YTRA - Yatra India IPO Approved; Yatra Also An Attractive Acquisition Target

Summary

• Yatra is a leading Online Travel Agency (OTA) in India. It is the largest OTA in corporate travel and the second largest in overall online travel.
• On November 19, SEBI approved the DRHP filed by Yatra for listing its shares on the Indian stock exchanges.
• Indian conglomerates such as Adani and Tata are launching super apps in which travel is a key element and they are looking for acquisitions.
• As one of the most recognizable and trusted brands in the travel space, Yatra Online is expected to do well in IPO. It is also an attractive acquisition target.
• With a successful listing, Yatra shares will rise due to higher valuation in India. However, with an acquisition, the shares could rise even further.

Yatra Online (YTRA) filed the DRHP documents in March '22 for the IPO of its subsidiary in India. After more than seven months of waiting, the DRHP was finally approved by SEBI on November 19th to move forward with the IPO. This is a massive deal for Yatra, whose shares have been languishing on the Nasdaq stock exchange, where it does not have the name recognition it has in India.

The Indian stock market has been doing very well compared to the rest of the world. While Yatra is unknown in the US, it is a well-known and trusted brand in India. A successful IPO of the Indian subsidiary will substantially impact the share price of the parent Yatra Online shares since the parent Yatra will own most of the shares of the Indian subsidiary.

As Yatra gets ready for the listing with roadshow promotions among the investors, there is an exciting window of opportunity when it could be acquired. This is because travel has become a significant component of attraction for the giant conglomerates that are rushing to build super apps . Yatra is one of the few pure plays that will be reasonably priced even with IPO pricing. Such an acquisition could result in a much higher value for the parent Yatra Online shares than even with an IPO.

Ascending Indian Stock Market

As the world recovers from the pandemic, while the economies of the US, Europe, and China are struggling to recover, the Indian economy is poised to grow quickly. With a large and young population, India's economy is somewhat self-reliant. All the ingredients are in place for it to grow despite the gloomy global outlook. While the global stock markets have dropped, the Indian stock market remains strong, reflecting the economy's strength.

One of the reasons for the strong performance of the Indian stock market is the increased participation of retail investors. Millions of Indians entered the stock market during the pandemic . Investing through mutual funds and other institutions is also on the increase. As the Fed raised the rates, foreign investors started moving away from the Indian stock markets. However, the retail investors and the Indian institutional investors have stepped in and have held the market steady.

India IPO could be hugely beneficial for Yatra stock

Some technology stocks, such as Paytm and Zomato, which recently went IPO, have not done well. This is mainly because these are loss-making entities with no clear timeframe on when they will be making a profit. Promising technology companies such as EaseMyTrip, a peer of Yatra, have done exceptionally well. Very few pure travel tech companies are trading on the Indian stock exchange, and there is a hunger for such companies among Indian investors and institutions.

EaseMyTrip went IPO in early 2021 at around a $200M market cap. Now it is trading at a market cap of over $1B! Yatra's revenue is comparable to that of EaseMyTrip. However, EaseMyTrip is much more profitable than Yatra. EaseMyTrip is notoriously lean on operations. While Yatra has more of a standard travel tech company structure. Yatra cut its workforce by half during the pandemic and focused on automation. While it is adding resources as the revenue is coming back, due to automation and more focus on corporate travel, the resource requirements will be much lower than before. This will likely help Yatra to be profitable in 2023.

Yatra is planning to raise Rs7500 crores from the IPO from fresh issue of shares , and it is also planning to sell about 9M Offer For Sale ((OFS)) shares. Now that the IPO is approved, Yatra will go through roadshows and determine the pricing for the shares. Typically companies offer up to 20% of their shares for IPO. Going by that trend, Yatra will likely target a valuation of Rs37500 crores, about $450M. The proceeds from the fresh shares will all go to the Indian subsidiary, and the proceeds from the OFS, which is expected to be around $40M, will likely go to the parent. After the IPO, the parent Yatra Online will own about 70% of the shares, which will have a valuation of about $325M based on the projected IPO price.

Even after applying a discount equivalent to the cash raised from the IPO, this will value Yatra Online shares at around $5. With the name recognition and trust along with investor appetite for shares of companies in the OTA space, Yatra shares may rise after the India listing, which could have a positive impact on the underlying valuation of Yatra online.

Super Apps Mania

The growing economy and the rising stock market have filled the coffers of large Indian conglomerates such as Adani, Tata, and Reliance. A few months back, the chairman of the Adani group, Gowtham Adani, surpassed Jeff Bezos as the second richest person on the planet. As the conglomerates grow, they are looking around to spread their bets, and one of the areas they are looking into is online travel.

Among the large Indian business groups, there is a new trend of creating super apps on mobile along the lines of the Chinese giants WeChat and Alibaba (BABA). These apps will offer all different parts of the businesses on a single app. Travel tends to be one of the most attractive pieces for any super app as travel is expected to be one of the fastest-growing sectors of the Indian economy.

Business Standard discusses this trend in the article " Super app war: Adani, Tata and Reliance Industries go on an acquisition spree ." According to the article, India's top business groups are scouting for acquisition targets to offer additional goods and services under their "Super app" umbrella in personal loans, travel bookings, and movie tickets. The super apps will use these services to attract users to their apps and offer many other core functions.

Yatra - an Acquisition Candidate?

In the travel segment, only a handful of India-focused pure-play OTAs exist. The key ones are MakeMyTrip (MMYT) , Yatra, and EaseMyTrip. Cleartrip was another player. It was impacted by Covid and was acquired by Flipkart at a firesale price. MakeMyTrip is the most significant Indian OTA and is listed on Nasdaq. It has a market cap of $2.7B, making it an expensive acquisition target. EaseMyTrip is listed on the Indian stock exchange and carries a $1B valuation. Though the valuation may be within the range of acquisition for large groups, EaseMyTrip is run more as a family-owned business by two brothers with tight control of the company with minimal resources. This model may not fit well in a large corporation looking to acquire and plug it into the corporate structure.

This leaves Yatra. Yatra is a professionally run organization with a very experienced veteran leadership team in the online travel industry for many years. Though the company trimmed the workforce almost by half during the pandemic, the corporate structure is maintained to grow efficiently as travel picks back up. Also, Yatra has a robust customer loyalty program used as a surrogate loyalty program by the providers it serves. This could fit into the super apps where loyalty programs are a critical part of the attraction.

As Yatra goes through the steps required for the IPO process after the approval, a window of opportunity has opened up for some large companies in India to acquire Yatra.

Potential Suitors

Yatra is attractive as an acquisition candidate for each one of the business conglomerates we have discussed. This is because Yatra could thrive as an independent travel OTA under the umbrella of any of these business groups. The acquisition costs, which likely to be at around the potential IPO pricing, could be more than justified with Yatra being an independent entity. Being included as a super app's travel component would be a huge bonus.

In addition to the conglomerates we looked at, some other players might also be interested in acquiring Yatra. Now let us look at each of the potential acquirers of Yatra and how Yatra may fit their needs in a little more detail.

Adani Group

Adani group has grown at a breakneck speed in recent years. Adani group operates many airports in India, including some busiest ones, such as the Mumbai International Airport. Adani group has been looking at adjacent areas and to include everything in the form of a super app.

In Oct 2021, the Adani group took a significant minority interest in Cleartrip , which was owned by Flipkart then. Yatra may present an excellent opportunity for them to completely own a part of the growing OTA market in which the Adani group already has a strategic interest.

Tata Group

Tata Group owns a wide range of companies, from building cars and software services to selling cooking salt. While they spent the last few decades expanding internationally, recently, they have been focusing more on operations within India. Early this year, Tata Group took over Air India from the Indian government . Tata group already jointly owns Vistara airlines with Singapore Airlines, and recently, they acquired Air Asia also. Despite owning three different airlines in India, they still have only about 20% of the market share, while Indigo, an Indian airline company, owns almost 60% of the market .

Tata released their super app called Nue in April'22 . Tata has tried to bring in all their group offerings in this super app, including shopping and travel. Currently, the travel part of the app is limited to Tata-owned airlines and hotels only. However, their goal is to offer all airlines and hotels from other providers on their app to make it more attractive. Here Yatra would fit in nicely.

Reliance Group

Reliance Group had invested in Yatra before Yatra's listing on Nasdaq. Since then, they have moved out of their position. With their prominent presence in mobile phone services and groceries, they have all the elements needed for a super app. Reliance has already launched an app called MyJio with focus on groceries, mobile and internet services. Yatra could expand the reach of the service making it a true super app.

Others

Flipkart acquired Cleartrip in 2021 in the middle of the pandemic. Cleartrip seems to thrive under Flipkart reporting strong growth and many new initiatives. Flipkart has been planning on going IPO by listing on Nasdaq and is looking for very high valuations in the order of $60B+. To have travel as one of their core strengths when they go IPO at a high valuation, they need to be dominant in travel challenging MakeMyTrip. The only way they could do that is through an acquisition. Acquiring Yatra would make them the second-largest OTA in India instantly. It will also give them a strong foothold in corporate travel.

Other companies, such as Paytm and EbixCash, might be interested in Yatra. However, pursuing such an acquisition in their current situation might not make sense. Nevertheless, in the situation changes, it is possible that they could be potential contenders.

Acquisition Might be Attractive for Yatra

Yatra's India subsidiary will go IPO likely in the later part of Q1 CY23. Pricing of the shares will be decided based on the interest. Even if the IPO of the Indian subsidiary gets a reasonably high valuation, it may not be fully reflected in the share price of the Nasdaq-listed parent.

Now, at the point when the pricing of the IPO has been decided, if one of the acquirers approaches Yatra with an offer equivalent to the proposed valuation, it is highly likely that the Yatra board will consider such an offer seriously. This is because any buyout offer will be a cash offer directly translating to the Nasdaq listed share price with no discounts. For example, if the offer is $450M, which is the estimated target IPO price, it would price the shares at $7.25, almost 50% higher than that possible from an IPO.

Recently there have been two key investors, MAK Capital and Maguire Investment , who hold a significant percentage of the shares of Yatra online. They are also represented on the board. If such an offer comes through, it will be highly likely that these investors will push the management consider that offer seriously.

Conclusion

Multiple factors contribute to the secular growth of online travel in India, including a growing economy, increasing interest in travel, and a move towards the online booking. This growth optimism is reflected in the stock price of EaseMyTrip, a peer of Yatra trading at a valuation of more than $1B.

The SEBI approval of Yatra IPO in India is a HUGE deal. It is highly likely that the India listed Yatra shares will be well received. Once the IPO pricing is decided, and the shares are listed, this has the potential to almost double the current value of Yatra Online shares.

If that is not enough, there is the possibility that one of the large conglomerates in India that are hungry to expand the offerings on their super apps could potentially acquire Yatra. This could result in even better stock appreciation for the Yatra stockholders. In a gloomy recession-feared environment in the US, Yatra Online shares are extremely attractive at these levels.

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