About the company:
Week by week, new IPOs are hitting the markets. This week we have one such IPO with unique business model, RateGain Travel Technologies. The IPO has an issue size of Rs 1,335.74 crore which comprises Rs 375 crore of fresh issue and Rs 960.74 crore of an offer for sale.
Issue Details:
· Dates: December 7, 2021 to December 9, 2021
· Price Band: Rs. 405 to Rs. 425 per share
· Minimum Lot: 35 shares
· Minimum Application Amount at the Upper Band: Rs. 14,875
Objects of the Issue
The proceeds of the fresh issue are expected to be utilized towards:
· Repayment/prepayment of indebtedness availed by RateGain UK, one of the subsidiaries, from Silicon Valley Bank;
· Payment of deferred consideration for acquisition of DHISCO;
· Strategic investments, acquisitions and inorganic growth;
· Investment in technology innovation, artificial intelligence and other organic growth initiatives;
· Purchase of certain capital equipment for the Data Center; and
· General corporate purposes.
Company Overview
RateGain Travel Technologies began operations in 2004 with the introduction of a competitive intelligence price comparison product for hotels and have over the last 15 years, expanded its product portfolio to include artificial intelligence and machine learning capabilities that leverage in-house data lake to offer products in the areas of rate intelligence, cognitive revenue management, smart distribution and brand engagement.
The company is among the leading distribution technology companies globally and is the largest Software as a Service (“SaaS”) company in the hospitality and travel industry in India. They offer travel and hospitality solutions across a wide spectrum of verticals including hotels, airlines, online travel agents (“OTAs”), meta-search companies, vacation rentals, package providers, car rentals, rail, travel management companies, cruises and ferries.
The company has 3 main business divisions:
· DaaS (Data as a Software): This includes delivering insights including competitive intelligence. It is mainly divided into 2 categories; Market Intelligence and Dynamic Pricing Recommendations.
· Distribution: This includes critical distribution including availability, rates, inventory and content connectivity between leading accommodation providers and their demand partners.
· Lastly, Martech which offers enhanced brand experience to drive guest satisfaction, increase bookings and increases guest loyalty.
Industry overview
The tourism industry represented 10.4% of global GDP in 2019 and faced a number of challenges, the most critical of them being low digitization and disparate systems that are not inter-operable. COVID-19 has however, accelerated digitization of customer interactions with hospitality and travel companies. These changes are likely to lead to a shift by hospitality and travel companies from in-house solutions to thirdparty software and services. Third party travel and hospitality technology is therefore estimated to be a US$ 5.91 billion market in 2021 growing to an estimated U$ 11.47 billion in 2025 at a CAGR of 18%. This bodes well for the company as it aims to be the leading revenue maximization platform for the hospitality and travel industry. They believe in the idea that human necessities have changed and has now been food, clothing, shelter and travel. Further, the company is not looking to diversify its business and direct its focus only to this industry.
Key Strengths
High Expected Growth: The company has unique business model which has very few players globally. In India, the company is one of its own kind. Hence, being the early mover, the company can capture a lot of market and with the addressable market poised to grow at 18% CAGR till 2025, the company has the potential to grow at a higher rate.
Diverse portfolio with ability to cross-sell: The company’s products are inter-operable and integrate across a single platform allowing customers to maximize their revenues while also resulting in cost savings. Further, integration of their products with major property management systems (“PMS”), central reservations systems (“CRS”) and revenue management systems (“RMS”) and long-tail channels such as tour operators, GDS, bedbanks, wholesalers and Online Travel Agents (OTAs), allows the company to access data that results in a strong network effect for the business. While each of the products has value as a standalone offering but each of them contribute to the larger capabilities of their product suite. This has led to creation of innovative cross use-cases across products that the company believes, cannot be easily replicated.
Marquee Global Customers with Long-term Relationships: It has global and diverse customer base with long-standing relationships. As of September 30, 2021, the customer base of 1,462 customers including 8 Global Fortune 500 companies comprised both travel suppliers and travel intermediaries, 25 out of the top 30 OTAs, several of the world’s fastest-growing airlines, 23 of the top 30 hotel chains, tour operators and wholesalers, all leading car rental companies, all large cruise lines, and the largest travel management companies. Further, the company has a high customer retention rate reflected in 7 out of top 10 customers being associated with the company for more than 10 years.
Financial performance and successful past acquisitions: The company’s revenue grew by 52% over FY19 to FY20, however, due to the brunt of the pandemic, the revenues declined by 37% over FY20 to FY21 and increased by 28% in the 5 months ended August 2021 on a YoY basis. The company was profitable with an EBITDA and PAT margin of 12% & 4%respectively in FY19. Thereafter, the company has incurred net losses but continues to remain both, EBITDA and cash flow from operations positive. As a part of inorganic growth, the company in the past has acquired loss making companies and successfully converted into profit making ones. This acquisitions are in the same industry which have helped the company to expand its product portfolio and improve performance of its existing products.
Key Risks
Highly dependent on the Hospitality and Travel industry: Substantially all of the revenues are derived from the worldwide hospitality and travel industry. The worldwide hospitality and travel industry is highly sensitive to general economic conditions and trends. Factors that negatively impact the industry could have a material adverse effect on the company’s business and financial condition. One of the most significant factors that continues to affect is the COVID-19 pandemic, which has resulted in a significant fall in demand for travel worldwide.
Customer dependent: The company’s business depends on customers renewing their contracts and on expanding sales to existing customers. Any decline in customer contract renewals or expansion or any impairment of long-term relationships with customers would adversely affect business operations and financial performance. Further, if they are unable to attract new customers in a manner that is cost-effective and assures customer success, then its business would be impacted.
Benefits from past acquisitions: The company may not derive the anticipated benefits from its strategic investments and acquisitions that it has undertaken in the past, Further, the company is also currently evaluating potential acquisition opportunities and targets for supporting its growth. If the company is not successful in pursuing them, it can affect the rate at which the company expands its services.
Conclusion
The company is financially sound, not highly leveraged and despite the net losses, it has been able to generate positive operating cash flows and EBITDA throughout the pandemic. Further, with a rapidly growing addressable market and its ability to cross-sell and scale its offerings, the long term growth prospects of the company are promising. The key risk is the uncertainty due to Omicron variant which can substantially dampen its short term operations.
On the valuation front, while there are no listed peers in India, when compared to a certain global competitors that the company has identified, the valuation seems on the expensive end. Further, the company had issued shares to one of the investors - Avataar Holdings in August and October 2020, at an average price of approximately INR 144/- per share. When compared to this, the IPO offer price seems substantially high considering that in the past year, there have been no exceptional improvements in the financial performance of the company.
Considering the above, though the long term outlook of the company is attractive, the premium valuations and Covid-19 related uncertaintly are concerning. Therefore, only investors with a decent risk appetite are recommended to ‘SUBSCRIBE WITH CAUTION’ to this IPO.
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