Track record of poor corporate governance makes this offer an ‘Easy’ avoid
Investors must avoid the IPO of Easy Trip Planners (Easy Trip). The company is coming out with an IPO where the promoters are offering 25 per cent of their stake (offer for sale) to raise ₹510 crore at the price band of ₹186-187. At the IPO price, the market cap of the company would be around ₹2,000 crores.
While the company may be in the high growth online travel industry, its IPO filings reveal questionable governance. This apart, the competition in the space is high with larger players such as MakeMy Trip still unprofitable.
With recent news reports that Walmart owned Flipkart is also looking to enter the space, competition is only likely to intensify. Valuations too are stiff. At the IPO price range of ₹186-187, the company is valued at a rich 14 times its FY20 operating revenue. Much larger industry players trade at lower levels. For example, MakeMy Trip trades at around 6.5 times its FY20 revenue. Global leaders Expedia and Bookings trade at 4.3 times and 13 times CY20 revenue. It needs to be noted that CY20 was more severely impacted by Covid than FY20. Hence, the valuation of global leaders would be even cheaper if FY20 is taken.
At present, the company is largely a family-owned entity with entire 100 per cent of equity shares held by three brothers who are also promoters of the company – Nishant Pitti, Rikant Pitti and Prasanth Pitti. There are a few red flags which raise questions on the governance practices of the company:
One, high promoter salary. During FY20, two of the promoters drew an annual salary of ₹7 crore (excluding other benefits like provisions for gratuity and leave benefits, sitting fess). This apart, the reimbursement expenses of promters are also high at nearly ₹6 crore for the year. The promoters’salary alone represents 6 per cent of revenue from operations. For the nine-month period ended December 2020, the promoters salary of ₹6.1 crore represents a whopping 12.5 per cent of revenue from operations. .
In comparison, for FY20, CEO of TCS took a total compensation (including performance-based incentive) of ₹13 crores that represented just 0.008 per cent of its revenue. The Chairman and CEO of MakeMy Trip reduced their compensation to zero from April 20 post the covid impact. One must wait and watch if promoters continue to take home such high salaries once the company is public. The more prudent way to go about for public companies would be to keep salaries reasonable and pay dividends that will benefit both promoters and minority shareholders.
Two, diversification into unrelated business in the past and high related-party transactions. The company has a history of diversifying into businesses totally unconnected to itscore business of online travel agency. Some of the businesses the company was engaged in earlier were coal, movies and share-trading business. The company has made huge advances to entities/ persons including related parties and has even had to make write-offs for such advances. While according to management these businesses have been discontinued, this does not lend confidence on the quality of the management.
Three, there are audit qualifications noting serious delays in payments of GST dues for FY18-20. While maybe delays for FY18 can be overlooked, given initial teething issues after GST was introduced in 2017, that this has repeated even in subsequent years is an indication of poor internal controls and systems.
The auditors have also given a qualification regarding uncertainty and business impact related to Covid-19 disruption. As per reported financials, the company was profitable in nine months up to December 2020 and the company has surplus cash and bank balances which should ideally help it tide over Covid-related uncertainties. Why this qualification was necessary needs to be seen.
Four, high contingent liabilities. The contingent liabilities of the company are very high compared to its size. Its contingent liabilities involving matters related to litigation and claims, tax demands, guarantees etc. were at Rs 126 crore as of Dec 20 and amounting to nearly 90 per cent of its FY 20 revenue from operations.
Business and financials
The company is engaged in the business of online travel agency (OTA) – facilitating online booking of travel related services like air/rail tickets, hotel bookings. The industry is well placed for high growth over the next few years given increasing digitization trends. According to a Crisil report, the company was ranked third amongst key OTAs in India in FY20 in terms of gross booking revenues. However, in terms of operating revenues it was ranked fourth.
The company’s operating revenue grew at 40 per cent y-o-y in FY20. In comparison leading Indian OTA MakeMy Trip grew revenues at 11 per cent for the same period. While the growth of Easy Trip is higher, it needs to be noted that it comes from a low base of ₹100 crores. In contrast, MakeMy Trip has a revenue base that is 27 times higher than that of Easy Trip.
While according to the same Crisil report, Easy Trip was the only profitable player among key OTAs in India, the company’s financials indicate high levels of other income. For example, for the nine months ended December 2020, while the company reported a net profit of ₹31 crore, other income was at ₹32 crore (out of which claims written back is around ₹23 crore). Hence, wether the core business will be profitable in future needs to be seen.