The Yatra Online offering is priced at 4.5 times EV/revenue, while MakeMyTip trades at 6.5 times
The ₹775-crore IPO of Online Travel Agency (OTA) company – Yatra Online (Yatra) – closes today. With few hours left to close, the IPO so far has been subscribed by around 0.64 times, with retail portion subscribed by 1.89 times. The offering consists of fresh issue of ₹602 crore and offer-for-sale by the promoters of around ₹173 crore.
The promoter stake, at 98 per cent now, will reduce to around 65 per cent post-issue. The fresh issue proceeds will be used for strategic investments/ inorganic growth (₹150 crore), organic growth initiatives (₹392 crore) and for general corporate purposes.
At the upper band of the issue price, the company will be valued at trailing EV/revenue of 4.5 times, and EV/EBITDA (adjusted) of 25 times. The market cap will be around ₹2,200 crore. While the company appears expensive on the EV/EBITDA metric, there is scope for good growth in EBITDA over the medium to long-term, driven by top-line growth as well as expansion in margins. The company is a play on the consumer boom that is expected to play out in the travel and leisure industry in India over the next decade.
Given that the company is still in the growth phase, and investing in customer acquisition as well as in scaling up technology at an EV/ revenue of 4.5 times, the risk versus reward appears reasonable given the growth prospects. At the same time, a lot depends on good execution over the next few years in a competitive industry, which will determine the path of profitability. We recommend investors with a higher risk appetite with willingness to tide through volatility, to subscribe to the issue.
The fact that the issue primarily consists of a fresh issue reflecting the promoter’s commitment to business, is reasonably priced on the EV/ revenue metric, and a strong balance sheet post-issue that will ensure it can continue to invest and compete well, are positives.
An important thing to note is that investors can also partake in the business prospects of Yatra, via its ultimate holding company Yatra Online Inc, which is listed on the Nasdaq. Yatra Online owns 100 per cent of Yatra Online promoter entities. However, there is not much incentive for that given Yatra Online Inc trades at an EV/ revenue of 3.7 (not much cheaper verses Yatra) and investors will be subjected to hold co discounts and will have to deal with regulations related to international investing.
Business
Yatra is one of India’s prominent OTAs in the B2B (corporate travel) and B2C segments. It is India’s largest corporate travel services provider (based on number of clients) and the overall third largest OTA in the country (MakeMyTrip is the leading player). Yatra’s OTA business spans bookings on flights, hotels & holiday packages, buses, trains and others. Of these, flights and hotels/ holiday packages account for the bulk of revenue, currently accounting for 47 and 38 per cent of FY23 operating revenue.
The company makes revenue by enabling booking of air and other tickets, and accommodation via its digital tech platform. Of the total gross bookings made on its digital platform, the company gets a commission from the airline/ hotel. From the commissions earned, certain expenses such as customer inducement and acquisition costs are deducted to arrive at operating revenue. The operating revenue divided by gross bookings represents what is termed as the ‘take rate’. In FY23, the take rate for Yatra was at 5.7 per cent (it was at 9 per cent for MakeMyTrip). Going forward, one of the crucial metrics to determine the path of profitability would be on how the take rate for Yatra trends. At present, the take rate could be impacted by customer inducement and acquisition costs, as the company tries to grow its customer base. At end-FY23, the company had 14 million customers (B2C) and 50,613 corporate clients (B2B). While it lags MakeMyTrip’s over 55 million customers, it is the industry leader when it comes to corporate clients.
According to the management, their B2B business leadership is a core advantage, given customer stickiness and high retention rates. The service involves integrating their tech stack with customer systems for seamless processing at the customer end.
Overall, at an industry level, growth will come from three drivers. First being the growth in travel and leisure as GDP grows and also as a share of GDP as per capita income increases. The second being the penetration of online bookings in India’s travel industry from the current 66-68 per cent, to 73-75 per cent by FY28. The third being the OTA’s share in online travel from the current 67-69 per cent, to 72-74 per cent by FY28. Estimates of the second and third drivers are Crisil estimates as mentioned in the RHP. Overall, the OTA industry net revenue CAGR from FY23 to FY28 is estimated at 14-15 per cent. Also, between FY23-28, the share of the B2B segment is expected to increase from 38-43 per cent, to 40-45 per cent.
Yatra will need to execute well to retain its B2B leadership and grow at above the industry rate overall and also grow earnings at a higher rate. In such a case, its IPO valuation is favourable to investors.
Financials
In FY23, Yatra reported revenues of ₹380 crore, adjusted EBITDA of ₹67 crore and PAT of ₹7.6 crore. The main difference between EBITDA of ₹51 crore and adjusted EBITDA of ₹67 crore is the share-based payment expense of ₹13 crore. While the FY21-23 revenue CAGR of 74 per cent is quite strong, this is also due to the base effect, as FY21 was significantly impacted by Covid-19 lockdowns. The company just about reached breakeven in PAT in FY23, and will have to build on it.