RateGain Travel Technologies: What should you do post discounted listing?

RateGain Travel Technologies (RateGain) had a poor debut in the bourses on Friday, listing at Rs 364.80 in the BSE versus issue price of Rs 425 – a discount of around 14 per cent. At the time of writing this, the stock was trading at around the same levels with not much recovery.

In our IPO note published in our Portfolio edition dated December 5, we had recommended investors to avoid the IPO as the pricing was expensive amidst lack of clarity on organic growth prospects for the company. While the company’s growth in pre-Covid year FY20 was good, it has had an acquisition-led business model. Clarity on organic growth prospects was missing and further complicated with recent emergence of Omicron Covid variant and its impact on travel and hospitality – the business vertical to which RateGain is exposed to.

Further, at the IPO pricing of Rs 425, which valued the company at around 18 times FY21 revenue (Covid impacted year) and 11.4 times FY20 revenue (normal year), there was no margin of safety in the stock for two other major macro uncertainties into CY22 that would impact equity valuations and growth outlook- inflation in developed markets putting pressure on central banks to hasten withdrawal of monetary stimulus and likely economic slowdown in China. Also, another factor to consider is that RateGain’s own acquisitions (done in 2019, 2020 and more recently) appear to have been done at around 1-2 times sales. The same businesses are now getting the high IPO/listing price multiple.

While an increase over the acquisition multiples are justified to some extent as the acquired business combined with synergies and cross selling advantages of RateGain’s platforms enhance its value, whether it is worth a significantly higher multiple needs to be ascertained based on business traction from hereon.

Thus, despite the discounted listing which values the company now at around 15.5 times FY21 revenue, investors need not rush in now. They can wait to assess organic growth potential as the company reports results over the next few quarters that would help determine reasonable valuation levels at which one can enter the stock.

Business and Prospects

Within the SaaS space, RateGain Travel Technologies is focussed on the hospitality and travel industry and its solutions are used by customers across sub-sectors such as hotels, airlines, online travel agencies or OTAs, meta search companies, vacation rentals and car rentals.

The company’s solutions are offered via three main business segments. The first segment is Data as a Service (37 per cent of FY21 revenue). Here, its technology provides real-time data and market intelligence to suppliers of hospitality and travel services (like hotels, OTAs) that enables them to increase customer acquisition/conversion and revenue maximisation.

The second one is Distribution (49 per cent), which enables seamless connectivity between accommodation providers and their demand partners and ensures smooth operations and accurate reporting for its customers.

Third is Marketing Technology (14 per cent), which offers solutions to enhance brand experience to drive guest satisfaction, managing social media engagements and run promotional campaigns. As a SaaS company, its solutions are cloud-based and the revenue model is primarily subscription driven, with some transaction-based and hybrid (minimum subscription fee and pay-per-use) billing as well.

Acquisitions have been integral to the company’s growth strategy. In 2019 it acquired DHISCO, a hotel distribution company in the US. In 2020 it acquired US-based BCV Social, which was its entry into the Marketing Technology business segment mentioned above. Recently, it acquired Germany-based Myhotelshop, a company which offers reporting, bid management and campaign intelligence platform for customers.

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