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Next up, Makemytrip.  Despite its stumble in its first quarter as a public company, this stock remains incredibly overvalued, and has at least 50% downside from current levels.

MMYT runs the largest travel website in India.  The bullish argument goes like this:

1)  The Indian economy is growing

2)  Air travel is growing at 1.5x the Indian economy

3)  Online booking of travel is growing faster than this, as more Indians get credit cards and internet connections.

While the first two points are true, the third requires some discussion.  The reality is more like this:

1)  There is currently a significant disadvantage to booking air tickets online.  It is more difficult to get refunds if needed, and the ubiquitous nature of travel agents on every street corner makes it very convenient to use them.  One contact with whom I spoke said that most tickets are already booked online (~70%), just that they are largely booked by travel agents through their captive portals, and the internet is used mostly for price discovery.  I have heard, but cannot confirm, that many of MMYT's reservations are actually made through their local offices in various Indian cities, which I would argue implies poor scalability to the business.  Finally, as low-cost airlines continue to take share, this becomes more and more detrimental to the OTAs, who charge a booking fee (versus no fee on the discount airlines' own websites)

2)  OTAs don't make any money on airfare- it has always been a hotel-driven business.  This makes sense for a variety of reasons, including the opacity of hotel pricing and the transparency of airline pricing, and seems to hold across geographies.  The total lack of a developed hotel market in India is thus a huge impediment to profitability.  In addition, because of the strength of the "offline" travel market, when airlines tried to cut commissions a few years ago, a boycott forced them to back off.  So, the structure of the industry is such that online players may never reach profitability-currently, 85% of commissions are from airlines.

3)  It is highly competitive and increasingly so.  The main three players- cleartrip, makemytip, and yatra- are already very aggressive, offering rebates, free airline tickets, and other inducements that likely exceed their commissions.  Check out their websites to get a flavor for this-- there are promotions that you would never see in the US.  Yatra and cleartrip are backed by much larger companies, and Cox & King and travelguru are also expanding.  They seem to be eating these discounts as advertising expense in order to take share without paying attention to profitability.  Meanwhile, there should be several new entrants in the next six months, from my checks-Zuji, Air one, Nextor, and Expedia all seem to be ramping up.

4)  Recent results show that the economic model is already significantly challenged.  First, they have seen a steadily declining share of the revenue dollar, as airlines and hotels reclaim economics that they ceded to travel agents in the '07-'08 downturn.  Now, the competitive situation is heating up as discussed.  The fact that this "hyper growth" company missed their first quarter as a public company is shocking, in my opinion, with air growth decelerating meaningfully and hotel revenues actually declining year over year.

5)  Valuation is jaw-dropping.  Ignore the stated revenues, as the company reports gross hotel revenues and then backs out those costs (it only books net commissions for air though).  The net revenues for MMYT on an LTM basis are around $42 million.  The market cap is $1.1 billion.  So, it trades at 26 times revenues.  Sorry, what was that?  26 TIMES REVENUE.

6)  The numbers could disappoint meaningfully.  I think that Indian GDP growth will be 9%, air travel will be 1.5x this or 14%, and online will add 8% (move from 65 to 70% penetration), so maybe 20% topline growth, but that MMYT will lose share, thus seeing revenues flat to down over the next twelve months.  The sell-side is looking for around 50% growth I believe.

7)  The six month lock-up should expire in early February if they don't do a deal before then.  Private equity owns much of this stock and has an average cost of around $5.

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