MMYT - MakeMyTrip Limited: Earnings Growth And Impressive Balance Sheet (Rating Upgrade)

2023-08-03 14:51:38 ET

Summary

• MakeMyTrip has continued to see strong growth in gross bookings and earnings.
• Continued growth in these metrics outside of peak travel season has been encouraging.
• The company's quick ratio and long-term debt to total assets ratio have also been impressive.
• I take a bullish view on MakeMyTrip Limited.

Investment Thesis: I take a bullish view on MakeMyTrip Limited, based on strong growth in gross bookings and earnings, as well as impressive balance sheet metrics.

In a previous article back in May, I made the argument that MakeMyTrip Limited ( MMYT ) could see further upside over the longer-term, I also took the view that earnings on a yearly basis would need to see a rebound to justify further upside.

Since then, the stock has ascended to a price of $31.60 at the time of writing:

The purpose of this article is to assess whether MakeMyTrip Limited has the ability to see continued growth from here taking recent performance into consideration.

Upgrade from Hold to Buy

In my last article, I had rated MakeMyTrip as a hold. The reason for this is that while gross bookings had been increasing, the company had yet to demonstrate that it could sustain positive earnings growth. This has been demonstrated in the last quarter - while long-term debt to total assets has decreased, indicating the company has not had to increase long-term debt levels to fund such growth.

For these reasons, I revise my rating from Hold to Buy for MakeMyTrip.

Performance

When looking at the most recent earnings results for MakeMyTrip Limited, we can see that gross bookings for Q1 2024 are up on that of Q1 2023 - from over $987 million to over $1.2 billion.

Moreover, given that the months of March to June are not traditionally high season months for travel in India makes the results even more impressive - as gross bookings have not only exceeded that of Q1 2023 - but also that of Q3 and Q4 2023 which represent the high season for travel across India.

In my previous articles about MakeMyTrip - I had cautioned that while the growth we have been seeing in gross bookings is encouraging - investors will eventually want to see earnings move into positive territory for the stock to see growth over the longer-term.

Diluted earnings per share have seen substantial growth in this regard - from $0.05 in Q1 2023 to $0.30 per share in Q1 2024:

Balance Sheet

With regards to short-term liquidity, we can see that the quick ratio of MakeMyTrip Limited (calculated as total current assets less inventories all over total current liabilities) has continues to remain above 1 - indicating that the company has more than sufficient liquid assets to meet its current liabilities.

In addition, we can see that the company's long-term debt to total assets ratio has also fallen slightly over the period:

Source: Figures sourced from MakeMyTrip Q1 2024 Press Releases. Quick ratio and long-term debt to total assets ratio calculated by author.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I am impressed by the fact that 1) MakeMyTrip has still managed to grow gross bookings across the Air Ticketing segment this quarter despite the fact that April to June does not traditionally represent a high season for travel across India, 2) the company has managed to continue growing earnings per share, and 3) MakeMyTrip has not had to increase its long-term debt levels substantially to fund this growth.

In this regard, while I was previously more reserved on MakeMyTrip's prospects - that was in significant part due to the fact that the company had yet to show evidence of sustaining earnings growth. However, MakeMyTrip has clearly demonstrated impressive growth in this metric across the last quarter.

Risks and Looking Forward

Going forward, I am optimistic that MakeMyTrip has the capacity to continue sustaining growth in gross bookings and earnings - particularly as we start to head towards the October to March period - which represents high season for travel across India.

In terms of the potential risks to MakeMyTrip Limited at this time, the main concern for investors could be the potential for gross booking growth to plateau following a period of strong growth - which could dent investor expectations on the stock's long-term performance.

For instance, we saw that during the COVID-19 pandemic, MakeMyTrip was able to prove more resilient than many travel firms globally due to a vibrant domestic market continuing to fuel travel demand. With that being said, as international travel has rebounded and travel demand across North America and Europe was highly vibrant this summer - it is unclear as to whether we might see travel demand across India start to level off in the high season.

However, the results we have seen to date have been encouraging in my view - and growth in gross bookings outside of peak season indicates that booking momentum could be set to continue.

Valuation

When looking at the P/E ratio over time for MakeMyTrip (calculated as price on date of earnings release divided by the adjusted diluted EPS for the relevant quarter) - we can see that the ratio has fallen to 105.33x in the most recent quarter - which is the lowest ratio since Q2 2022 (the company had previously reported an adjusted diluted loss of $0.09 in Q1 2022).

Source: Price sourced from nasdaq.com. Adjusted diluted EPS sourced from previous MakeMyTrip quarterly reports. P/E ratio calculated by author.

With earnings per share having seen a strong increase over the last eight quarters - along with the P/E ratio substantially below levels seen in previous quarters - I take the view that the stock is trading at increasingly good value.

Moreover, with domestic competitors such as Yatra Online, Inc. ( YTRA ) having reported adjusted diluted earnings per share of $0.01 for Q4 2023 - along with a price of $1.98 on the 30th May 2023 (the date of the earnings release) - this yields a P/E ratio of 198x as compared to 122.90x for MakeMyTrip in the same quarter.

As such, I take the view that MakeMyTrip is showing strong earnings growth relative to its competitors and the valuation looks increasingly attractive on a P/E basis. We saw that earnings per share increased by 42% from the last quarter from $0.21 to $0.30.

Assuming the P/E ratio were to remain at 105.33 and EPS was to increase by 42% yet again, then this would yield a target price of $45 (105.33 * 0.42858 = 45.14). Given the growth the company has demonstrated to date, I take the view that $45 would be a good representation of fair value if earnings per share were to increase by 42% over the course of the coming year.

Conclusion

To conclude, MakeMyTrip Limited has seen impressive growth in both gross bookings and earnings. The fact that the company has maintained a strong balance sheet while seeing growth is encouraging. I take a bullish view on MakeMyTrip Limited.

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