Rategain Travel Technologies Ltd – Saas Play In Travel And Hospitality

Company Name – RateGain Travel Technologies Limited (RateGain)

Current Share Price – INR 389 (January 4, 2022)

Market Cap – INR 4,153 cr

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1. What is interesting about the stock?

Last time you booked a plane ticket or a hotel night, there is a very good chance that you interacted with this Company without even realizing it. That is because this Company operates in the background offering its services to various airlines, hotel chains, cruise lines, car rental companies, online travel agents, tour operators, and others. The total addressable market for the Company is expected to grow to USD ~8 billion in the next 4 years at a CAGR of 18%.

The Company’s first product was an intelligent price comparison product for hotels way back in 2004 and expanding on those relationships, it developed revenue optimization. distribution and marketing solutions for the hotel industry. Then, it extended these products to other travel industry participants like airlines, car rentals, and cruise and ferry lines.

It has a strong software and analytics team, but more importantly, has access to a lot of data relevant to the industry participants. It packages this data and insights into various products and services like Data as a Service (DaaS), a Distribution platform service, or Marketing Technology solutions. These can be accessed on a subscription basis or transactional basis, giving a high degree of flexibility to the users.

It has grown both organically and inorganically in the last few years acquiring DHISCO (0.6x EV/Sales) in 2019, BCV Social (1.8x EV/Sales) in 2020, and Myhotelshop (1.0x EV/Sales) in 2021. Company has entered into a definitive agreement to acquire Adara Inc (0.6x EV/Sales) through an asset purchase agreement in January 2023. These acquisitions have helped the Company enter adjacent markets and target a higher wallet share from its existing client base.

Why invest in RateGain?

The key investment arguments summarized would be:

• ~2,800 global customers across 100+ countries of all sizes across the travel and hospitality industry

• Stickiness of customers shows the strength of technology (7/10 top customers have been with the Company for more than 10 years)

• Deep vertical focus, access to data, and skillsets across data science, machine learning (ML), and artificial intelligence (AI) allow it to generate deep insights valued by the customers

• Experienced management team

2. Key Historical Financials

• Company had a fall in revenue in FY21 due to COVID-19-related travel and hotel booking reductions. And this led to lower EBITDA margin due to operating leverage

• Revenue recovered in FY22 with 46% growth on a YoY basis - but still lower than FY20 revenue

• EBITDA margin has improved to 9% in FY22 and ~12% in H1FY23

• Cash flow conversion (CFO/EBITDA) was poor in FY22 with a jump in receivables

• Return ratios (ROCE/ROE) are expected to improve in FY23 based on H1FY23 results

3. What is my view on company valuation?

The Company did its IPO in December ’21 and while it saw a subscription of 17.4x, it listed at a 15% discount reflecting the weakness in the market at the time. At its lowest in its brief trading history, it saw a dip of ~40 to the IPO price%. For a loss-making company, the ~ INR 4,000 crore market cap (8x annualized H1FY23 revenues) can only be called a reflection of its potential fed by “narrative investing” that seems to be driving tech company valuations currently. We also need to see the valuation in light of the average acquisition price (1.0x EV/Sales) paid by the Company. Even at EV/Sales of 2x (100% premium to their acquisition price), the valuation comes to ~ INR 1,000 cr (25% of the current market cap).

This is a Company that should be on the radar for any long-term investor as the Company has the elements of becoming an attractive acquisition target for a large global data analytics/SaaS player interested in expanding into the fast-growing travel domain, but the investor would be better off waiting for the valuation to cool-off significantly from here.

4. What are the risks to the investment analysis?

Risks to the analysis are:

• Single vertical dependence intertwines the Company’s fortunes with the industry’s fortunes significantly, as seen when Covid-19 lockdowns crippled the travel and hospitality industry significantly affecting RateGain also

• Technology is constantly evolving, and should any competitor offer better solutions the possibility of customers moving to the competitor is high

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About the Author

I have over 17 years of experience in private equity and public markets. I am an engineer by background an MBA from a premier institute in India.

Disclosure

I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.