Rategain Travel IPO review (May apply)

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Review By Dilip Davda on December 1, 2021

•    RTTL is a leading global player in hospitality and travel under SaaS.
•    It posted losses on a net basis but kept generating cash at the gross levels.
•    The issue appears aggressively priced on current financial parameters.
•    It has bright prospects once the dust settles down over a pandemic scare.
•    Post listing, may generate first-mover fancy and gain momentum.

PREFACE:
Of late we are observing a mad rush for technology-based start-ups/unicorns/aggregators fetching fancy valuations and the trend was set by a few loss-making companies like Burger King, Zomato, Barbeque Nation, Devyani Intl., CarTrade, Sapphire Foods, P B Fintech, One 97 Fino Payments etc. The mindboggling valuations given to such ventures perhaps received an alert from the recent fiasco of One97 IPO. As SEBI recently denied its intervention on the pricing formula of IPOs, it's now totally on the shoulders of merchant bankers and the promoters to avoid greedy pricing. We have yet another IPO from a pack of such unicorns/start-ups. 

ABOUT COMPANY:
Rategain Travel Technologies Ltd. (RTTL) is among the leading distribution technology companies globally and is the largest Software as a Service ("SaaS") company in the hospitality and travel industry in India. The company offers travel and hospitality solutions across a wide spectrum of verticals including hotels, airlines, online travel agents ("OTAs"), meta-search companies, vacation rentals, package providers, car rentals, rail, travel management companies, cruises and ferries. RTTL is one of the largest aggregators of data points in the world for the hospitality and travel industry. (Source: Phocuswright Report)

It offers a suite of interconnected products that manage the revenue creation value chain for customers by leveraging big-data capabilities and integration with other technology platforms helping hospitality and travel providers acquire more guests, retain them via personalized guest experiences and seek to maximize their margins. The company serves a large and rapidly growing total addressable market. This is a large and rapidly growing addressable market opportunity for a vertical-specific platform company like RTTL. The travel technology segment is further favoured by industry tailwinds of digitization in the post COVID times. 

RTTL's mission is to be the leading revenue maximization platform for the hospitality and travel industry. It offers an integrated technology platform powered by artificial intelligence enabling customers to increase their revenue through customer acquisition, retention and wallet share expansion. COVID-19 has, however, accelerated the digitization of customer interactions with hospitality and travel companies. These changes are likely to lead to a shift by hospitality and travel companies from in-house solutions to third party software and services. 

As of September 30, 2021, RTTL served 1,462 customers including eight Global Fortune 500 companies. Its customers include Six Continents Hotels, Inc., an InterContinental Hotels Group Company, Kessler Collection, a luxury hotel chain, Lemon Tree Hotels Limited and Oyo Hotels and Homes Private Limited. It also counts 1,220 large and mid-size hotel chains, 110 travel partners including airlines, car rental companies and large cruise companies and over 132 distribution partners including OTAs such as GroupOn and distribution companies such as Sabre GLBL Inc., in over 110 countries as its customers, as of September 30, 2021. 

RTTL services its customers in multiple geographies with local go-to-market teams and as of September 30, 2021, have offices in six countries. As of September 30, 2021, over 415 customers have been associated with it for over five years and it has grown its customer base over the years through well-developed sales, customer success and marketing function that focuses on generating and converting quality sales leads and measuring customer satisfaction. It covered over 194,000 hotel properties with over 70 demand partners, as of September 30, 2021.

ISSUE DETAILS/CAPITAL HISTORY: 
To part finance its plans for repayment/prepayment of its UK subsidiary indebtedness (Rs. 85.26 cr.), payment for deferred consideration for DHISCO acquisition (Rs. 25.20 cr.), strategic investment for inorganic growth (Rs. 80.00 cr.), investment in technology innovation - artificial intelligence etc. (Rs. 50.00 cr.), purchases of capital equipment for Data Center (Rs. 40.77 cr.) and general corporate purposes, RTTL is coming out with a maiden IPO to raise Rs. 1335.74 cr. (31429065 shares at the upper cap). The company will be issuing equity shares of Re. 1 each worth Rs. 375 cr. (approx. 8823535 shares) as a fresh issue and an offer for sale (OFS) of 22605530 shares (worth Rs. 960.74 cr. at the upper cap). RTTL has fixed a price band of Rs. 405 - Rs. 425 per share of Re. 1 each. The issue opens for subscription on December 07, 2021, and will close on December 09, 2021. Minimum application is to be made for 35 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 29.44% of the post issue fully diluted equity capital of the company. 

The company has reserved shares worth Rs. 5 cr. for its eligible employees and offering them a discount of Rs. 40 per share. From the residual portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for the Retail investors. 

Joint Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., IIFL Securities Ltd. and Nomura Financial Advisory and Securities (India) Pvt. Ltd. while KFin Technologies Pvt. Ltd. is the registrar to the issue.  

Having issued initial equity at par, the company raised/converted further equity in the price range of Rs. 6.94 to Rs. 1372.84 (based on Re. 1 FV) between December 2014, and November 2021. It has also issued bonus shares in the ratio of 11 for 1 in August 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.00127, Rs. 0.00157, Rs. 0.00321 and Rs. 75.28 per share. 

Post-IPO, RTTL's current paid-up equity capital of Rs. 9.79 cr. will stand enhanced to Rs. 10.68 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 4536.70 cr. These valuations are pretty high for a loss-making company. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, RTTL has posted a total revenue/net profits (loss) of Rs. 272.70 cr. / Rs. 11.03 cr. (FY19), Rs. 457.61 cr. / Rs. - (20.10) cr. (FY20), Rs. 264.09 cr. / Rs. - (28.58) cr. (FY21). For the first five months of FY22 ended on August 31, 2021, it has posted a loss of Rs. - (8.34) cr. on a revenue of Rs. 131.22 cr. Thus the company has been incurring losses since FY20. However, it has posted gross margins of above 76% for all these periods. 

For the last three fiscals, RTTL has posted an average negative EPS of Rs. - (2.10) and an average negative RoNW of - (9.42%). The issue is priced at a P/BV of 16.78 based on its NAV of Rs. 25.33 as of August 31, 2021, and at a P/BV of 7.33 based on its post-issue NAV of Rs. 58 (at the upper cap). Thus the issue is priced aggressively.

Due to negative earnings for the last 29 months, its P/E ratio could not be ascertained. Clarifying on the losses incurred for the last 29 months, management clarified that at the gross level, the company has positive margins, but due to amortization of the cost of acquisitions and depreciation provisioning resulted in a loss at the net levels.

COMPARISON WITH LISTED PEERS:
As per the offer documents, RTTL has no listed peers to compare with. 

DIVIDEND POLICY:
The company has not paid any dividend for the RHP reported periods. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with this offer have handled 46 public issues in the last three years, out of which 16 issues closed below the offer price on the listing dates. 

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