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.
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