through the same punishment phase CTRP experienced in 2012. Similar to CTRP, MMYT has shifted its focus away from net income toward maintaining/gaining market share. Revenue growth on a constant-currency basis was 14.7% this past quarter. Yet, this top-line figure masks the rapid growth in transactions booked on MMYT's platform due to reduced transaction values and lower prices charged to customers (at the expense of net margins to MMYT) in an effort to grow market share.
Management guided to 50% to 55% transaction growth in hotels and packages, and air ticketing transaction growth has been running near 40% recently. With about $150 million in net cash (cash and term deposits), several demographic and economic tailwinds behind it, and with a growing share of the overall market for online travel, I believe within 12 to 24 months, you could see a much higher share price for MMYT.
One near-term catalyst to look out for is a partnership with Flipkart (FPKT), one of the largestInternet players in India that did its latest capital raise at a valuation of $15 billion , which was rumored to be in advanced talks with MakeMyTrip on launching a ticketing platform .
Recommendation
I started buying shares at $19 and added to it today at $15. I would recommend this under $16 for anyone looking to get exposure to one of the leadingInternet companies in India, a country in the midst of an economic boom.
See also McDonald's: Don't Just Fall For The 3% Dividend, Declining Comps Are A Real Concern on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
