Description

Summary

• Yatra is India’s 2nd largest homegrown OTA and its largest business travel provider; FD market cap is ~$90m with EV of ~$60m (at $1.50/sh and $30m of net cash); it trades at ~0.7x forward revenue and ~4x EBITDA

• Yatra trades at a ~20x discount to its Indian traded peer EaseMyTrip/EMT, a value gap we think will contracts significantly after the completion of its secondary listing on the BSE and the retail buying that follows, as was the case with EMT

• The long is a multivariate bet on both macro and micro factors (both discussed in separate sections below) that give it 2-3 bagger potential over the next 1-2 years, with the excess upside (3x+) dependent on how competitive the bidding process becomes, particularly due to the coveted hotel partnerships Yatra has

• The macro factors (OTAs generally – which sets up for a second boom for OTAs; Indian economy) are compelling and have been partially noted in a previous post; we will focus on the micro, given the near-term catalyst for a secondary listing (which we think doubles the stock), and the likelihood for an eventual takeout (that adds a further 50%+ of upside); the macro factors and the current valuation are best thought of as providing a MoS for the thesis until the above catalysts materialize 

Catalysts

• Ebix Cash IPO in India: provides a readthrough for the success of Yatra’s secondary listing; gives Ebix Cash the dry powder necessary to attempt a second takeover of Yatra (more details further on)

• Current activism aligns shareholders: activist investor Tim Maguire has aligned all large existing shareholders on the plans for an eventual sale; prospective investors can participate in the upside of this campaign, with little ambiguity for the goals on the eventual outcome; Maguire’s board member Mendis will be primarily compensated through the eventual sale of the company

• We anticipate that Yatra will run a dual-track process alongside the IPO to try to strongarm 

• Fundamental performance of the company in the interim that will see substantial business and leisure travel coming back into the country 

• The continued outperformance of the BSE and Indian tech: as Indian tech companies continue to outperform (DGIN/VanEck Digital ETF down only ~14% vs. ~25% for the NASDAQ; MSCI India ETF down only 12%), it helps solidify the strategic benefit of Yatra’s secondary listing and the pool of potential acquirors for the company

Risks

• The current inflationary/global macro environment is the biggest systemic risk: tech valuations outside of India have compressed significantly on the back of monetary tightening, which could impact the valuation of key Indian peer EaseMyTrip, the ability for Ebix and Yatra to have successful listings in India, and for an eventual acquisition to materialize

• Mitigants: EaseMyTrip is up 60%+ YTD through May, ~3.8x since its IPO in India, and trades at a 20x premium to Yatra; in the extreme event that Yatra’s secondary listing is delayed, the current valuation and ample cash reserves provide significant insulation

• The concentrated float: key holders such as Maguire Asset Management, MAK Capital, and Altai own a combined ~35% of shares; the stock only trades ~150k shares on average and <100k more recently, which could make an exit outside of an acquisition a lot more tough

• Mitigants: this is likely the largest trading risk in case the macro risks above compound further and existing holders become forced sellers; we gain some comfort that MAK Capital for example is outperforming the market with its key positions in SKY, AGYS, and especially CVE; activist long Tim Maguire has a cost basis 50% higher from where the stock is currently and he is committed to making a deal work; a secondary listing should create additional liquidity as the valuation expands on the Indian listed shares and sell-side coverage expands

• Price competition and an overly promotional environment continue to erode growth and profitability: the largest risk missed by the prior author was the unrelenting promotional activity (especially in hotels) that took place across the sector that led to ballooning losses and cash burn; if this were to continue, we think shares could remain pressured and the IPO sentiment to decline

• Mitigant: peers have all effectively signaled a desire to end the promotional wars to focus on generating profit, and this type of discipline continued throughout the pandemic (hotel net booking margins moved to mid/high-teens since 2019 from LDD); reducing competition through consolidation of smaller peers like Yatra would further help to strengthen this agenda

Misunderstood Micro Factors

• Yatra went public on the NASDAQ at the end of 2016 after being backed by the likes of Intel Capital and Norwest; it was a large and growing Indian OTA competing against rival MMYT/MakyMyTrip that was the clear #1

• Both companies have had limited market success since their debuts due to A) prolonged paths to profitability; B) a North American investor base with operations limited entirely to India; but what makes Yatra attractive here beyond valuation is C) a complicated background and story that the market has avoided; and D) a misunderstood asset

• We believe the involvement of activism finally makes the company investable and will act as a key catalyst moving forward

• On March 31, 2021, Maguire Asset Management disclosed its activist stake after a call with Yatra CEO Dhruv Shringi that took place on April 1, 2021

• On July 27, Tim took a more vocal stance, hiring an industry veteran/expert to consult on operational improvements that could be made at the company

• Finally, on January 19, 2022, Roshan Mendis was added to Yatra’s board, with the sole goal of implementing the above recommendations, preparing the company for its secondary offering, and then for an eventual sale to a competitor – Mendis is a well respected industry veteran, currently the CCO at Sabre

• We have talked to Tim on various occasions and have become fully aligned on the goals of the campaign 

Factor A): Prolonged Path to Profitability

• Since their inceptions, both MMYT and Yatra have been unprofitable, focusing on growth and customer penetration – this has been well detailed in the prior Yatra article from 2018

• Promotions/inducements both firms provided until 2019 have been a key reason for this, with net bookings rates historically averaging ~11% vs. the more typical 15%+ in the industry; gross hotel take rates for both have been in the ~20% range excluding these discounts though

• Both MMYT and Yatra also screen poorly because the introduction of IFRS 15 forced them to disclose revenues net of these inducements instead of having the discounts flow through costs (bookings actually increased 20% in fiscal 2019, but it appeared as if revenue fell – not the case)

• By fiscal 2019 (March year-end), the take rates improved to 14%, with both signaling the end of promotional wars (this has been the case for the last year with net take rates now in the 20% range for hotels, an all-time high)

• The other big headwind in 2019 was the bankruptcy of Jet Airways that grounded flights and reduced competition/bargaining power for the OTAs, so take rates in air declined to an all-time low of 5.1% for the year

• Jet Airways then emerged in late 2020, and the December 31, 2020, quarter showed net margin expanded to 8.3% for flights and 17.7% for hotels

• During the pandemic, this promotional discipline continued and take rates expanded to 11.4% and 20.6%, respectively (despite lower overall revenue from the pandemic; see below for financial performance, with noteworthy cells highlighted in green) 

• The mix of accounting changes, price competition, and Covid have all made Yatra’s financials a headache to work through, but if given the proper time of day, positive signs emerge

• Moving forward, Yatra expects to be EBITDA positive and to be cash flow positive by the end of 2022

• Yatra in fact generated $3.5m of EBITDA for the year ended March 31, 2020, despite Covid partially impacting financials (see below, highlighted in green as well)

Factor B): A “Sleepy” Investor Base 

• The BSE/Bombay Stock Exchange remained undeveloped until many of India’s unicorns began going public – this forced the likes of Yatra to list in the US despite having no operations in the country

• Since the proliferation of capital into India, many tech companies have opted to list locally in the last few years due to a growing institutional/VC and retail investor base that previously didn’t exist in the country

• One such company was EMT/EaseMyTrip that went public in the depths of the pandemic in March 2021, doubling a month later (now up over 3.5x in ~1 year)

• EMT is the #3 player in the market, with significantly less customers and revenue than Yatra and MMYT

• The BSE continues to perform well, and EMT is up 60%+ YTD through May

• Since their respective listings on the NASDAQ, MMYT and Yatra became orphaned Indian stocks and have limited sell/buy-side coverage, although MMYT is largely flat from its 2010 IPO, while Yatra has declined ~85% – the story for EMT has been much different as noted above

• Currently both MMYT (3.5x revenue; 44x EBITDA) and EMT (18x revenue; 35x EBITDA) trade at significant premiums to Yatra, with the former somewhat warranted due to a larger size, but the latter mostly due to its Indian listing

• EMT is the more important comparable as it is SMALLER in operational scale than Yatra, despite an EV that’s 20x+ larger (EV of US$1.25B+); pre-covid revenue was $100m+ for Yatra and only $20m for EMT (forward estimates also imply a similar gap that existed pre-Covid)

• We believe the completion of the company’s secondary listing will help to double the stock due to Yatra’s strong brand penetration in India (which is nonexistent in the US) – we believe EMT provides a precedent for the robust strength in India’s retail buying that has created such a large valuation disparity between the two companies 

• A well-capitalized Yatra will then make for a very appealing acquisition target to any of its peers; we also think management will run a dual-track process to try to strong arm peers into an acquisition ahead of the financing completion (buy now or pay more later) 

Factor C): A Complicated Background 

• Yatra was having a difficult time getting investor appeal in North America, partly due to profitability question marks, but more importantly due to size and an odd structure as noted above: a US listed entity with the entirety of its operations in India; Yatra eventually put itself up for sale and agreed to be acquired by Ebix in 2019 for $4.90/share (vs. ~$1.50 currently)

• Ebix announced the all-stock deal that effectively gave Yatra holders 1 Ebix share for every 10 Yatra shares they owned; the bad news was the deal came with a minimum $59 collar on Ebix shares, that would eventually be the catalyst for the deal’s collapse

• 6mos after the deal was announced, the world shut down because of Covid, and Ebix’s floor commitment to Yatra had ballooned to 50%+ of its market cap, which Yatra describes in its eventual lawsuit – Ebix rightfully played games with Yatra management and delayed the closing until Yatra was forced to terminate the merger in June 2020 in favor of a financing to raise capital (all its business disappeared over night)

• Ebix likely knew Yatra would be running out of cash and would be forced to raise capital and scrap the deal; Yatra had received poor advisory during the process and failed to stipulate post-termination rights, with the judge siding on Ebix’s behalf during the conclusion of the trial

• We think the Ebix IPO will act as a key catalyst in both companies coming to the table again and negotiating a new deal, particularly with the excess cash Ebix aims to raise (more on this below)

• Yatra is the one coveted asset that remains outstanding in the Ebix Cash portfolio, which includes: various payments assets like remittances, gift cards, forex, etc.; travel (in SE Asia, with limited presence in India), including B2C, B2B, and corporate; and other FinTech including BPO, wealth management and lending, ITMSs, and backend provisioning to the OTA sector

• Yatra management has told us it would put personal differences aside if Ebix wanted to negotiate a new deal, which we think the new Ebix Cash management would be willing to do as well

Factor D): A Misunderstood and Underappreciated Asset

• Yatra’s largest and most misunderstood asset is its hotel footprint: Yatra has an inventory of 93k+ hotels in India, which is larger than any of its peers, including MMYT

• All the Indian OTAs agree, there is only one way to win new hotel clients: having boots on the ground and signing them up one by one; Yatra created this hotel base through its 15+ years of investment in the country that makes it very difficult for new entrants or large incumbents to quickly replicate, especially in a cost-effective manner

• Hotels are a much better business for OTAs than flights given take rates typically range between 15%-20% (23% in India between 2017-2019), vs. 6%-8% for flights (roughly the same in India; due to more fragmentation in hotels and thus more bargaining power for OTAs)

• We believe M&A is the only meaningful way in which peers could rapidly win the more coveted hotel business that the likes of Booking Holdings have dominated elsewhere

• As the Indian economy continues to boom out of the pandemic, we believe a significant land-grab opportunity will make these assets highly coveted for incumbents, with the dual mandate of taking out a competitor 

• We believe there are three obvious suitors for Yatra as above, for the following reasons 

• Flipkart announced a partnership in February with its OTA subsidiary Cleartrip, which is a distant tier 2 player in India; Flipkart may realize it’s cheaper to buy Yatra, then to replicate the business and sink significant dollars trying to compete (gaining a significantly valuable hotel asset while taking out a competitor); Cleartrip appears to already understand the significance of Yatra’s hotel assets through this partnership announcement; Cleartrip is too insignificant for Flipkart in the current state and M&A is the only way to add scale in India to make this part of the business relevant 

• EMT is the new entrant in the space and 90%+ of its business is in air travel (i.e., it’s hotel footprint is nowhere near Yatra’s scale, primarily due to limited/no investment in the space; 60% of Yatra’s revenue came from hotels pre-Covid) – an acquisition is EMT’s only meaningful way to compete out of the pandemic; its inexpensive equity currency would make the deal immediately accretive by a factor of ~5x longer-term given our calculations below

• This acquisition makes the most strategic sense due to the obvious/immediate revenue (bundling flight and hotel) and cost synergies (Yatra’s G&A would effectively be eliminated)

• Ebix already saw the value of these assets when it announced the its acquisition for Yatra back in 2019 for $4.90/share (implied value of ~$340m) – all described in the previous section; Ebix Cash is spinning off from the legacy business via an Indian listing as well, aiming to raise $785m, with the bulk to be used for acquisition; we believe an acquisition after its successful IPO would be well received by the market and help to demonstrate the robust consolidation opportunity the company believes exists within India

• We think a $250m valuation (4x upside) based on the above is “fair value” – the ceiling depending on how competitive an eventual bidding process becomes; our conversations with the current investor base (passive and activist) suggested that a bid in that area would get their approval

Yatra Historical Financials and Impacts of IFRS 15

• We believe the above financials, the macro prospects (below), and the expanded acquisition pool make Yatra a much more investable company then it has been since its gone public, particularly as activists continue to ensure management is focused on realizing value through 1) its Indian listing; and/or 2) an eventual sale

• Although some of the costs (including OpEx) are variable, we believe EMT or Ebix, could take $50m-$60m out of the system, based on Mar-19 numbers

• This implies an EBITDA margin of 30% on the low-end, making the transaction immediately accretive to any of the potential acquirors, even assuming a $300m take-out

Underappreciated Macro Factors 

• Growing consensus is that OTAs will have their second boom out of the pandemic (the first in the mid-2000s post GFC), driven by significant closures of physical agencies (increased internet penetration by older demos that were forced to move online is additive) 

• What may come as a surprise, is that physical agencies still accounted for 50% of the market in 2019, with the share wins slowing for OTAs by the late 2010s (older folks have remained the largest customer for physical agencies)

• We believe the pandemic was an extinction event for physical travel agencies, that will be compounded by higher internet penetration in older demos, both of which will help to move OTA’s share of the market to 60%-65% by 2025

• Booking Holdings is already showing signs of this, reporting all time high bookings in its Q1-2022 print

• Physical OTAs have simply not had any business for 30+ months in most geographies, with any surviving ones forced to pay excessive costs

• Even large, well-capitalized retailers have shuttered doors in mass numbers: Hays Travel, the largest UK travel agency has “nearly 450 branches” left after it merged with Thomas Cook, which had 555 shops (and “over “180 stores” in 2019 prior to the merger/pandemic), a degradation of 285+ locations and ~39%;

• Marlin Travel, which serves Canada’s Air Transat, went from “some 500 outlets” in 2019 to “some 300” left currently – also a degradation of 40%

• Finally, Flight Centre, a publicly traded company, which has made obfuscated the extent of its closures, was reported in September 2020 to have “temporarily” closed 408 of its 740 locations, a significant portion have permanently closed, especially in areas outside of Australia – it’s likely 40%-50% are now permanently shuttered as well

• The smaller, less capitalized independent shops that make up the bulk of the market have likely fared much worse; the numbers are likely to grow moving forward as well

• The above sets up for a significant land-grab by OTAs across the entire space, but we believe the opportunity is disproportionately positive for developing areas like India, where OTAs have much lower share, likely in the 40% range

• Indian GDP is expected to grow at a ~7% CAGR through 2027 that will take a significant portion of the population into the middle class, with air travel a key beneficiary – business/leisure travel should be a 10%+ growth category, which various forecasts agree with

• We’ve held extensive talks with India’s two major OTAs Yatra and MakeMyTrip and they agree with our sentiment as well (reflected here and here)

• India’s internet penetration is currently only at 50%; it has the youngest demos across any large country; and is likely to see 22% of its population (142m people) move into the middle class by the end of the decade

• In most respects, India is best viewed through the lens of China in the early 2000s that saw the likes of TCOM 30x in value

• We believe these factors are all “gravy” to the macro case for investing in OTA’s, but consider this to be a MoS for being long Yatra (that helps limit going concern risk) – the attractive macro backdrop is also a key reason why we think Yatra is likely to be acquired by a larger incumbent  

Catalyst

• Ebix Cash IPO in India: provides a readthrough for the success of Yatra’s secondary listing; gives Ebix Cash the dry powder necessary to attempt a second takeover of Yatra (more details further on)

• Current activism aligns shareholders: activist investor Tim Maguire has aligned all large existing shareholders on the plans for an eventual sale; prospective investors can participate in the upside of this campaign, with little ambiguity for the goals on the eventual outcome; Maguire’s board member Mendis will be primarily compensated through the eventual sale of the company

• We anticipate that Yatra will run a dual-track process alongside the IPO to try to strongarm 

• Fundamental performance of the company in the interim that will see substantial business and leisure travel coming back into the country 

• The continued outperformance of the BSE and Indian tech: as Indian tech companies continue to outperform (DGIN/VanEck Digital ETF down only ~14% vs. ~25% for the NASDAQ; MSCI India ETF down only 12%), it helps solidify the strategic benefit of Yatra’s secondary listing and the pool of potential acquirors for the company