Smallcap Travel Stock in my watchlist
Hello friends, welcome to Yadnya Investment Academy. Today we will talk about a small cap company which is in the travel sector but is an asset light business. In the travel sector, asset light businesses are very rare. So this is a company which has not been listed for a long time and they have done pretty well. And their overall mode and business model is very interesting. So in that video, we will talk about everything in detail.
The name of the company is Rate Gain. We will talk about it in detail. We make a lot of videos like this regularly on Stock-O-Meter. So if you have not subscribed to Stock-O-Meter yet, then you can check on our website, www.investyadnya.in and some good offers are also available, which you can check on the offers page.
So what does Rate Gain do? As I said, this is a company in the travel sector. It is a tech company in the travel sector which provides software as a service based solution to various players in the travel sector. Be it hotels, online travel agents or cab aggregators.
So a lot of companies provide their services or tech solutions in the travel sector. We will talk in detail about what tech solutions they provide, what problems they are trying to solve. It is important to understand that this company is a global company. It is not just India based revenue. These tech companies are product-based, solution-based, which gives solutions to travel sector companies globally.
So we need to understand that. 23 of top 30 hotel chains use their solutions. 25 of top 20 online travel agents, OTA, use their service.
All leading car rental companies, like in India, car rental companies are not that popular. There are some Zoom cars, but in the US and Europe, car rental companies are very big. Large cruise lines companies also use their solutions. We will talk about what they are. So what is the role of tech in the travel sector? Obviously, a lot of technology is being used in the travel sector, and it is being used everywhere. So if you look at this chart, you will realize what solutions are being used in the travel sector.
Obviously, there is no solution for rate gain in all of these. But I just wanted to tell you that in the travel sector, in very small places, in operational, revenue management, marketing, guest experience, even if we go to hotels nowadays, we have online check-in, online website booking. So a lot of things have become tech-oriented in our vacation planning these days. So in the same things, rate gain provides a solution, and obviously there are a lot of companies in this. So now let's first understand where does this segment work? So rate gain works in three major segments. Data as a service, distribution, and marketing tech.
So DAS, distribution and marketing tech, and they have different products in this. So if you look at the chart here, you will see the names of the products. In this, Optima, Cargain, Airgain, so obviously, on the customer base, it is a little different for airlines, for car companies, so they have different products of that type. Okay, distribution, and what all is this, I will tell you later.
Okay, but what is important, you will see how their segment role, I mean, if there is segmentation or revenue, how is it different, see. Marketing tech, in 2019, it was 0% revenue, now it is 37% revenue. So this is what happens, in a small cap, these things happen a lot.
Anything that happens suddenly, and then it suddenly takes you up. Right, so now you can imagine that in just 4 years, 0 to 37% of revenue comes from that segment, that is marketing tech. Okay, so if we look at the rest, so consistently, now it is an equal 3% revenue, 29% is coming from data as a service, 34% as distribution, and 37% from marketing tech. That is FY23 numbers, okay.
So this is how the overall segmentation is. I will explain the company's modes and key positives and negatives in detail at the end. I am telling you in detail, okay.
So what is marketing tech now? First, let's talk about what data as a service is. So basically, what they do is, they take data from different places. What data, revenue data, pricing data, right, which hotel is being sold at what time, at what price, which airline is being sold at what time, which car company's rental price, what is currently going on, what is going on in the past, what is going on in the holiday season, what is going on in the non-holiday season, what is going on in the weekend, what is going on on Friday, right, a lot of companies need all this data. How should I set my pricing? Okay, and how many margins I can take on those particular things, how many discounts I should give, how many I should not give, how many questions do you think all these companies will have, right? So all this data which these guys provide as a service, data as a service, these are subscription-based services, right, so they provide this to various companies, right. So majorly, the customers in this are online travel agents, like MakeMyTrip, for example, so obviously they need data on what is the price of the hotel in other sectors, in other OTAs, at that particular date, okay, or what is going on before that, right, so all this is important information for them, or what is their price on every weekend, how does it change, at what price does the customer buy, and at what price does he mostly not buy that hotel, so all that data is very important for them, So they have like 6 billion price points, 500 plus data sources, they use AI technology, they put AI on top of it, so analyze and use that data and help them in making informed decisions, so they do all these things, okay, so this is their service, as I said, their customers are OTAs, cab aggregators, car aggregators, car rental companies, okay, so this type of majorly, and they also use hotels, but majorly this is used more, so this is one thing.
Their second business is distribution business, so distribution business is basically simple, that they connect hotels with online travel agents. MakeMyTrip needs hotels and hotels need MakeMyTrip So how much inventory is there, when to book a hotel, how many people are coming, how many things are there, all that data is required So that connection provides the rate gain with their products So that's why you have to connect quickly, cost effectively, now there are a lot of OTAs Now MakeMyTrip is different, ClearTrip is different, I am telling you in India, there is no global I am explaining with examples from India, but this is not an Indian example, it's a global company So, what are the factors while booking? What are the factors? Rating is important. Price is important.
Room photos are important. So, what are those factors? It is the connection between these two factors. And quick connection, right? That new OTA has come, it is going well.
This hotel sells more on that. It doesn't sell on this. So, they provide all the connections and distribution. And they also check different languages.
So, AI-powered. They also have AI-powered solutions in this. They have some products.
They have acquired a company called DHISCO. So, they have a company called Content.ai. They also create content in it. So, all those things, they basically work. This segment is targeted to hotels.
They connect hotels with OTAs. That is Online Travel Agents, right? So, this is done. So, this is their second segment. The third segment is MarkTech.
The new segment in which we saw such a great growth. Right? So, in that segment, what do they do? Basically, they help in marketing. Majorly, again, hotels. Okay? So, how to do different marketing? At what price? Okay? So, a lot of things. How will you get the ROI of marketing? Right? The travelers who are searching on Google.
How to book your website or your hotel? Right? How to check guest satisfaction? How to increase engagement with guests? So, all those things. In that, they also have started playing a role recently. So, they launched a few products in that. And they also acquired a company. The company is called Adara.
That is also in this segment. Okay? They have also launched AI products in that. So, this is majorly again a hotel segment.
So, hotels come to them. And they want to market their product. I mean, themselves. So, they buy their products. And according to that, they put money.
And then they market it. Okay? So, in this way, they have three products available. Okay? Now, what is in this? Obviously, their pricing is very different in this.
Right? If we look at data as a service, then there is a subscription model. And there is also a hybrid model. Subscription. And if you are taking transactions from it.
All the data you are taking from different sources. So, they charge on the basis of that too. Okay? In distribution, again majorly a subscription model. There is also a transaction model in that. Who are you connecting with? How much data are you taking out? Okay? So, whatever things you need with them. So, there is also a transaction model there.
And MarkTech is majorly a subscription model. Because they have products. So, you subscribe to it.
And then you can market your product. I mean, in your hotel or whatever things are there. Then you can do that.
Okay? So, acquisitions too. The Adara acquisition is also in the data. And they are in MarkTech as well.
They did Disco in 2018. That was done in the distribution segment. And then they have also done to My Hotel Shop and BCB Social. Which was done in MarkTech in the last 2-3 years. So, obviously, they have focused a lot on MarkTech. And because of this, their segmentation, their revenue is very big.
Okay? And they have launched AI-based products also. Because there is data. So, AI tools are installed on the data.
And then it helps their customers to work basically. Okay? So, these are the basically 3 segments. Now you understand what problem they are solving. Okay? So, a good problem is being solved. Now obviously, how good it is, how bad it is. How do we know that? We get to know through their customers.
Right? If there are so many customers. 30 out of 23 are hotel chains. 30 out of 25.
So, all these are working with them. So, we get to know from this that their products, their solutions are very relevant. For hotels and all these folks.
Right? Because if so many big top world global players are using their solutions. So, it means that they are decently, obviously, they are decently present. And they have good products available. So, we can assume this.
We will get to know by looking at the product and using it. And the other competitors. I am not an expert in that. Okay? But if you have used it, if you are in it, then tell me too.
But I think that when I look at the customers. So, I think they are pretty decent. And if we look at the customer's overall renewal rate. Right? That is also 90% plus. Okay? So, we saw all those things. So, it works.
Yes, they have a very good overall auto-renewal clause. We found all those things to be positive. Okay? They have also told us transparently that there are 100,000 hotels in the world to which we can send these solutions Right now we are only in 400 hotels They do marketing in their 3rd segment and they have a very big addressable market Their overall key market is of 300,000 hotels if we add everything and 80% of their revenue comes from hotels 20% revenue comes from OTAs and car rental companies So this is how they work and they have a major presence in the US and Europe So that's how they are If we see their revenue mix, they have 90% revenue retention It was 95% before covid, now it is around 90% Revenue by engagement, 32% from subscription 25% from transaction and 42% from hybrid subscription Their model works more on leisure business Revenue by geography, 56% from North America 30% from Europe and 11% from Asia Pacific Their top 10 customer contribute is around 32% It was 42% before covid, now it is around 34% 32% comes from top 10 clients diversification and dependence on top customers is reducing as well. So that is also a good thing. So overall, we can see a lot of positive numbers, parameters and indicators here.
I have already talked about acquisitions. Lastly, I will talk about the positive and negative. Overall, it is a high-growth sector. If you look at this chart, which we got from SDFC Securities, the OTA revenue, i.e. after the COVID crisis, the travel sector is growing well and is expected to grow well in the future. Online travel, airline business, hospitality business, vacation rental business, car rental business, if we look at the CAGRs of the next 2-3 years, they are very strong CAGRs and global CAGRs.
17-18%, SAM, which is a serviceable available market of rate gain products, is also an expectation of growth of 17-18%, which rate gain has given. Very strong growth is expected, at least in the next 3-4 years in their segment. So, this is segment growth. Obviously, if they gain market share and all that, then they can have a different player in that. So, it's a very high growth sector, which is expected and the way they have given the numbers here, right? If we look at governance, there is a strong promoter holding, around 56% promoter holding So even though it can be considered as a start-up, there is a strong promoter holding There is a strong DII's and FII's holding, around 15% DII's holding with a small company of 5 lakh crores, not a big company FII's also has 4% investment Even in public, there is a 25% holding, even in this, corporates have a 10% holding Overseas corporates have a 7% holding, so in this company, only 10% of retail investors are involved So we can see that there is a strong institutions holding, there is a strong promoter skin in the game There is no pledging, so all these things are fine IPO is not that old, it came in January 2021, so it hasn't been that long Bhanu Chopra ji, who is the CEO and founder, if we look at history, he was very interesting He started this company in 2004, he was in Deloitte before that in US He saw that there is a scope of software business in India He came back to leverage technical talent, he started this in 2004 in his South Delhi home They started with B2C thought process, then they realized B2B is bigger Expedia became their biggest client In 2011, a company talked about acquiring them, but they refused Then COVID came and many problems were created From 2004 to 2015, it was a bootstrap business After that they took a private equity investment in 2015 They have a focus on bottom line They focus on profit growth as well They have a good focus on profits as well If we see their journey, it is a very interesting company I liked one more thing in governance, their overall issue size was 1300 crores Fresh issue was 375 crores and offer for sale was 950 crores One of their investors took 727 crores from offer for sale The promoters also sold their sale stake.
172 crore Bhanu ji and 5.5 crore Megha ji also sold their sale stake. What did Bhanu ji do with 172 crore? He bought a house.
6-7 months ago he bought a home of 27 crore rupees. for personal reasons, he sold it and said it's okay, you have made a company, you want to live in a good house, so I think that's fine. I mean, it felt like that, that's what it felt like, that he bought a house with that money. So overall, as I said, it's still good, it's still 55% overall, so I don't have much tension, right? So that was a good thing. And the second thing I liked very much, if you look at his presentations, the money he raised in the IPO, 375 crore rupees, which was a new, fresh issue, basically, he gives a clear account of it. So if you have seen the latest presentation, that we used 85 crores here, 25 crores here, 80 crores here, used so much in acquisition, so I think it's a very good thing.
I mean, transparency, I also attended some earning calls, so it's very transparent, the way he gives data, he discloses more than the requirement by law, he talks transparently. So all those things seemed a little positive to me from a management and governance perspective. And there were some negative, we didn't see any news from a governance perspective. And obviously, growth has been very good in the past one year specifically, 54% sales growth has been given by the company.
Obviously, the travel sector is also doing very well. Operating margins have also significantly improved. And Patam has also, I mean, they had booked a negative loss in COVID, then they took an operating margin of 3.2, 3.7, 14.7 in FY23. And they are improving, they are saying that we can go up to 20% operating margin. So that is what it is all about.
And Patam is also not much different from the operating margin because there is no increase in the middle. Another thing they said is that they don't capitalize on the new products they make, they show it in expense That's why their margin is around 30% And obviously they will have to keep making new products because they have to keep innovating in the tech sector So that's why they said that their gross margin is around 30% But because their expenses on new product development is very high So that's why their margins are lower If we subtract that then margin is around 30% So margin wise also looks like a strong company Organically growth is also good and inorganic growth is also focused And we have seen their acquisitions consistently So this is a debt free company, generating a cash flow of 52 crores in FY23 So those are all good things which we can see from a small cap company perspective Debt free in small cap is a good thing The only worry for me is that the PE valuation is around 60+, with good numbers in the last financial year. So, the stock has run away recently. So, obviously, when we look at the numbers and the different cases, I think there is still a good growth in the base case in the next 4-5 years. The market growth is expected in the next 4-5 years.
So, there is still a 15% growth in the stock at this level in the next 5 years, according to our numbers. Again, there are too many assumptions which go into it. But it is visible in the base case. In the bear case, it is obviously less, but in the base case, we can see that number. So, that is what it is.
So, positives in the last. It is in a very high growth sector. It is a tech-based business, which India is very strong. We have skills available, we are tech-based, there is no issue in that. There is a product in tech.
It's a product-based business, not a service-based business. So, obviously, there are more margins in that. Operating leverage is created. Because when your products start running, you can reach more people in the same number of resources, like Google and Amazon. So, it's a product-based business in tech, which is very interesting. And there are very few companies in India.
The customer profile looks very strong, as they say, 30 out of 25 and all these things. So, it's very strong. So, it means they make good products.
That's how you know. Promoter holding skin in the game. Even though there is a skin-in-the-game promoter in startups. We have talked about good transparency and governance. And the switching cost is high, mostly in this type of product-based business. I am a customer.
So, if I have been integrated with their data, I am used to looking at their data. So, if they keep improving and keep doing new things, it's very tough for me to switch to another person. Because change in technology is not easy. That's why the retention rate of the client is more than 90%.
So, the switching cost is high. So, even in that, in such a business, the switching cost is high. So, I consistently feel that if you keep doing a decent innovation, you will keep getting revenue. Negatives, right? Obviously, they are global player. India is not a global player, so they have big competition They have big competitors, they have players, they have billions of dollars of companies So obviously, it's not easy for them to always innovate and keep on competing and always So they can do it consistently, I am sure they can do it, but there is competition, there is strong competition The travel sector is a recession prone sector. If there is a recession, the travel sector will be in a bad state So the travel sector works only, I mean, it's a little cyclical, it's a little festival-based And as they said, their revenue is mainly from leisure-based business travel, not business travel So that business is a very cyclical, small cyclical business and it's a recession-based business So we have to understand that if there is a recession, then the travel sector is down, if the bull market comes, then it's good So we have a little bit of those things in the sector Okay, a lot of their products that they sell to big hotel chains, so it feels like they have told themselves That it may also happen that they make this type of product themselves, it's not a big deal for them Because they are such big companies, like Hilton type of company, right, or Marriott type of company So they are such big companies, so they may think that we can do it ourselves, why should they pay us It is unlikely, because that's not their work, so I don't think it will happen, but they told us that risk Innovation is very key, right, that in this type of business you have to stay ahead of the competition You have to always innovate, always improve your products, enter new products, enter new places, gain market share there Right, you have to sell this product to this customer, so all those things are very important if you want to grow well So that will always be the key in this, those risks will always be there in the tech business Right, so we have to understand that thing here, so that is all I just wanted to tell you in this Overall, it's a very interesting company in our small and mid-cap portfolio Very closely we are watching it, it's not part of it's portfolio yet, but it's definitely in our shortlist Right, so I told you about the risks, so all those things are there It's recently listed, it's been 1.5 years now, so recent
data has come, they have done 2-3 con calls, so we understood all those things So the company is looking very interesting, right, so if you are looking at an asset line business in the small cap space, in the travel sector So I think we should definitely consider it as a long-term investment, there are a lot of positives in it So definitely we should see it as a lower risk travel sector business in comparison to a hotel business, which is a very high capital based business Right, so according to that, if we are interested in the travel sector, then we should definitely keep this company in the shortlist If you have any questions, please do write in the comment section below, do like the video if you liked it And do share it with your friends and family, have a great time Have a great time ahead Jai Hind!
2023-07-29 03:29
