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'No-frills' - Going for the Kill

We initiate coverage on Easy Trip Planners (EasyTrip; EaseMyTrip.com; EMT) with a BUY and TP of Rs.450. Given our analysis of the competition and extensive discussions with travel experts, we believe that EasyTrip’s focused, capital-light, low-cost, no-frills approach sets it apart from the rest in the online travel agency (OTA) business in terms of profitability and cash flow, remarkably similar to the success of no-frills airlines in India. Further, EMT's large bank of traditional travel agents (TTAs); (while not a major contributor to current revenue) subsume part of the vital, less organized arm of travel trade and should stand in good stead when EasyTrip expands to hotels and tours in a big way later. Lastly, we draw an interesting comparison with luggage companies, which forms basis for valuation.

Demand drivers – The obvious, the valuable, and the not-so-obvious: As unit commissions from airlines don’t vary much, EMT's momentum is predicated on (i) increasing number of airlines and airports in India, (ii) market share gains from other OTAs and TTAs, (iii) revenues from nascent international operations, and (iv) expansion of hotels and tour bookings. The company's battery of 58,000 TTAs is a powerful means of bringing part of the large offline market into its online wing and will boost its prospects in the hotel business where bookings are still predominantly offline. Less visibly but tangibly, EasyTrip can and does use its vast data repository for cross-selling and to provide guidance to suppliers – airlines & hotels – for the latter’s better product planning

‘No-frills’ model – Source of competitive advantage: EasyTrip’s zero convenience charge policy is a gamechanger, putting its unprofitable competitors in a state of quandary. The near-monoline focus (air bookings) and a no-frills strategy have kept the company grounded in a very competitive landscape. EMT's underlying airline business is quite concentrated, manageable, and thus, more profitable. Further, we have analysed how the stupendous success of the no-frills airlines demonstrates that tightly controlled and basic business models could deliver in the Indian context

Remarkable and sustainable cost/capital efficiency and cash flow: EasyTrip’s controlled sales and marketing initiatives as against an intemperate splurge, a tech-based operation (which has made several other verticals cost-efficient), calibrated entry into the ‘add-ons’ like hotels make it immensely profitable and cash flow generating vs. rest of the industry. Given that EaseMyTrip has been able to maintain such tight controls despite competition, not just from other OTAs but meta searches and super apps coupled with the intermittent travails of the travel business, is indeed commendable.

Valuation & Risks: We believe that the OTA business strikingly resembles the luggage industry – travel-driven, oligopolistic in the organised sector, a largely unorganised sector, and brand value-led ‘high’ valuations. We believe that EaseMyTrip deserves to continue to trade at elevated valuations even after some natural normalization of profitability and cash flows over time and peg its TP at Rs450 based on FY24E P/E of 47x. The volatility of the underlying travel business remains the key risk.

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