Yatra - Indian OTA Neglected by Mr Market

Yatra is #2 OTA in India and listed on Nasdaq via SPAC in 2016. I first started buying it at ~$10/share after reading Dane Capital and Greenhaven Road Capital letters talking about Yatra as an undervalued way to play the India market.

Recently, YTRA stock price dropped to ~7/share range and I doubled my investments in YTRA because it offers asymmetric risk / reward ratio at current price.

First, some color on India Travel Market:

The Indian air travel market is the fastest growing market in the world (16% CAGR in 2017) and is currently #3 in terms of size (after US and China). Over the last 10 years, during my annual trips to India, I've been amazed by the improving quality of airports and better air connectivity. And many middle class Indians have started traveling by flights due to higher paychecks, increased air connectivity with tier 2 cities, and introduction of domestic budget airlines. In addition to the general increase in # of air travelers, there's also a move from offline to online booking of air travel and hotels.  However, the per capita spend in India on air travel is only 20% that of China, which hints towards continuing growth.


What's driving the low prices?

1. SPACs have a bad track record, and so Yatra is being clubbed with other "bad" SPAC investments.

2. Major investor (20%) - Norwest Ventures - recently sold off their holdings. It seems that this VC fund reached its life of 10 years and so the stock was sold / returned to LPs. This seems like forced selling.

3. Limited analyst coverage (3 analysts)

4. Yatra is currently making a loss because of heavy spend on sales and marketing as they try to scale up. However, they have enough cash to continue at current burn rate for 2 years. They plan to breakeven by end of 2019.


What makes Yatra a compelling investment?

1. Yatra grew 40% Revenue year over year while increasing EBITDA 100%. And yet it sells at 1.4X Rev (assuming Q417 Revenue annualized).

2. Its way cheaper than competitors. MMYT trades at 3.6X Rev (assuming Q417 Revenue annualized). MMYT bought competitor goibibo at 8X Rev, while YTRA acquired Air Travel Bureau (ATB) for 1.8X Rev. This also shows the capital allocation discipline shown by YTRA.

3.  Hidden asset in terms of partnership with Reliance (major stockholder). Reliance will install Yatra app on all of its Jio smartphones, effectively increasing the install base by factor of 3x. For those not familiar with India Market, Reliance is huge and is known to win in the markets they enter, and smartphones are the new market for them.




What is range of value for YTRA?

To determine a lower bound for the valuation, let's assume that Yatra grows only at the average OTA rate of 12% (unlikely given high growth in India, but still useful to get a lower bound). Also, I assumed a lower multiple due to lower growth.

Value = 2 x 2020 Revenue less service cost + Cash from warrants - Cash burn =
2 * $153M + $280M - $100M = $486M
# of shares = 24M outstanding + adding 17M shares from warrants = 41M shares
Value = $486M / 41M = $11.9/share, implying good downside protection.


For a more realistic estimate on value, I refer to estimates from other value investors:

a. Dane Capital's estimate of value = 5 x 2018 Revenue Less Service Cost = 5 x 98 = $490M
Value = $20 / share

b.  Scott Miller's valuation:
Assuming 20% year over year growth:
4x 2020 Revenue Less Service Cost + Cash from warrants - Cash burn =
4 * $170M + $280M - $100M = $780M
# of shares = 24M outstanding + adding 17M shares from warrants = 41M shares
Value = $780M/41M = $18/share


So the range of value is $11.9 / share - $20/ share. 



Multiple shots at the goal in terms of unlocking value:

1. Market re-rates
2.  YTRA continues on the growth trend, adds new users at minimal costs due to network effect and turns a profit
3. YTRA acquires other smaller players (Eg: Cleartrip) and gains more size
4. Global players acquire YTRA to get a foothold in the India market. Expedia will be a good candidate here.



What is Mr Market missing?

1. Online travel in India need not be winner takes it all, but Mr Market is pricing MMYT and YTRA as such. MMYT is priced at ~10X higher than YTRA though MMYT's market share is only 2.5X higher.

2. Though MMYT has big backers (Naspers, Ctrip) and big cash stockpile, we think that Yatra will continue to grow because a. the India market is big enough and growing, and b. Yatra's strategic partnership with Reliance.

3. There can be multiple winners if they have different focus areas. Example: MMYT can win in high end hotel space, while YTRA can win in its focus areas - corporate air travel and budget hotels.