After a three-year hiatus, an Indian initial public offering hit the U.S. markets this week. MakeMyTrip (MMYT) raised $70 million. And it was a doozy. On its first day of trading, the stock jumped 89%. That's the biggest one-day gain in about three years.
Founded in 2000, MakeMyTrip made a key decision five years ago to focus on the U.S.-India inbound airline tickets market. It wasn't easy and required huge amounts of investments in technology infrastructure and branding.
But it has certainly paid off. Through www.makemytrip.com, customers can easily research, plan and book travel services. What's more, the platform also includes hotels, rail tickets, bus tickets and so on.
From 2007 to 2009, MakeMyTrip was the second most popular site in India, averaging about 1.7 million unique visitors per month. And given the investments, the website is highly scalable and can accommodate much more traffic, with little additional cost.
Like other online ticket brokers, MakeMyTrip uses a global distribution system (GDS) to facilitate reservations and confirmations. The provider is Amadeus GDS, which charges a fee. Of course, MakeMyTrip levies a commission in excess of this.
This is why it's important to focus on net revenues, which came to $83.5 million in the past fiscal year, up 22%.
Issues for Investors to Consider
A study from McKinsey estimates that the Indian middle class will expand from 50 million in 2005 to a whopping 583 million in 2025. In light of this, it seems inevitable that online travel operators like MakeMyTrip will grow at a hefty clip. Discretionary income and more Internet penetration seem likely increase as a result.
Just look at how well the U.S. online airline ticketing business can perform, especially Priceline (PCLN), which sports a market cap of $14.4 billion.
However, MakeMyTrip presents some issues for investors. The company will face greater competition, some of which could come from players like Priceline. Also, the valuation is at nose-bleed levels, with the stock trading at over eight times its trailing revenues. So, investors may want to wait awhile for this company to reach a more reasonable level before jumping in.
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