Description

Background:

Yatra is India’s second largest Online Travel Agency and went public at the end of 2016 via SPAC. Two funds who backed Yatra in its private equity life, Norwest Ventures and Valiant Capital, sold most of their shares on the market shortly after the listing process (shares were released from lock-up if they reached $12), which cratered the stock over the ensuing months.  Norwest Ventures is a large growth equity fund with a single LP (Wells Fargo), and Valiant Capital is a long short hedge fund that has side pocket private equity investments. In total, 30% of the company shares were up for sale.

Thesis/ Set-Up:

India is the fastest growing large economy and has a large domestic travel market with underpenetrated online bookings. India has the world’s 2^nd largest base of internet users (480m) with low penetration (36% vs 96 in the US) and has the world’s second largest base of smartphone users (416m) with low penetration (22% vs 70% in the US). The current travel market in India is $42B and forecasted to increase to $67B by 2021 or a 12% CAGR (according to MS). In addition, 38% of travel bookings are currently completed online and BCG estimates it will reach 45% by 2021.  This translates to a 17% CAGR for online Travel bookings. While keeping in mind that these forecasts were cited by management and without question will be proven inaccurate by some degree over time, the broader picture is that India’s domestic travel market is growing at very healthy rates with a lot of runway ahead.

Business Background:

Yatra has 3 ways it reaches customers: (1) Direct to Consumer via mobile app and website (B2C), (2) Through 20,000 physical travel agents that use the Yatra software (B2B2C), and (3) Corporate Travelers (B2E). This multichannel platform is unique amongst Yatra’s competitors, drives a down the cost of customer acquisition, and serves to increase brand awareness in Tier 2 and Tier 3 cities where cash is still the preferred method of payment.  As recently as 2012, Yatra’s business was 100% Air Ticketing and today is 70% Air Ticketing and 30% Hotels and Packages by Net Revenue. Their largest peer, Make My Trip, is 30% Air Ticketing and 70% Hotels and Packages by Net Revenue. Yatra’s blended take rate for Hotel and Package bookings is about double the take rate for Air Ticketing (12.5% vs 6.5%), and as the business transitions to more stand-alone hotel room nights vs. packages, the blended margin on the Hotels and Packages segment will increase further (MMYT has a 22.5% blended take rate on the Hotel and Packages segment and they are heavily weighted towards stand-alone room nights). In total, Yatra has TTM net revenues of ~$105m USD and is growing those Net Revenues at 30+% YoY. The market cap at today’s share price is ~$250m with $55m in net cash on the balance sheet for an EV of $195m. ($87m in cash on the balance sheet less $12m in debt and less $20m for upcoming contingent performance payment relating to the acquisition of ATB).

While Yatra is the second largest B2C OTA, Corporate travel makes up over half of Yatra’s business and they are the largest corporate travel platform in India by gross bookings. The B2E segment has lower Net Revenue margins than the B2C segment but the revenue is very sticky, requires less marketing expenditure, and provides a great opportunity to cross sell B2C travel to the 4.2m corporate travelers on their platform. Yatra’s e-cash rewards system is an important driver of these cross-sales. Employees at the 700+ Indian Corporates and over 8,000 SMEs that Yatra partners with earn e-cash when traveling for business which can then be used to book personal travel through the Yatra app.  As of FY 2018 the cross sell rate was 22%, up from 16% in FY 2017 and 14% in FY 2016. Importantly, this is a very low cost way to acquire B2C customers versus the alternative of heavy promotions and brand advertisements. 

Yatra is currently spending 50%+ of Net Revenues on Marketing and Advertising, which makes their current financials look very unappealing. In the past, management has stated that most of this marketing spend was brand campaigns and advertisments. However, this past quarter was the first time both Yatra and Make My Trip were forced to report under the new IFRS 15 accounting standard which required them to count discounts and customer incentives as contra revenue, and brand advertisements as marketing expenditure. This past quarter roughly 70% of the total marketing spend were discounts and customer incentives. While the inconsistency of management’s narrative is disappointing, not all the news was bad. Year over year the absolute dollar value of discounts and customer incentives remained unchanged (and the total marketing spend including advertising went down 11% in total), while the total gross booking on the platform increased 37% year over year. This gives me some comfort that even though they are heavily spending on customer acquisition through promotions and advertising, the platform is growing strongly even ex-spend. On the latest quarterly call the CEO explained that they still view the discounts and customer incentives as brand investment, as they are a critical part in getting the Indian consumer to transact online as opposed to offline. Based on the most recent fiscal year, roughly 1.3 million new B2C customers were acquired at 3,000 INR each (assuming that all of the marketing and promotion expense was B2C related). This would mean that the breakeven for a new customer is about 4-5 transactions (10,000 INR average transaction value at 7.5% average take rate). Yatra has shown that their repeat customer base transacts on average 3.9x a year while their new customers in any given year transact about 2x. Given these metrics, I think it is very likely that the marketing spend is profitable and potentially very much so. In addition, while it is less of a factor in emerging India, it is worth mentioning that OTAs have a significant advantage versus meta search in customer experience. On overage it takes about 1/3 the amount of time to book through an OTA compared to a meta search (payment details saved and no need to move off platform). In addition, the ability to build itineraries amongst other things drives customer experience.   

There are also a few very powerful advantages for Yatra as India evolves as a mobile first economy (87% of Yatra’s traffic is through the mobile app). Both Airline and Hotel direct to consumer will be less of a threat as the mobile environment grows. Are you going to download 10 different airline apps on your phone, and 200 different hotel apps?  Instead consumers are downloading 1-2 OTA apps, which are a completely free source of recurring traffic for the OTAs (not paying google to acquire customers). The mobile user experience will also be a very important factor to the success of YTRA or any B2C OTA. By tracking reviews on Google Play, on you can see that YTRA has the highest user review ratings, and incrementally is achieving 75% + 5 star ratings while the peers are in the mid 60% 5 star ratings. Currently Yatra has about `12-13% market share of the B2C OTA space, compared to Make My Trip at 50%.

Valuation:

The business as it stands today is a wonderfully profitable business, conservatively financed, growing incredibly fast, and with a tremendous amount of operating leverage. To show the tremendous operating leverage that is characteristic of the OTA business model, YTRA grew Net Revenues by 52% from FY 2015 to FY 2017 and grew employee head count by 7.5% (2343 vs 2179). Management has guided to GAAP breakeven over the next 1-1.5 year and cash flow breakeven soon thereafter. They also believe that in the long run, the business should earn between 15-25% EBITDA margins while spending 30-35% of net revenues on marketing. I believe the business could easily be at a 20% EBITDA margin today if they decided to stop reinvesting in growth, which would put the business at 9.0x TTM EBITDA and 7.5x this years expected EBITDA. This seems incredibly cheap for a business growing 25% +.  Another simple way to think about the business is the multiple of net revenue. Yatra currently trades at a TTM EV/Net Revenue multiple of 1.7x while their largest competitor Make My Trip trades at 6x, Booking Holdings trades at 6.7x, and CTRIP trades at 14x. While there are many factors to consider, Yatra is growing faster than all of these comparables and their corporate segment is arguably even more attractive than the B2C segment. Given that this is one of the most attractive business models in the world operating in one of the highest growth geographies in the world, I believe a fair price for this business would be 20x underlying EBITDA or 4x Net Revenues. Based on a share count of 47m, this would result in $9.5 per share or roughly 78% upside to today’s price.

Risks:

·         Airline Take Rates are 3% in developed markets and 5% in China, how do you know Airline Take Rates won’t collapse?

o   This is a real risk. The Airline industry is vastly more concentrated than the hotel space which is not a great dynamic for pricing power. A few of the things that give me comfort are that a portion of the airline net margin comes from the OTAs charging a convenience fee to the consumer to complete the flight booking. By perusing through YTRA’s app, you can see that this fee is a flat fee per flight leg. For domestic flights it appears to be ~205 INR per leg and for international it appears to be 370 INR per leg. These fees are part of the total take rate that the airlines cannot take away, and are likely in the 3% range (~ 40% of total airline margin). Given that nearly 40% of all domestic Indian flights that are booked in India go through either YTRA or MMYT, and that the airlines have a desire to grow and have significant seat capacity coming online over the next 5 years with new plane orders, I doubt they have the ability/desire to negotiate their partners out of 1% of revenue. A second thing that gives me comfort in this area is that airline net margins have remained between 5.5% and 7% over the past 10 years. You can see this by looking at Make My Trips historical financials. Finally, a large portion of Yatra’s business is in the corporate space which already has lower take rate and is more stable.

·         Make My Trip dramatically increased their size by buying Goibobo and has lots of firepower by having Naspers and CTRIP as investors:

o   The data points thus far suggest a friendlier rather than a hostile competitor. Yatra CEO Dhruv Shringi has mentioned before that Make My Trip and Yatra agreed not to hire employees from one another. This is extraordinarily important given that Make My Trip could afford to pay much more for talent. In addition, while the combined MMYT entity is about 3x as big as Yatra based on Gross Bookings, MMYT and Goibobo will continue to operate under separate brands while Yatra intentionally operates as one brand. Finally, Yatra is intensely focused on the B2E segment, a growing profitable segment where they are firmly the market leader.

·         Dilution from the Warrants:

o   There are currently warrants outstanding for 17.4m shares exercisable Dec 2021 at an 11.5 strike. Two warrants combined are exercisable for one Yatra share, and the warrants are callable if YTRA reaches $24 per share. The warrants currently trade at 35 cents which would imply a 17.5x if the stock reaches $24. If one is not interested in owning the warrants, but wants to hedge for the dilution, you could own 1 warrant to every 2 shares of YTRA owned. This would imply that management uses the cash receive from the warrant exercise to repurchase shares.

·         Management Incentives/Quality:

o   In June of 2018 Yatra announced a follow on offering for 10,350,000 additional shares at a price of $5.50 per share, meaningfully below any reasonable estimate of intrinsic value. The management team owns 9% of the business (the CEO owns about 2%), so it’s hard to be confident that they would prioritize shareholder return vs growth at any cost. With that said, the CEO seems very competent, has mentioned many times that the stock was very undervalued, and other thoughtful investors like Valiant Capital were impressed enough with him to back him in the VC phase. The corporate travel side of the business is working capital negative as they often extend credit to their customers, and is currently 50%+ of YTRA revenue. If they see the path to growing this segment massively (which acts as a low cost customer acquisition model of personal travelers), then that could also be an acceptable use of cash. Time will tell.

·         Currency Risk:

o   Yatra’s revenues and expenses are denominated in INR. While in the long run INR inflation is likely to be priced into air fare and hotel booking prices, a rupee collapse would negatively impact Yatra as customers hesitate to book in periods of rapidly increasing notional prices.

·         Airline Solvency Risk:

o   Yatra heavily relies on airlines as a source of revenue. Many of the airlines have financial debt and bankruptcy in the space has happened before. The collapse of a large airline would damage Yatra’s business.  

Catalyst

Continued Growth / Reaching Cash Flow Break Even