RateGain Travel Technologies Limited (RateGain) is a Noida-based distribution technology and Software as a Service (SaaS) company in the hospitality and travel industry. The IPO consists of primary offer of ₹375 crore and offer for sale of ₹960.74 crore totalling to ₹1,335.74 crore. The secondary sale is by an investor in the company – Wagner, and to a smaller extent by the promoters. The promoter stake which is currently at around 65 per cent, will stand reduced to around 55 per cent post issue. Out of the IPO proceeds, company plans to utilise ₹85 crore for repayment of debt at a subsidiary, ₹80 crore for strategic investments and acquisitions/inorganic growth, and ₹50 crore for investment in technology innovation and organic growth initiatives.
The company is the first of its kind to hit the bourses. The interest around emergence of SaaS companies in India may be a tailwind for RateGain. However, the issue appears expensive. At the price band of ₹405- 425, the valuation works out to 18 times FY21 revenue (covid impacted year) and 11.4 times FY20 revenue (normal year). Three major macro uncertainties – inflation in developed markets putting pressure on central banks to hasten withdrawal of monetary stimulus, expected economic slowdown in China, and impact of new Covid variant will influence equity market valuations and growth outlook for CY22. Another factor to note is that while company’s growth in pre-Covid year FY20 was good, it has had an acquisition-led business model. One also needs to assess organic growth prospects to determine right valuation multiple for the stock. Hence, long-term investors need not invest in RateGain Travel Technologies IPO. They can monitor company’s quarterly performance and consider entering at valuation levels which tilt the risk reward in one’s favour.
RateGain Travel IPO business & 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 like hotels, airlines, online travel agencies or OTAs, meta search companies, vacation rentals, car rentals etc. 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 maximization. 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.
In terms of geographic exposure, in FY21, RateGain derived around 65 per cent of revenue from North America, 15 per cent from Europe, another 15 per cent from Asia-Pacific and balance 5 per cent from rest of the world.
Acquisitions have been integral to 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. As mentioned above, inorganic growth will remain integral to its growth strategy.
As far as business prospects are concerned, the scope appears good. Across the board, the software sector is seeing increasing shifts to the SaaS model. Within the travel and hospitality sectors, according to research firm Phocuswright, the spend on third party technology (excluding hardware) is expected to growth at a CAGR of around 18 per cent in the four years into FY25. If it executes well RateGain can grow above industry growth rates, given the shift to SaaS and its customer relationships.
RateGain Travel financials
Being exposed to the industry that bore the brunt of the global covid lockdowns and subsequent change in consumer preferences, RateGain had a tough FY21 with revenue declining 37 per cent to ₹250.7 crore versus ₹398.7 crore in FY20. It however managed to improve margins in FY21 despite revenue decline and reported adjusted EBITDA margins of 9.44 per cent versus 7.97 per cent in FY20 (adjusted EBITDA of ₹23.6 crore in FY21 and ₹31.7 crore in FY20).
While it reported net loss of ₹20 crore in FY20 and ₹28.5 crore in FY21, this is not unusual for SaaS companies in growth stage where the profits are more backend loaded. The business has been positive at the operating cash flow level from FY19 to FY21 and for the five month period ending Aug 21, 2021. For the same period, it reported operating revenue of ₹125.3 crore (implying annualized revenue of ₹300 crore) and adjusted EBITDA margin of 9.89 per cent.
RateGain Travel IPO valuation
While there are no clear comparable companies within the same vertical at the domestic or international level, at an absolute level the asking price of RateGain Travel Technologies IPO 18 times FY21 revenue or 11.4 times FY20 revenue appears high given its lumpy performance (although impacted by Covid) and acquisition-driven growth. For example, if not for acquired business impact, FY20 (pre-Covid) revenue growth would have been around 22 per cent versus the actual 49 per cent. On an absolute basis, the 11.4 times revenue multiple is expensive for organic revenue growth of around 20 per cent when adjusted EBITDA margin is in single digits.
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 IPO multiple. While 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 post listing. Thus organic growth rate needs to be clearly assessed to determine the sales multiple it deserves. Quarterly performance post listing may provide more clarity on that.
Indian SaaS company Freshworks (in completely different space compared to RateGain) priced its recent IPO in the US at price to revenue (trailing 12 months) of 30 times, making RateGain appear cheaper. However, digging deeper one will be able to note that this is not the case. Unlike RateGain, FreshWorks saw revenue growth of around 44 per cent in CY20 (9 month overlapping with RateGain’s FY21 which saw revenue decline of 37 per cent). Being restricted to travel and hospitality vertical, RateGain’s business opportunity and growth prospects are not comparable with the substantially higher opportunity for CRM and allied services that Freshworks provides.