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MakeMyTrip Limited (NASDAQ:MMYT)

Morgan Stanley Technology, Media & Telecom Conference Call

February 26, 2013 8:00 pm ET

Executives

Rajesh Magow – Co-Founder, Chief Financial Officer and Chief Operating Officer

Analysts

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Good evening everybody, we have MakeMyTrip with us. I’m Vipin Khare, I’m the India Infonet Analyst from Morgan Stanley. We have Mr. Rajesh Magow, who is the Co-Founder and CFO for MakeMyTrip. Rajesh, welcome to the Morgan Stanley TMT Conference for 2013.

Rajesh Magow

Yeah. Thank you.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

So just to begin with, there’s a lot going on in the India air segment, which is a big revenue stream for you. So the capacity has been low we’ve had some announcements now. So let’s start with how the low capacity has impacted you and how it’s exposed you to look at your business?

Rajesh Magow

Sure. Good evening everyone. You’re right, Vipin. Indian air market has been actually going through a difficult phase in this current year. And it has been largely because of one of the important full service carrier called Kingfisher stopped operating in the past couple of quarters in fact they have been ramping down for sometime. They used to have about 70 planes at one point in time. They were flying about 12 planes, and now they’re not flying anymore, and that led to capacity constraint in the overall capacity in the domestic air market, and that eventually led to artificially load for the rest of the airlines going up and therefore, they could afford to back up few prices quite a bit. So the fares have been up 20% to 30% year-on-year in the domestic air market.

So clearly, that led to a decline in the market overall, because all of the other airlines became so bottleneck focus as well. And so they kind of sacrifice the growth into the profitability. So as a result of these were happened, that market declines to first nine months of this first 12 market declined by about 5%. Last quarter, it’s actually declined by about 9%, and as far as the impact on our business is concerned, clearly it did impact our overall take rates from the airlines, because they could afford to as to again more bottom line focus, they could afford to, they started looking at every cost item and that being the airline and they started squeezing the commission, certainly they brought down the commission.

So overall take rates went down last quarter, it went down to about 5.3% for the nine months of the fiscal they were about 6.6% down from about 7.4%, and kind of a number last year. So clearly, there was a dilution there happened in the net revenue margin. We tagged it in this decline in, take rates from the airlines in our long-term outlook as well, but we didn’t expect Kingfisher to stop operations, and therefore it kind of happened faster than what we expected, and that led to a revenue drop in the last quarter, and as far as overall revenue growth for us is concerned, we have given the guidance of constant currency growth of 13% to 16%, which we hope we should be able to being but clearly impacted the overall revenue growth for us as well.

Now having said that there are a couple of positive developments that has very recently happened, because eventually capacity has to improve. So government announced foreign direct investment, by a foreign airline into any of the Indian carriers both direct Etihad and its all in the effects anyone can take it out the Etihad, which is an Abu Dhabi based leading carrier has been in talks with Jet to pick up some meaningful stake out there.

Last week, very interesting development happened that is Malaysian leading carrier, AirAsia announced the JV of the leading business house in India, called, TATA Group to start a low-cost carrier in India as well. So clearly, government is trying to make more to ensure that the capacity comes all the existing carriers are also trying to bring in more planes. Recently IndiGo, filed an application for additional 11 planes, they have actually got approval for 5 planes already; 6 planes is work in process.

So I guess it will take sometime, because overnight capacity bringing back the overall capacity reduction of about 70 planes that happened because of Kingfisher, that takes some time. It will take two quarters for capacity levels to come back. But definitely, once it comes back the growth is likely to come back in the industry as well.

Just to give you one example, very recent example how the price could drive or the fares could drive the demand either way. While in the past couple of quarters, the fares have been high 20% to 30% of overall growth decline. Recently, in this current quarter, they had announced the sale, all the carriers generally started by one carrier and then everyone followed suite. They had announced, they went to another extreme, they had announced they will be discounted fares, for just about four days and bookings were included.

So the price has a direct impact on the demand side. We believe that there is a clear demand in the marketplace given the overall economy growth that is happening in India at the right price point, not necessarily the price point that’s 20% to 30%, a fair hike year-on-year that’s the airlines were operating last quarter, and also probably not the kind of fares that they came up and announced the sale on.

So there is somewhere in between they have to find a way to maximize their revenue, tick their revenue on revenue management model in terms of going out and filing the advance, which is fares, probably six weeks in airlines, some of the airlines started actually doing this. But I guess there are other compulsions, being they are bottom line focus kind of compulsion that are happening, which they’re not able to just follow the revenue management model, which is the global practice of filing eight week fares, six weeks in advance, and then go closer to the travel date, and the ticket becomes so more expensive. But as things stabilize a bit as we go into the next fiscal and supply gradually and slowly comes back, I think we’ll see far more stability there.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Okay. And because of the whole Kingfisher issue in the air segment, inherently the share of low-cost carrier has gone up.

Rajesh Magow

Right.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And even in other words you mentioned, AirAsia and their tie-up, which will further increase the presence of low-cost carriers.

Rajesh Magow

Right.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And the way your air commission structure is the GDS fee plays a big role, and with the low-cost carriers coming up, is this something you could do a about increasing or protecting the air commission rates?

Rajesh Magow

Yeah, you’re right. I mean the market is moving toward low-cost fare or low-cost carrier model. For sure, it used to be 60% markets in favor of full-service carrier, 40% in favor of low-cost carrier, it is now estimated to be the other way around, so 60% in favor of low-cost carriers, and 40% full-service carrier, because Kingfisher is out of the mix, and yes, you’re absolutely right, we do have segment fee that comes from GDS, which is Amadeus in our case, in case of full-service carrier segment that we will conduct on Amadeus. But in the last quarter, that we saw 5.3%, it was 50%, 40% kind of a skew, so 50% low-cost carrier and 40% full-service carrier. So we’ve kind of achieved overall take rate as 5.3% in that kind of scenario, and I don’t think now and we hope so that it varies now going to further skew in favor of low-cost carrier. So therefore takes rates are probably going to stay between 5%, 5.5% kind of scenario.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

End user for your service charge is something very unique to India, that you’ve been able to maintain we’ve not seen that in a lot of other markets.

Rajesh Magow

You’re right.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And you did refer to it in your last quarterly call that you’re planning to play with it.

Rajesh Magow

Right.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

What should we expect there, and a lot of things are impacting it, you have MNC is coming into India, not charging end user fee, you have AFAs falling and being very volatile from being very high to very low?

Rajesh Magow

Right.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

How is that affecting your ability to change the service fee at various points? Thanks.

Rajesh Magow

Actually the last part of the question the international players coming and trying to actually charge no fee and all, it’s not really very significant and not really very material. For example, Expedia has been there in the market for some time, their focus is more on the retail business and not necessarily in the air business. There actually, air bookings are powered by Cleartrip. So they’re not really kind of focusing on that. So it doesn’t really impact us a lot. But what is unique about Indian market is worth mentioning when it comes to service fee over convenience fee is that there is a little bit of a flexibility and a play that we can play around with. But more importantly, what has also happened is that which is pretty unique to Indian market that airlines have also decided to charge on their website, so thereby giving price clarity as well, so which kind of works well for us, because in many ways it’s actually a fair increase.

Yes, it will impact price, but over a period of time when the capacity comes to light, fares would get rationalized a bit. But when it comes to a commission rate, now instead of being from their own pocket, we are charging from consumers and they are also passing it on to the consumers. So I guess from that point of view, it kind of helps us, but not really overly concerned about any international player coming and kind of making that kind of disaster move.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And the volatility in airfares, it was very interesting what you were mentioning. is it easier to put a service charge on fares when you have the high price fares or is it easier when fares are actually cheaper?

Rajesh Magow

Obviously low fares, because the fares look so attractive that we actually the trends where people were booking, making a lot of the advanced bookings and not necessarily a sustainable model clearly. But that is what that tends to happen when the fares are very, very attractive, when people tend to like book advanced, four, five months, six months down the line, any trips that they were planning and they would book that, try to take the fair advantage when the sale was on.

But your question, yes, it is much easier when these fares are discounted and then you feel charge a little bit more service fee, it doesn’t get noticed, because there is a big difference of overall fare that you would order up and do end up in as compared to when the fares are normal or pretty high.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

So this quarter, because you have the huge promotions from airlines that portion should actually were…

Rajesh Magow

It should, but I would go, would not say that it would have a material impact, because the duration of the sale was like four days.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Okay.

Rajesh Magow

And again, it happened only twice in this quarter. So let’s say about a week sale it’s going to significantly more (inaudible) to that.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Okay. Hotel and packages has been a very good growth area for you, your strategy on the domestic and the recent side has rode very well. What are the trends you’re seeing there both on the domestic side and regional traffic for the close by destination?

Rajesh Magow

Very encouraging trends actually, very, very excited about that part of the business, which were the focus area historically as well. So we did see as we reported last quarter, 119% growth on our hotels, standalone transaction year-on-year and the agency, which is hotel and packages segment together grew about 68% year-on-year as well. So very, very encouraging trends, and it’s happening because of two or three key drivers, and strategies that we’ve been driving historically.

So one is on the supply side so we have on the supply on to now, have about 10,700 hotels on our side, significant numbers than anyone else in the marketplace, significantly better numbers than anyone else in the marketplace, and that’s in the domestic market in India, and we have also looked at the encouraging trend where India consumers are actually traveling overseas, and it’s the fastest growing segment when it comes to the leisure travel especially to Southeast Asia region, short haul destinations five hour, six hour flying distance.

So therefore, we announced trying to cover and look at our overall hotel strategy more comprehensively looking at Indian’s traveling within India, and then Indian traveling overseas, and then provide the hotel accommodation options to the Indian consumers for both the categories, and therefore we have acquired as we’d reported out last quarter a company called HotelTravel.com, which has given us access, which is based out of Phuket, Thailand, and given us access to 75,000 hotels, majority of those hotels is in that region. And we have also integrated that side with our side. So we will get the benefit of traffic that was on HotelTravel.com to coming into India as well.

We have also acquired, we had acquired previously a definition management company, or a hotel aggregator, and ground handler in Singapore earlier. Last quarter, we reported another similar acquisition in Thailand as well.

Now again, bringing more hotel inventories more for our Holidays business and also gives us capability to enhance the customer experience for all our consumers who are going to both destinations.

So we are looking at supply more in India as well as in the Southeast Asia regions. We are also working hard to move and push more and more Indian consumers come and book online and you can see the growth rate from standalone hotel bookings that I just mentioned about 119% last quarter, and large part of those bookings are all happening online, and we’re trying to address it in multiple ways, looking at the consumer in sites where there was a potential trust deficit in terms of what they get after they have book the hotel, booking in terms of property amenities and so on. Do they actually get what they see on the website or not, so we backed that by campaign and the kind of – took out all the claims out of there – and if you don’t get what you see on our website, we will actually refund your money back as well.

So we took the acquisition and try to address, on the consumer side, tried to push them more and more online. And the third important thing that we’ve been trying to do is to improve booking experience on our site, have rich content. We recently introduced videos there, the hotel pictures, the reviews, we have TripAdvisor reviews; we have our own reviews. We have our stars category ratings on our site et cetera as well. So all these three strategies put together actually are working very well for us in terms of hotel’s strong growth.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And despite this strong growth in the hotel segment, the price per transaction has been volatile, actually keeps inching down. So what are the trends that you see in terms of number of nights people are booking or the number of people per booking, which could these are essentially mixed things that could drive. What is the low end and high end booking?

Rajesh Magow

Sure, absolutely. So if we look at the combined segment hotels and the packages, this sounds as it the total transaction value or per transaction is actually to a large extent, function of season. So a high season which is a high travel season or a holiday season you will have long duration holidays. For a low season, you will have actually no – we do have two high season quarters, and two low season quarters from a leisure travel perspective.

The low season quarters, you will have shorter duration holidays. We can get rebates so on and so forth. So that’s kind of one big driver for the change in the transaction, overall transaction value. The other one is the mix, as you rightly pointed out, from a long term perspective, we do want to try and make shift from more holidays business bundle product is growing, and some of these are growing from an operation leverage point of view, try to move consumers more and more book, online hotels, and also provide bundle product options like a flight plus hotel, so that consumer come online on the website, be able to actually book dynamically both flight plus hotel option as well rather than we putting together a bundle product together and putting that on the shelf. That’s the long term goal. It will happen over time. It will – the consumer behavior could not really change over night. But the other important thing that is happening, which is kind of headrest that mix issue as we grow our online hotel in India as a percentage contribution to the overall S&P segment, is that hotel travel acquisition.

So the transaction value out there, that’s again a pure play online hotel transaction and the transaction value, the ticket value is much higher because the travel is more into the region, in bound traffic coming into the Southeast Asia region and largely leisure and the longer duration holidays. So that’s going forward, kind of also going to address its overall transaction values.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

You’ve also actively and consciously driven the growth in hotel segment to increase the mix of revenues from hotels over there. What’s your view on air hotel breakup over the near-term and medium-term?

Rajesh Magow

Sure.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Six to 12 months and one to three years.

Rajesh Magow

Sure. So absolutely and that’s exactly what we’ve been trying to – let’s take a step back. We used to be 15% revenue coming in from hotel and packages in 2008. Last quarter, as we reported, we were actually 31% revenue coming in from hotel and packages another 4% coming in from the other segments, so around 35% was non-air revenue. That was last quarter, reported more from around a perspective, but if we look at last 12 months, we are – non-air is about 30%, 31%.

So we moved significantly towards our goal in terms of increasing our contribution from hotel and packages. As far as our outlook is concerned, we want to take this H&P revenue contribution to 50% for short in the next couple of years, and probably to about 60%, 65% in the next four to five years.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

In the OTA segment, how is the industry dynamic shaping up? You’re obviously the largest, but given the tough time, the smaller players could be getting more desperate. What are the moves they’re seeing from your (inaudible) and maintenance?

Rajesh Magow

Actually if we look at some of the data points that we see or we’ve been seeing in the past. So let’s say the market share in the overall domestic market – our market share of the total is domestic market which significantly improved from 10.8% a quarter before last 13% last quarter. If you look at some of the data points on the traffic side, so you look at com score, you look at the traffic trends vis-à-vis the competition the other hotel has. We clearly seem to have pulled it away even more and then it was the fall. We today have as per comp score monthly unique visitor of about 8.5 million as against Yatra and Cleartrip which were number two, number three, roughly around 4.5 million and 4 million respectively. You look at page views we have in the gap even much – huge. We have about 136 million page views monthly as against 29 million page views for Yatra annual 37 page views monthly for Cleartrip.

Expedia is actually about 16 million page views monthly as well. So there’s a huge difference. So that makes us kind of believe that we have pulled it away further. And clearly what we know, they’re actually predominantly both Cleartrip and Yatra are air business and given the difficult conditions in the air market situation, we think that probably the impact – they would have been impacted even more.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Moving away from that more on to the side, how should investors think both your operating margins, they were trending up nicely. The safety issues have impacted it a bit. So what’s the headwind, tailwind dynamics?

Rajesh Magow

Sure. If we analyze the operating margins, yes, we were trending quite nicely. If you really analyze, the operating margin has gone down and the single most reason is the evaluation on the air margin side and nothing else because if we look at the tailwinds, if we look at the H&P growing nicely, very decent growth, very intelligent growth. And since we are trying to fast track that or accelerate that growth even further, we are obviously in amazement more there as well. And our thoughts were trending absolutely fine as a percentage of net revenue. And now when you look at it as percentage of gross booking because of the fact that the dilution has happened on the net revenue margin, you will see that our incremental gains that are coming in year on year on the cost front as well.

Be it marketing cost, is moving in the right direction clearly as a percentage of net revenue or loss booking whichever way we want to look at it and given our direct traffic is above 50%, even our repeat rate is about 50%.

So we’re less worried about our cost structure. We’re clearly in an investment mode in trying to grow our hotel and packages business. And given the dilution as happened and there is at this point in time significant contribution comes from the air revenue, and that has impacted the profit and probably likely to impact the profit for sometimes. As the market improves on the air side, as we accelerate our growth and bring in our hotel and packages contribution even more, profitability is also likely to improve. So I would like to leave it at that.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

And finally, what have been the mobile usage trends for your overall business and what have been the downloads and the transaction value for transactions taking place over the mobile?

Rajesh Magow

Sure, very intelligent trends there as well. So 20% of our traffic today is coming from mobile already. As we have been talking about in the past, we actually have apps upon pretty much all the platforms. So we’ve got Blackberry apps, iOS app, Android app, Windows 8 app, just tablet kind of form – website is in the work.

As far as downloads are concerned, without making a significant or a serious push, we already have about 800,000 downloads all apps, put together and growing very faster. As far as transactions are concerned, we’re beginning to see transactions coming through for both air bookings as well as hotel bookings on mobile as well. It’s clearly not – the conversion levels are not the same as the desktop conversion at this point in time. But think we will get there very soon as well.

So going forward, we do believe mobile is going to play a bigger role given the fact that, as the estimates have been put out, smartphones are going to grow to about 160 million smartphones by 2015, currently about 20 million, 25 million smartphones in the next two to three years, maybe by 2015. And the broadband penetration is also kind of increasing. So there is for the first time serious alternatives emerging as far as access to Internet is concerned through another medium as well.

So combining with of course, there will be some cannibalization that will happen because to start, there will be a significant overlap with people who have or who access the Internet through desktop or who would access Internet through mobile phones or smartphones. But as we grow, we will definitely get some incremental gains from mobile. But overall trends are very, very encouraging.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Thank you, Rajesh, this is all the time we have.

Rajesh Magow

Thanks a lot.

Vipin Khare – Morgan Stanley India Company Pvt Ltd.

Thank you very much.

Rajesh Magow

Thanks a lot.

Question-and-Answer Session

[No Q&A session for this event]

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