With the Sensex cruising above 50,000, investors are lapping up stocks on offer in the primary market. The Easy Trip Planners initial public offering (IPO) is a case in point. Small retail investors have been allotted shares worth ₹50 crore in the issue; but just on the first day of book building, they had already bid for shares worth ₹645 crore.
The Easy Trip issue is being seen as a case of easy money, with investors betting on an unusually high listing pop. Investors aren’t deterred by the valuation of around 60 times FY20 earnings.
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Yet, the Easy Trip business model is hardly anything to get excited about. It gets nearly all of its revenues through commissions from the sale of air tickets, which is a highly competitive business.Other online travel agencies (OTAs) such as MakeMyTrip typically diversify risks by venturing into other segments such as accommodation. In the case of Easy Trip, while it diversified into the hotels space as early as 2013, it hasn’t achieved scale, as its agreements with suppliers are non-exclusive and short-term. Air ticketing accounted for 97.8% of gross booking revenues in FY20.
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The short-term advantage of being predominantly in the air ticketing space, of course, is that Easy Trip is profitable and boasts of a decent return ratio, unlike other OTAs which are running high losses to grow their hotel booking business. “Note that firms such as MakeMyTrip (MMYT) are also profitable in their air ticketing business; but margins and growth prospects in this segment are low, and so they have diversified into other segments to drive growth," says an analyst at a domestic institutional brokerage requesting anonymity.
Another risk of being present in only one segment is that a shift in competition dynamics can severely impact the business model. Air ticket booking is a highly price-sensitive business; customers flock to the cheapest venue and loyalty is generally low. Also note that firms such as Amazon and others with payments licences in India have offered air ticketing options to their customers. Since this is only a small business segment for these larger firms, there is the risk of them increasing discounts to drive use of the payments products. This can severely impact smaller firms such as Easy Trip. But none of this is reflected in the IPO valuations, which values the firm around 11 times FY20 revenues. Nasdaq-listed MMYT trades at 6.5 times FY20 revenue.
Thus far, Easy Trip has done well to tackle competition. Its market share in FY20 stood at about 4.6%, up from 3.1% in FY18. According to Arun Kejriwal, founder of Kejriwal Research and Investment Services Pvt. Ltd, “The company has not received funds from private equity investors and so it has not burnt cash like some other OTAs."
While the conservatism is a positive, it sits a bit oddly with the relatively high valuation of the IPO. Of course, the major factor riding in its favour is the exuberant mood on the Street. Kejriwal says, “The stock markets are in a good mood, which will aid Easy Trip’s listing."
And while MMYT’s revenue multiple is far lower, IPO investors are likely to get swayed by the fact that its shares jumped nearly 80% in the past six months, on the back of the reopening narrative.
March 08, 2021 at 04:01PM
https://www.livemint.com/market/mark-to-market/easy-trip-planners-isn-t-the-money-spinning-biz-ipo-investors-assume-it-to-be-11615191553469.html
Easy Trip Planners is not the money spinning biz investors assume it to be - Mint
https://news.google.com/search?q=easy&hl=en-US&gl=US&ceid=US:en
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