MakeMyTrip Limited
Q2 2020 Earnings Call Transcript

Published: 4 Nov 2019

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MakeMyTrip Limited Fiscal 2020 Q2 Earnings Conference Call. . As a reminder, this conference this call is being recorded. I would now like to turn the conference over to your host, Mr. Jonathan Huang, Vice President of Investor Relations.

[Jonathan Huang:]

Thank you, Crystal. Greetings and welcome to MakeMyTrip Limited's Fiscal 2020 Second Quarter Earnings Call. I would like to remind everyone that certain statements made on today's call are considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to inherent uncertainties, and actual results may differ materially. Any forward-looking information relayed on this call speaks only as of the date, and the company undertakes no obligation to update information to reflect changed circumstances. Additional information concerning these statements are contained in the Risk Factors and Forward-looking Statements section of the company's annual report on form 20-F filed with the SEC on July 23, 2019. Copies of these filings are available from the SEC or from the company's Investor Relations department.

[Deep Kalra:]

Thanks, Jonathan, and welcome, everyone, to our second quarter earnings call for fiscal 2020. I'd like to begin by sharing a quick summary of the operating environment in India. During our last call, we pointed out the impact that the slowing economy and cyclical disruptions in the travel industry had on our results. We also believe that the operating pressures from Q1 would continue into the seasonally slow second fiscal quarter. While near-term growth challenges persist, we remain optimistic of our long-term growth opportunities. It's definitely worth noting that despite a slowdown, India's GDP remains among the highest in the world, and growth is expected to reaccelerate in 2020 per recent IMF forecast. India's fast economic growth combined with the large and growing young online population gives us confidence in our long-term growth prospects as the headroom to shift the travel market online remains very large scale. More encouragingly, our government has also demonstrated willingness to support travel and tourism as a means to drive economic growth. Recent cuts to the GST, goods and services tax, on hotels, which took effect on October 1, was a welcome move and should have positive impact on growth in times to come. In addition, the unexpected corporate tax cut was intended to improve business sentiment, which should help revise overall economic growth as investments from the corporate sector pick up once tax benefits begin to reflect on balance sheet. At the same time, the government's Incredible India 2.0 marketing campaign should help drive greater awareness for travel and tourism in India. On the airline supply front, we anticipate that the lost seat capacity due to Jet Airways grounding has largely been restored for the domestic market and is likely to be restored on international routes by the end of this calendar year. Recently, the leading domestic carrier reiterated its commitment to rapidly increase seat capacity given the long-term pent-up demand for air travel in the country. Their confidence has also led to an order announcement of 300 new A320 last week. Furthermore, the BGCA Director General of Civil Aviation anticipates passenger growth rates to rebound in the second half improving from the low single digits growth seen during the first half of this fiscal year. The good news is despite a lower growth in the domestic air market, our performance in the first half of the year continued to outpace the market significantly, resulting in continued share gain, even in a more mature segment of the online travel market.

[Rajesh Magow:]

Thanks, Deep, and greetings, everyone. I would like to begin by reminding everyone of our vision for fiscal 2020 and beyond, which is to become the travel super arc for Indian travelers when researching and planning, shopping and booking travel within or outside of India. The foundation of our super arc vision is to provide comprehensive set of travel offerings, allow greater flexibility in booking different combination of products, generate personalized selection and offer, enable affordability in payment options and ensure quality customer service. In recent quarters, we have made significant progress on this front by adding new products and services, including airport transfers; inter-city cabs; activities and experiences, both at source and destination cities; online visa booking for some key destinations; affordable payment options, like EMI or Book Now and Pay Later, et cetera. Furthermore, we have also made significant progress in expanding our customer support channels from call centers to self-service channel and chatbots on all our brands to ensure we make ourselves available to provide timely customer support and resolution at any stage of customers' journey post booking. We believe that these focused investments will help further strengthen our brands in consumers' minds, leading to growth in our business. Now I would like to share some quick highlights from our Q2 and first half financial results, which Mohit will share in greater details later. For Q2 of fiscal year 2020, MakeMyTrip group achieved gross bookings of nearly $1.5 billion, representing a constant currency growth of over 20%. This represents nearly $3.2 billion in gross bookings and constant currency growth of over 22% for the first half of fiscal 2020. Our Q2 adjusted revenue grew by nearly 14% on a constant currency basis to $181.1 million. For the first six months of this fiscal year, adjusted revenue reached $379.6 million with a constant currency growth of over 17% year-on-year. During the quarter, we also achieved a company quarterly record of nearly 7.4 million room nights in the stand-alone online hotels business even as our focus, as communicated earlier, has been to drive greater promotional spend efficiencies. From a supply standpoint, we further expanded choice and selection for customers to over 66,500 accommodation properties bookable within India, which include 16,500 alternative accommodation properties. Additionally, nearly three quarters of these hotels received active bookings from our platform, which underscores the value added to the hotel partners who participate and distribute through our platform.

[Mohit Kabra:]

Thanks, Rajesh. And hello, everyone. We are pleased to report that during the seasonally slower travel quarter of Q2, the adjusted revenue stood at over $181 million with nearly 14% year-on-year constant currency growth. Under the overall slower growth environment as called out by Deep and Rajesh, we have, however, managed to meaningfully reduce adjusted operating losses, which came in at $19.4 million, including the $2.4 million one-time accelerated compensation charge due to a change in one of our acquisition agreements. Without this one-time cost, we estimated adjusted operating loss at $17 million, a significantly lower than the previous quarter's loss of $29 million as well as significantly lower than the $25.4 million loss reported in the same quarter last year. This improvement came from increased efficiency in our marketing and promotional expense, which as a percentage of gross bookings came down to 9 percentage points compared to 10.8 percentage during the same quarter last year as well as down from the 9.5% reported in the previous quarter. Let me now share some highlights of the quarter by business segment beginning with the air ticketing business, where the industry continues to face growth challenges given the ongoing capacity constraints and a foster demand environment. Therefore dealing with a quarter apart from targeting a better than the industry growth in ticketing volumes, we focused on driving higher revenue growth in the air ticketing business. In the reported quarter, our air ticketing segment grew by 11.6%. Helping drive this growth rate was the continued share gains in our domestic air-ticketing business. Our ticketing growth of over 7% in the domestic air ticketing business far outpaced the market's growth, which was less than 3% during the quarter. Further, our international air ticketing segment grew by over 36% as we continued to focus on driving online penetration in this largely off-line market segment. As a result of the continued share gains in the domestic air ticketing business and the much higher growth in the higher value outbound air ticketing segment so we were able to register 17.2% year-on-year constant currency growth in air ticketing adjusted revenue, which was higher than the air ticketing growth of 11.6%. Hotel room night growth, which came at 12% for the hotels and packages business and 12.3% excluding the packages business, reflects the current slowdown in the domestic travel market in a seasonally slow travel quarter and our ongoing efforts to reduce promotional expense in the budget hotel segment. The room night growth within our premium set of domestic hotels despite the slowdown in the travel market stood closer to the 20% level that we have been reporting earlier. We also anticipate that once pruning promotional expense to get to positive net unieconomics within the segment is achieved, this segment will also start contributing towards the acceleration of overall room night growth. Separately, in international hotels, the room night growth was very encouraging at about 60%, and we continue to target faster growth in the outbound market across air ticketing, hotels and packages. Our bus ticketing business continued to grow strongly during the quarter driven by the continued off-line to online momentum within this travel segment. Bus ticket unit grew by over 33% with nearly 17.7 million bus tickets traveled during this seasonally slow travel quarter. The business also generated over $16.6 million in adjusted revenue, a growth of over 38% year-on-year in constant currency terms. Lastly, adjusted revenue from other sources in Q2 reached over $11.4 million, majority of which was driven by facilitation fees for travel insurance and ancillary revenue from our travel alliances and affiliate partnerships. With this, I'd like to thank you for joining this call and open up the call for Q&A. Operator, please?

[Operator:]

. Your first question comes from the line of Arya Sen from Jefferies.

[Arya Sen:]

Deep, Rajesh and Mohit, firstly, specifically, on the air ticketing part despite the relatively tepid domestic air traffic growth, your gross booking is growing at almost 20% plus in constant currency terms. So couple of things. How much of this is coming from the international air ticketing? And when, cyclically, domestic air traffic goes back to, say, 10%, 12% kind of growth, what would this number sort of go up to?

[Mohit Kabra:]

Yes, I'll take that. So as I called out the growth in the domestic segment, it was more like 7% plus. However, from a gross booking point of view, the growth was almost like twice of that closer to about 14% because the ASPs have been stronger, but the overall growth kind of inched up to about 22% on the gross booking side and the rest of it was aided by international.

[Arya Sen:]

Understood. And what's driving the growth in the ASP? Is it the ticket size? Is it more to do with - is it the increase in the ticket fares? Or is it mix? I mean, how much would be mix? And how much would be increase in ticket fare?

[Deep Kalra:]

So I think, if you really look at it, considering that capacity has been constrained, any period where capacity is kind of not growing significantly within the air ticketing marketing, you typically see some amount of price strengthening, and so this is quite typical of that. Anything which is like 5%, 7% or single-digit increase in fares at a time when capacity is not growing, or growing like in the low single digits, it's kind of fairly routine.

[Arya Sen:]

Right. And how much would be your market share? So 7% minus 3%, 4% your market share gain. Is It on a volume basis?

[Mohit Kabra:]

Yes, in terms of growth on the market, yes. Over all share stands at close to about 26%.

[Arya Sen:]

Right. Secondly, on the bus ticketing opportunity, I mean, can you give us some sense about the opportunity size that you see there from, say, 3 to 5 years perspective? And is it profitable today? Or what does it take to, what sort of profitability can that business generate? What's the sort of thinking there?

[Rajesh Magow:]

Sure, Arya, this is Rajesh here. Let me take this. We'll give you a sense of the growth trajectory in that business and just from an opportunity standpoint, and as you know, we haven't really been doing a segmented reporting on profitability. So I guess, I'll just kind of stay away from that. But just to give you a sense of this headroom on business, we believe, that there is still lot of headroom. There's a lot of privatization of the generally in the bus sector that is happening from an operator standpoint, so they keep adding more capacity on the private side. We also, actually in addition to that be an opportunity on the state transport undertaking, or corporations, where there's a lot of headroom in terms of just potential shift from off-line to online. So the supply has started coming online from state to state, and a lot of the booking has started happening online. So we're seeing a lot of the encouraging trends in terms of growth coming in from that sector, while even the private sector continues to keep growing as well. So we believe that this kind of growth trajectory is likely to continue in the bus market in the coming 3 to 4, 5 years.

[Arya Sen:]

Right. Thirdly, anything you can share on Ctrip's involvement, and particularly on the cost side? If they are able to help in some way?

[Rajesh Magow:]

Yes, sure. No. Actually the product, this have been called out in the script itself. As we speak, we've been actually working with Ctrip to leverage their international inventory build, both on the flight side as well as on the hotel side. And that is one of the most important identified areas of synergies. And as we integrate on flight side, we have actually made lot of progress, and we're already seeing some quality traction from that side. And hotels is work in progress. So as we kind of complete that integration, we will get the benefit clearly reflecting on the business on that side. So that's kind of an important identified area. And I guess, linked to that also going forward, in terms of acquisition of the in the supply base, again, in international markets for different cities, we do see some potential synergies coming in combining sources from a sourcing standpoint as well. So these are the potential synergy areas that we see right now.

[Arya Sen:]

And then last question, is there any impact of the tax cuts for you given that you're loss making, I guess, not in the near term, right?

[Deep Kalra:]

Yes, not really, I guess you answered the question yourself. Yes.

[Operator:]

Your next question comes from the line of Sachin Salgaonkar from Bank of America.

[Sachin Salgaonkar:]

I have three questions. Number one, when I look at your hotels and packages growth at 4.3% y-o-y constant currency, could you consider this as more or less bottomed out? Would love to get some commentary in terms of how you guys are looking in terms of curtailing couponing and discounting at the low end and then how should we see a recovery in the second half?

[Mohit Kabra:]

Yes, Sachin, maybe I'll take that. We had called out from a little bit of a slowdown point of view. So multiple factors going into this, and I'll take them probably one after the other. So if you look at it from a slowdown point of view, we had called out that probably Q2 might be the toughest quarter and before, that potentially some recoveries will start setting in from Q3, which is seasonally a better travel quarter. We'll come to know more of it as we get into December because that is the peak month in terms of seasonality. So from that point of view, yes. If you also look at it, what we have doing at least over the last year or so in line with the directional line that we have been calling out. As we've been reducing our marketing and promotional expense, we've also been kind of going a little down on the overall take rates, and therefore, you could see that overall take rates have kind of seen a small correction compared on a year-over-year basis. So if we look at it, last year, same quarter, the margins in the H&P business were like close to 24.4%, and they are down to about 22.7% currently. So we've been trying to kind of also reduce the overall performance-linked incentive from the hotelier considering that the overall deployment to customers has also been going down. But as you see, this, going forward, like I've been saying, hopefully, over the next couple of quarters, we should largely see the entire course correction on the budget hotels in terms of promotional expense going down also getting completed. And therefore, yes, hopefully in the next few quarters, you should probably see this overall growth inching up again. And this could possibly be among the lowest in terms of growth that we have posted in terms of revenue growth. So directionally, what you have called out absolutely stands to ground for these reasons.

[Sachin Salgaonkar:]

Okay, and so will you still expect more recovery in the second half?

[Mohit Kabra:]

We do expect second half to come in better. I mean, I think as I said, once we get into December, we'll have a fairer idea of how better because this - the third quarter typically is very lopsided with December. But hopeful that second half is going to look or pan out much better than the first half.

[Sachin Salgaonkar:]

Okay. Got it. My second question is with regards to this Competition Commission of India inquiry. Any high-level thoughts on how we should look at it?

[Mohit Kabra:]

So look at it - we'll, obviously, kind of keep cooperating with CCI or any of the regulators in terms of any inquiries that they kind of want to make. Overall also, if you see in the e-commerce industry, the government and the regulators have been evaluating or trying to get a better understanding of how the e-commerce has been developing in the country. In fact, CCI on its own had initiated a market study as well almost about like four months back. So I think there is a clearly, a concerted effort to kind of get more and more understanding of how the e-commerce market is evolving, and how do we kind of look at it going forward. As part of that, if there is more data or there is more info sharing that is required, I think we'll kind of to keep doing that. Otherwise, we haven't really seen anything which is kind of - which kind of is there in the order which calls out anything to be specifically provided. If you look at it from a market segmentation point of view, they've kind of called out a potential market segment that we kind of need to start evaluating at - beyond the total market. And there also they've kind of only said this kind of appears to be large market size and not necessarily a clear assessment that they have already made. And similarly, they've also said that there has to be evaluation if there are any abusers in terms of the significant share that the players have. So I think we kind of to keep cooperating, don't really see any concern out there, and we should kind of be able to get through the inquiry in due course of time.

[Sachin Salgaonkar:]

Okay. Got it. And the last question is I do see a reasonable amount of cash and cash equivalents of close to around $250 million. But any thoughts of potential liquidity raising in future, 12 months?

[Mohit Kabra:]

Deep, do you want to take that?

[Deep Kalra:]

Also Sachin, on the previous point, just want to point out from a time line point of view, we should expect anywhere upwards of 18 months, so 18 to 24 months is normally what this process takes. So that is what we have been informed by people working with - dealing with CCI, et cetera, as well as our council. So just wanted to kind of set the expectation there. It is a long process. Yes. In terms of fund raise, I think given the trajectory and how we are going in terms of operating losses, for organic needs, we are quite comfortable. I don't think we foresee a raise requirement at all, but if there is an M&A requirement, which is significant M&A, then definitely we would look at various ways to raise. But organic needs, we are comfortable.

[Sachin Salgaonkar:]

Got it and sorry, just one follow-up. Given that inquiry may continue for 18 to 21 months, any thoughts of making any contingent liability provision? Or you don't feel a need of doing that?

[Deep Kalra:]

No, we don't.

[Mohit Kabra:]

Not at all.

[Rajesh Magow:]

Not really. Sachin, we've assessed the situation. I know it's a prima facie thing internal to just find out more, and it's not really a case made out. And we continue to believe, at least, from our point of view that we are completely compliant on every aspect. So no real need for making any provision of any sort actually.

[Operator:]

. Your next question comes from the line of Vijit Jain from Citi.

[Vijit Jain:]

Deep, Rajesh, Mohit. My question is on the corporate travel strategy. Could you just give a couple of numbers around what the overall share of corporate in your business is? And what kind of growth you're seeing in there? Maybe I know it's a very small base likely so maybe something on the - on a q-o-q or y-o y basis will help.

[Deep Kalra:]

Sure. As you rightly pointed out, and we've been talking about it in the past few quarters that it's the new business that we ventured into, and we weren't really focusing out in the past. I can tell you the number of accounts that we've been increasing. I think that probably would be best for a bit right now, and then the business follows from there. So we today have about around 3,000 corporates that are active on small and medium enterprises side, and we've been acquiring handsomely on Quest2Travel for the large corporates as well as some of them we called out in the script. And given that there was really no way, we've been growing very handsomely like 50%, 60% and beyond year-on-year, but that doesn't really mean anything because the base is really low. But we're quite happy and encouraged with the growth. Our vision here is that in the next 3 to 4 years, we are going to actually take lion's share of this market. We are quite confident with both the products that we have in the market now. And that's what we kind of focused on. So I guess that's it on corporate business for now. As it becomes more important and material in terms of sharing the exact numbers of real business kind of coming from there, whether it's flight or hotel, we will definitely go out and share.

[Vijit Jain:]

Sure and my second question is about this - you - Rajesh, I think spoke about the new credit approval models that you've launched. And I think the number was $50 million of business you are doing through this EMI option with select banks per month. So that I think roughly translates around 10% of your business, right, $1.5 billion in gross bookings, and you're doing $150 million odd a quarter. So is that number inclusive of all the EMI options that would've been available a couple of years back as well? Or is this something very specific that you've newly launched? Just wanted to get more color and clarity on what that is.

[Deep Kalra:]

You're right, you're right. No, I think it's a combination of the two. We have definitely grown on - in the back of now. See, we used to operate earlier, but that used to be a very, actually it used to be more a bank product more than our own database-backed contribution, if you will. See, what we have developed in the last few quarters, however raised that and a lot of work that has gone into it in terms of just building models and tech platform to make sure that we end up giving instant loan booking with the NBFC partner. And that's picking up now. And Trip Money is actually a product of that, and Trip Money is going to be our product offering to the customer, which will be a combination of, like I said, instant credit, leveraging largely our own data point, of course, the bureau data and the rest of it, to make sure that the models are robust enough. But a lot of that - a lot of the input is actually going from our own data, whether it is customer data or searches, et cetera. And on the other side, on the lending side, there is partnership from many partners now. So we do believe that this is going to be a very important area, and probably - potentially a catalyst for this category growth as well. So we're kind of excited about that.

[Mohit Kabra:]

Just to add, the number is actually as a percentage of total booking. So there is a natural skew because all the EMIs tend to happen on the larger-value products. They happen a lot with international bookings and holidays. So in terms of transaction, that percentage is going to be much smaller, but in terms of total booking, you're absolutely right, on a run-rate basis, this is getting very close to 10%, which is actually very good. But probably, transaction number will be much smaller than that.

[Vijit Jain:]

Got it. And my final question is just on the other revenue side. I think you mentioned something about it's a mix of ancillary revenues and facilitation fees, et cetera. So just wanted to get a sense of, I guess, facilitation fees will be more stable component within other revenues, and it's the ancillary services and all the other activities and stuff that you've launched, which is driving the kind of growth we're seeing there. Is that ...

[Deep Kalra:]

in the last. Yes. Can you just repeat the last question?

[Vijit Jain:]

Yes, yes, so I just wanted to get a sense of what is driving other revenues. I understand the facilitation fees part, but not so much the other things that you mentioned.

[Deep Kalra:]

Yes, so, predominantly, Vijit, it is actually facilitation fee, only travel insurance and both for domestic market as well as international market. The other ancillary products are largely on the air side, which just kind of gets recorded here, but it essentially attached to the air booking, like the paid fees booking or the baggage or any of the other ancillaries that now airlines have started offering, which is likely to grow. But right now, large part of this is travel insurance.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.