Investment thesis: While recent revenue growth has been encouraging, investors will likely want to see a further rebound in growth in the airline ticketing segment and a rebound in earnings growth to justify further upside from here.
In a previous article last month, I argued that MakeMyTrip Limited (NASDAQ: MMYT) could see benefits in the future based on higher revenue growth through an increase in homestay listings, as well as the approaching peak travel season across the India, from October to March.
Over the past month, we have seen the stock make significant gains.
The purpose of this article is to assess whether we can expect this rise to continue, given the latest quarterly financial results.
From a balance sheet perspective, we can see that cash performance over the last quarter has improved, with the quick ratio (cash minus inventory to current liabilities) increasing since March – indicating that the company is in a better position to finance its short-term debts.
|March 2022||June 2022|
|Cash and cash equivalents||213283||253974|
|Total current liabilities||191216||204552|
Source: Figures taken from MakeMyTrip Q1 FY23 financial results. Quick ratio calculated by the author.
Revenues are also up sharply from June 2021 – with hotels and packages showing the biggest increase.
While revenue rebounded strongly, MakeMyTrip still posted a net loss in the last quarter:
The reason is that spending growth has simply continued to outpace income. In particular, we can see that the cost of sourcing hotels and package services has risen sharply over the past year.
From this perspective – while earnings growth continues to be encouraging – there will come a time when investors will demand to see a rebound in earnings growth to justify a further rise in this stock.
Going forward, while the strong rebound in the Hotels & Packages segment has been encouraging, the business will need to demonstrate that it can generate enough revenue to outweigh the higher costs that will result from the growth of this segment.
Airline ticketing was the company’s second largest segment in terms of revenue, which accounted for 21% of total revenue. Let’s compare the distribution of income with that of June 2019:
From the above, we can see that airline ticketing revenue accounted for 31% of total revenue.
As an indication, Hotels and Packages represented 48% of revenue whereas they now represent 58% of revenue.
In this regard, MakeMyTrip has become more dependent on hotels and packages to support sales growth. This may not be an ideal situation if it means the company must incur higher costs than before to fund further revenue growth in this segment.
It remains to be seen whether airline ticketing revenue can rebound to pre-pandemic levels. However, inflation and rising fuel costs may mean that growth in this segment remains weak.
On a holistic basis, I believe that with growth in key segments having offset a significant portion of the revenue losses experienced throughout the pandemic, investors are now increasingly likely to demand a rebound in earnings growth to justify a further hike from here. I am of the view that airline ticketing revenues need to strengthen further for this to happen.
To conclude, MakeMyTrip Limited has seen strong revenue growth, and an improved cash position is also encouraging.
That being said, the company is now more reliant on hotels and packages to drive overall revenue growth, which has significantly increased the company’s cost base.
As India heads into the peak travel season, investors will likely want to see a further rebound in growth in the airline ticketing segment and a rebound in earnings growth to justify further upside from here. .