MakeMyTrip Will Continue To Create Value

Sep. 3.14 | About: MakeMyTrip Limited (MMYT)

Summary

MakeMyTrip has moved higher by 126% since my recommendation and the stock will continue to trend higher.

The company serves a fast growing and under-penetrated market with market leadership being an added advantage.

Higher sales mix of hotels & packages as compared to air ticketing is boosting margins as MakeMyTrip moves towards profitability.

I had written an article on MakeMyTrip (NASDAQ:MMYT) on June 7, 2013. Since that time, the stock has moved higher by 126% to current levels of $28.98. MakeMyTrip made a high of $35.1 on June 30, 2014 and the stock has corrected by 21% in the last two months as investors have booked profits. I remain bullish on the long-term prospects for the stock and this article discusses the reasons to buy MakeMyTrip with the current correction providing a good entry point.

Being a market leader in an under-penetrated market is one of the primary reasons to remain bullish on MakeMyTrip. India has a population of nearly 1.2 billion and is the second fastest growing economy in the world. However, India's internet penetration is significantly low with broadband penetration of just 7% and smart-phone penetration of 6%. Therefore, the online market has huge upside potential and as internet penetration grows, MakeMyTrip will benefit. MakeMyTrip now has a leading market share of 47% and is well positioned to capitalize on the growth potential that is coming.

What I also like about MakeMyTrip is the company's strategic move in the right direction and the positive results from the move. As of 2011, 78% of the company's revenue came from air ticketing, a segment that has lower margins and only 18% of the revenue came from hotels & packages, which has higher margins.

The company's focus and success on higher margin business is evident with 59% of 2014 revenue coming from air ticketing and 37% of the revenue coming from hotels and packages. In 2014, hotels & packages had a net income margin of 12.6% as compared to 6.6% for air ticketing. Therefore, MakeMyTrip is moving in the right direction when it comes to boosting its margins.

In India, online hotel booking as a percentage of total hotel booking is just 13% as compared to 32% in the United States. The opportunity is big and MakeMyTrip is doing well to tap on this growth opportunity. I am of the opinion that the hotels & packages segment will continue to form a greater pie of the revenue share in the future.

By 2016, India's middle class will swell to 267 million and to 547 million by 2026. This will translate into a higher number of holidays and travel in India and overseas. Outbound departure by Indians has been growing at a CAGR of over 10% in the last few years and this can accelerate as India's economy picks momentum with good work being done by the new government.

MakeMyTrip's strong results have backed the stock upside as the company's revenue has increased at a CAGR of 27.5% in the last five years. I also see positive indications in 1Q15 result where the company's revenue increased by 22.9% to $94.8 million as compared to $77.2 million in 1Q14.

The biggest positive of course is the strong increase in revenue (less service cost) from hotels & packages. The segments revenue (less service cost) increased by 64.6% to $17.8 million in 1Q15 as compared to $10.8 million in 1Q14. If this growth trend continues, MakeMyTrip stock will also continue to move higher on overall improvement in key margins. For 1Q15, the company's diluted loss per share narrowed down to $0.09 as compared to $0.24 in 1Q14.

MakeMyTrip has also been growing through acquisitions and this growth will also continue for the company as it looks to make inroads into new markets. In February 2014, MakeMyTrip acquired EasyToBook and this gives access to the company to online hotel reservations in Europe and North America. The company also acquired HotelTravel in November 2012 to boost its presence in South-East Asia, which is one of the common travel destinations for Indians. I believe that inorganic growth will continue to be one of the key expansion strategies for the company.

Looking at the potential risks, increasing competition can impact the company's planned growth. Expedia (NASDAQ:EXPE) is already in India and existing players are also scaling up in a market with big potential. If the company's operating cost breakdown is analyzed, the marketing cost as a percentage of gross bookings has increased in 2014 to 2.21% from 1.68% in 2013. MakeMyTrip will need to maintain or increase its marketing cost in a highly competitive market. This can negatively impact the margins. Higher revenue from hotels & packages segment partially offsets this concern.

In conclusion, MakeMyTrip is a good stock to consider for the long-term. The Indian travel market growth is still at an early stage and even with high competition, the companies in the industry will continue to grow. MakeMyTrip has an edge over peers with a leading market share in the country.

I see more positives for the economy with the new government and I will not be surprised if India becomes the fastest growing economy in the world in the next 3-5 years. MakeMyTrip can make it big in such a scenario as the travel market gets a further boost. Even after the big rally, I remain very bullish on the stock and rate it as a long-term buy and hold.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.