Along with Ibibo, MakeMyTrip also gets absurd mkt valuation

INVESTORS MAY BE PUTTING THE CART BEFORE THE HORSE BY VALUING THE COMBINED ENTITY AT A ROUGHLY 75% HIGHER THAN MAKEMYTRIP’S EXISTING REVENUE MULTIPLE.

MakeMyTrip Ltd has said it will acquire Ibib o Group’s travel business in India to create India’s largest online travel firm. How much is this combined entity worth?

Nasdaq-listed MakeMyTrip had a market capitalisation of $850 million before the deal was announced, and a debt of about $180 million. In all, it was valued at 6.1 times fiscal 2016 revenues.

After the deal was announced, MakeMyTrip’s market capitalisation rose by 44% to $1.22 billion. And that’s not all. The company’s filings suggest massive equity dilution after the deal, with the total share count expected to rise by as much as 2.4 times. In other words, investors are valuing the combined entity at $2.9 billion, or around 10.8 times estimated revenues of the combined entity.

According to the bankers to the deal, the combined entity was valued at $1.8 billion, with Ibibo contributing 40% to the total.

Investors are enthused about the expected increase in profitability after the merger. After all, the cut-throat competition between the two had resulted in significant cash burn in the hotel booking segment in the past two years. In 2014-15, Ibibo made losses of $62 million on the back of revenues of $38 million.

Since Ibibo had started giving discounts in this segment, MakeMyTrip was forced to follow suit as well, and ended with losses of around $100 million in 2015-16.

Losses can be expected to reduce as the merged company will have a market share of over 50% in both online airline as well as hotel bookings. Lower discounts would result in better unit economics, besides which, the company can also be expected to is likely to have better bargaining power with airlines and hotels.

But this is the fastest growing segment for both companies. If discounts are reduced considerably, growth may suffer. Analysts at Jefferies India Pvt Ltd, for instance, estimate that the combined entity’s hotel revenues of $88 million in 2015-16 could rise to $300 million by 2017-18. But to keep growth so high, losses are likely to keep pace. Investors may have to tone down expectations on growth or profit.

But a more immediate concern is the expected equity dilution. When MakeMyTrip shares rallied on Tuesday, it looked as though the extent of the dilution wasn’t public information. Analysts at Jefferies, for instance, had assumed equity will expand by around two times to 85.8 million shares. Even though the company was asked on a call with analysts, it didn’t provide details about the actual post-merger share count.

An SEC filing reveals that China’s Ctrip, which had invested $180 million in the company in January this year, will be issued 9.857 million shares. Elsewhere, it was stated that Ctrip will have a 10% stake in the combined entity. Since existing investors are being diluted much more than they had earlier imagined, MakeMyTrip’s shares could well correct when trading resumes.