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Yatra Online Is a Long-Term Value Creator

- By Faisal Humayun

For a quality long-term portfolio, diversification from an industry perspective as well as diversification in terms of regions is important. In particular, there are some excellent investment themes in emerging Asia that can be potential long-term value creators.

In Asian markets, the Indian economy has gained increasing importance, and India is likely to be the fastest-growing economy in the next decade. It does make sense to consider exposure to some interesting investment themes in India.


One of the sectors that has seen strong growth is travel and leisure, and this article will focus on one stock in the tourism industry.

Before I talk about that stock, I want to mention here that MakeMyTrip Ltd. (MMYT) is one of the stocks in the same industry from India; I have written articles on this company in the past. In the last two years, MakeMyTrip has surged by 96%. This just underscores my point on the potential the market holds.

Coming to the stock in focus, Yatra Online (YTRA) is one of India's leading online travel companies. The stock recently got listed in NASDAQ, and the company has the potential to be a long-term value creator. This article will discuss the factors that support my view on investment for the next three to five years.

Huge impending growth potential

The Indian travel and tourism market is still at an early stage of growth and with Yatra being the second-largest online travel agent, there is immense scope for growth.

Just to put things into perspective, India's airline spending per capita is around $7 as compared to $40 for China. Similarly, India's hotel spending is $3 per capita as compared to $24 for China.

With strong economic growth, young demographics, increasing middle-class and steep growth in online transactions, the Indian market is among the most attractive. Indigo Airline is one of India's largest airline service providers, and the company has 422 aircraft on order for delivery in the next few years. This is an indication of the growth potential.

India's hotel and air gross bookings (online) grew at a CAGR of 18% in 2014 to 2016; for 2016 to 2020, the CAGR is likely to be 16%.

With Yatra Online being the second-largest player in the market, there is a big market to tap, and the company is well positioned for growth.

Yatra is growing fast

There can be a case where the industry growth is robust, but the company's growth strategy fails to meet industry growth. Yatra Online has been consistently delivering strong numbers, and this is the key factor that will support stock upside.

In the air booking segment, Yatra has seen gross bookings grow at a CAGR of 19.3% between fiscal 2015 and fiscal 2017. For the same period, revenue (less service cost) has grown at a CAGR of 25.3%.

It is important to note that the air booking segment does not command high net income margin. The company's margin for fiscal 2017 was 6.4%, 60 basis points higher than fiscal 2016 margin of 5.8%. While I expect margin to remain in this range, gross bookings are likely to see continued growth.

For Yatra Online, the EBITDA game changer is the hotels and packages business. Even in this segment, the gross bookings for Yatra have increased at a CAGR of 19% for fiscal 2015 to fiscal 2017. Revenue for the same period has grown at a CAGR of 13% with net revenue margin for fiscal 2017 at 10.8%.

One of the reasons to be bullish on the company's hotel business is the fact that the company has a differentiated strategy in hotels with the largest hotel inventory in the budget category. This segment is likely to see strongest growth in the coming years as compared to premium hotel categories.

While talking about positives, it is also important to mention that Yatra Online reported adjusted EBITDA losses of $9.4 million for first-quarter 2018. This was on the back of an aggressive marketing campaign. As gross bookings continue to improve across segments, I see healthy numbers flowing.

Conclusion

MakeMyTrip stock has surged in the last two years, and the strong upside has been backed by robust growth across segments. Yatra Online has the potential to replicate that growth and stock upside.

The company has been delivering healthy numbers along with consistent margin. With increasing advertising spend, growth can gain further traction in the coming years.

Importantly, India is an attractive market and for the next five to 10 years, the tourism industry will continue to see double-digit growth. Yatra Online is well positioned to capitalize on this opportunity.

Disclosure: No positions in the stocks discussed.

This article first appeared on GuruFocus.