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Idle thoughts on valuations: Jet, Kingfisher and MakeMyTrip

  • Some days back, Mint carried a great story about how MakeMyTrip's valuation was higher than that of the combined valuation of Kingfisher Airlines and Jet Airways. Even more interesting, these two airlines reportedly have a 45% share in the domestic airline market, while MakeMyTrip has 11% share in the airline booking market.

    But revenues from ticketing are a small fraction of the total revenue made by the airlines. And this is amplified by the relative valuations. While the airlines are valued at 1/5th to 1/6th of (historic) sales, MakeMyTrip is valued at almost 14 times sales!

    The author of the Mint analysis believes that this is not really an anomaly, but "indicate the coming of age of dot-coms in this country."

    He goes on to describe the dismal financial position of the airlines, and concludes that investors are wise to stay away. I agree with this for the most part, but am not totally convinced about the dot-com bit.

    Sure enough, a company like MakeMyTrip does not require repeated Capex like airlines do; and can leverage network effects. Their gross margins too, are likely to be very high (given the negligible variable costs of completing a transaction). However, they do not dominate their industry (like a google or facebook). In fact, they're in an intensely competitive market and every percentage point of market share will be hard won. In other words, supernormal (significantly higher than industry) growth rates are not a given.

    Personally, I'd stay away from the airlines, despite them being cheap because the business model is shaky. As for the airline booking dot-coms, the business model may be more robust, but the valuations appear highly inflated.


Comments

4 comments
  • Ritika Shetty
    Ritika Shetty 'He goes on to describe the dismal financial position of the airlines, and concludes that investors are wise to stay away.' I bet everyone at Kingfisher Airlines wishes they'd listened :)
    March 31, 2012 - 1 likes this
  • Skeptical Investor
    Skeptical Investor Now the key issue is: How long will Kingfisher Airlines stay alive?
    March 31, 2012
  • Sridhar V
    Sridhar V The airline industry in India is not a good place for investors to put in their hard earned money. This is true even for several airlines abroad which are not profitable or lack consistency of earnings.
    Dotcoms such as makemytrip, flipkart, etc are like ...  more
    August 26, 2012
  • Remo Smith
    Remo Smith Well the whole country is facing financial imbalance. Indian government got to consider these problems soon.
    Link Building
    September 10, 2012

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