JETS - MakeMyTrip: Rebound In Earnings Needed To Justify Upside

• MakeMyTrip Limited has shown impressive revenue growth and a strong cash position in the most recent quarter.
• However, earnings growth still remains negative.
• I take the view that the company must see a rebound in earnings growth to justify further upside.

Investment Thesis: While recent revenue growth has been encouraging, investors are likely to want to see a further rebound in growth across the Air Ticketing segment and a rebound in earnings growth to justify further upside from here.

In a previous article last month, I made the argument that MakeMyTrip Limited ( MMYT ) could see upside going forward on the basis of higher revenue growth thanks to a rise in domestic homestay listings, as well as the approaching of the peak travel season across India running from October to March.

In the past month, we have seen the stock make significant gains.

The purpose of this article is to evaluate whether we can expect this rise to continue, taking recent quarterly financial results into account.

Performance

From a balance sheet perspective, we can see that cash performance over the past quarter has improved, with the quick ratio (cash less inventories all over current liabilities) having risen since March - which indicates that the company is in a better position to fund its short-term debts.

Source: Figures sourced from MakeMyTrip Q1 FY23 Financial Results. Quick ratio calculated by author.

Revenue is also up sharply on that of June 2021 - with Hotels and Packages showing the biggest increase.

While revenue has been rebounding strongly - MakeMyTrip still recorded a net loss in the most recent quarter:

The reason for this is that growth in expenses have simply continued to outpace revenue. Particularly, we can see that the procurement cost of hotels and packages services has risen sharply over the past year.

From this standpoint - while revenue growth continues to remain encouraging - there will come a point where investors will demand to see a rebound in earnings growth to justify further upside in this stock.

Looking Forward

Going forward, while the sharp rebound across the Hotels and packages segment has been encouraging - the company will need to demonstrate that it can generate enough revenue to outpace the subsequently higher costs that arise from growth in this segment.

Air ticketing was the company's second largest segment by revenue, which accounted for 21% of total revenue. Let's compare the revenue breakdown with that of June 2019 :

From the above, we can see that Air Ticketing revenue accounted for 31% of total revenue.

For reference, Hotels and Packages accounted for 48% of revenue whereas it now accounts for 58% of revenue.

In this regard, MakeMyTrip has become more dependent on Hotels and Packages to sustain sales growth. This may not be an ideal situation if it means that the company has to incur higher costs than previously to fund further revenue growth across this segment.

It remains to be seen whether Air Ticketing revenue can rebound to pre-pandemic levels. However, inflation and higher fuel costs may mean that growth across this segment remains low.

On a holistic basis, I take the view that with growth across major segments having made up for a significant portion of the revenue losses incurred throughout the pandemic, investors are now increasingly likely to demand a rebound in earnings growth to justify further upside from here. I take the view that Air Ticketing revenue needs to strengthen further for this to happen.

Conclusion

To conclude, MakeMyTrip Limited has seen strong revenue growth, and an improving cash position is also encouraging.

With that being said, the company is now more dependent on Hotels and Packages to lift overall revenue growth, which has significantly increased the company's cost base.

As India heads into the peak travel season going forward - investors are likely to want to see a further rebound in growth across the Air Ticketing segment and a rebound in earnings growth to justify further upside from here.

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