Trading losses at exorbitant rate?
Hospitality and travel industry worldwide is highly sensitive to economic conditions, and COVID-19 has significantly affected the global economy which has considerably contracted the business for travel and hospitality industry across the globe. Hence, unless and until normalcy returns, the industry may continue to bleed. Given the not so encouraging current scenario, paying hefty premium for a loss-making stock at the peak of IPO boom is fraught with huge risk.
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RATEGAIN TRAVEL OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 1335 Cr |
| Fresh Issue | Rs 375 Cr |
| Offer for Sale | 2,26,05,530 equity shares (Rs 960 Cr) |
| Face Value | Re 1 |
| Price Band | Rs 405–425 |
| Mkt/Bid Lot | 35 Nos. |
| Implied M-Cap | Rs 4,536 Cr |
| Implied Equity Cap | Rs 10.67 Cr |
| Free Float | 43.42% |
| Lead Manager | Kotak Mahindra Cap, IIFL Sec and Nomura Financial |
| Registrar | KFin Technologies |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :7-Dec-2021 | Closing :9-Dec-2021 |
| Allotment :14-Dec-2021 | Refunding :15-Dec-2021 |
| Demat Credit :16-Dec-2021 | Trading :17-Dec-2021 |
The Offer
The New Delhi-registered RateGain Travel Technologies Ltd (RTTL) is entering the capital market with a public issue of Rs 1,335 Cr. The IPO is comprised of a fresh issue of Rs 375 Cr (88,23,529 equity shares) and an offer for sale of 2,26,05,530 equity shares (Rs 960.74 Cr) from four existing shareholders, including two promoters. The offer is being made through the book-building route with a price band of Rs 405-425 for Re1 paid-up share.
Applicants for the IPO should bid for a minimum lot of 35 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on Friday, December 17, 2021. Kotak Mahindra Capital, IIFL Securities and Nomura Financial Advisory are the lead-managers to the offer. KFin Technologies is the registrar to the issue. The bidding opens on Tuesday, December 7, 2021 and closes on Thursday, December 9, 2021.
The company proposes to utilize the proceeds of the fresh issue (Rs 375 Cr net of issue expenses) towards repayment/prepayment of indebtedness availed by RateGain UK, one the subsidiaries, from SiliconValley Bank (Rs 85.26 Cr); payment of deferred consideration for acquisition of DHISCO Electronic Distribution Inc and DHISCO Inc, engaged in the business of hotel distribution technology based in Dallas, United States (Rs 25.20 Cr); strategic investments, acquisitions and inorganic growth (Rs 80 Cr); investment in technology innovation, artificial intelligence and other organic growth initiatives of the company (Rs 50 Cr); purchase of certain capital equipment for RTTL’s data center (Rs 40.77 Cr) and general corporate purposes.
Lineage
The nine year-old RTTL has been promoted by Bhanu Chopra (45) and his spouse Megha Chopra (41). The promoters collectively hold 64,064,520 equity Shares aggregating to 65.42% of the pre-IPO equity capital. Before floating RateGain, the first generation promoters seem to have engaged in real estate business under multi banners. RTTL too was originally incorporated in 2012 as Ridaan Real Estate Private Ltd. This company, pursuant to a scheme of arrangement and demerger, acquired the business of providing web-based solution to hospitality and travel sector of RateGain IT Solutions Private Ltd in 2014 subsequent to which, the name of the company was changed to the present one.
What’s the track record of the closely-held companies floated by the promoters? The offer document does not reveal much about their operational performance. However, if one has to go by the disclosures made in the RHP of RTTL, the promoters’ corporate governance record is much to be desired. For instance, Bhanu Chopra was on the board of Usha Structurals India Private Ltd, Sarvesh Chopra Builders Private Ltd and Qutab Greenary Private Ltd, which did not file of their respective financial statements and annual returns for three consecutive years which had led to the disqualification from directorship for five years and deactivation of DIN of Bhanu Chopra. Subsequently, all these three companies filed for condonation of such non-compliance under the Condonation of Delay Scheme, 2018, pursuant to which their names were reinstated into the rolls of the RoC and the DIN of Bhanu Chopra was also activated.
RTTL’s co-promoter Megha Chopra was disqualified from the directorship for three years, while on the board of Rohaan Buildwell Private Ltd, which had failed to file its financial statements and annual returns for a continuous period of three years. She filed a writ petition in February 2019 with the High Court of Delhi to get this disqualification rectified. The High Court, in its interim order dated March 6, 2019, has stayed the decision of Registrar of Companies and reinstated the DIN of Megha Chopra. The matter is now pending with the High Court.
As regards external funding, in December 2014,Wagner Ltd (part of US-based private equity firm TA Associates) invested in the shares of RTTL to the tune of Rs 171 cr. Wagner directly invested Rs 76.34 Cr in the company through convertible preference shares and acquired equity shares from Bhanu Chopra for Rs 95.43 Cr. Thus, as on the date of the RHP, Wagner is the second largest shareholder of the company with 22,819,320 shares (22.69%). Incidentally, Wagner is also one of the largest shareholders (29.28%) in another New Delhi-based company, TCNS Clothing. This company went public offering Rs 2 paid-up shares at Rs 716 in July 2018. The stock price hit a low of Rs 300 in March 2020. Currently it is hovering around Rs 800.
During last seven years RTTL has adopted the inorganic route to achieve its growth. In 2014, pursuant to demerger of RateGain IT Solutions Private Ltd, the Hospitality and Travel Business of RateGain IT Solutions was vested into RTTL. In 2018 RateGain US, one of RTTL’s subsidiaries acquired the assets of DHISCO Electronic Distribution, Inc. and DHISCO, Inc., by entering into an Asset Purchase Agreement. In 2019 RateGain US entered into an Agreement and Plan of Merger and indirectly acquired BCV Social LLC and its MarTech business. In September 2021, RTTL’s UK subsidiary, RateGain UK, acquired Myhotelshop GmbH.
Even though RTTL was able to convince two private equity firms to invest over Rs 282 Cr in its shares, the company’s performance after 2019 has been depressive which is largely attributed to the pandemic.
Key Management
Promoter Bhanu Chopra is the chairman and managing director of RTTL. He holds a bachelor’s degree of science in business from Indiana University and began his career with Deloitte in 1998. In terms of the Employment Agreement, he is entitled to receive remuneration by way of salary (Rs 3.10 Cr per annum to be increased by inflationary standards annually) and bonuses as follows: On achieving 100% of annual budget or more -100% of base salary as bonus; On achieving 85-100% of annual budget- 70% of base salary as bonus; On achieving 70-85% of annual budget – 50% of base salary as bonus; On achieving 50-70% of annual budget- 30% of base salary as bonus; Below 50% of annual budget – No bonus will be payable. He received a gross remuneration of Rs 5.03 Cr in fiscal 2021 from the company. Whether he deserves such remuneration for a performance of Rs 250 Cr top line that resulted in a loss of Rs 28 Cr is certainly debatable.
Co-promoter Megha Chopra, who holds a post graduate diploma in family business management, is the executive director of the company. She is reportedly having more than eight years of experience in the company. Prior to her directorship in RTTL she was associated with HCL Infosystems Ltd. Strangely, unlike her spouse, Megha Chopra is not entitled to receive any remuneration or compensation (including sitting fees) from RTTL and accordingly no remuneration has been paid to her in fiscal 2021.
Stakeholders
Presently, Bhanu Chopra is holding 48,527,400 shares (49.55%) at an average cost of less than a paisa each. Post-IPO, Bhanu Chopra will hold 44,483,450 shares (41.67%) at a negative cost. Megha Chopra currently holds 15,537,120 shares (15.87%) at an average cost of less than a paisa each and post-OFS will have 14,242,360 shares at a negative cost.
Wagner currently holds 22,819,320 shares (23.30%) at an average cost of Rs 75.28 a share. Post offer for sale, Wagner will have 5,704,830 shares (5.34%) at an extremely negative cost. In other words, post IPO, more than 61% of the equity will be held by the existing shareholders at free of cost whereas IPO investors will hold at an exorbitant rate of Rs 425 a share.
Business Model
RTTL is claimed to be one of the leading distribution technology companies globally. It is said to be the largest `Software as a Service’ company in the hospitality and travel industry in India. The company reportedly offers travel and hospitality solutions across travel verticals including hotels, airlines, online travel agents, meta-search companies, vacation rentals, package providers, car rentals, rail, travel management companies, cruises and ferries. The company generated about 97% of its total revenue in fiscal 2021 from leisure travel and its substantial revenue was derived from the worldwide hospitality and travel industry.
Financial Track
The worldwide hospitality and travel industry is highly sensitive to general economic conditions and trends. One of the most significant factors that has affected, and is continuing to affect, travel and the global economy is the COVID-19 pandemic, which has resulted in a significant fall in demand for travel worldwide. The outbreak of the COVID-19 pandemic, its continuing impact and recent developments, as well as government measures to reduce the spread of COVID-19, have had a substantial impact on the business of RTTL’s customers and consequently it impacted the company’s business and operations since early 2020. RTTL’s operating revenue declined 37.1%, from Rs 398.71 Cr in fiscal 2020 to Rs 250.79 Cr in fiscal 2021. And, the company’s bottom line has turned red since March 2020.
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RateGain Travel Consolidated Financials (in Cr) |
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| Period Ended |
Aug-21 |
Mar-21 | Aug-20 | Mar-20 |
Mar-19 |
| Months |
5 |
12 | 5 | 12 |
12 |
| Revenue |
125.27 |
250.79 | 97.9 | 398.71 |
261.57 |
| Operating Profit |
4.54 |
6.16 | 9.18 | -25.04 |
21.76 |
| OPM% |
3.6 |
2.5 | 9.4 | -6.3 |
8.3 |
| Other Income |
5.95 |
13.3 | 8.05 | 58.9 |
11.13 |
| EBIDTA |
5.76 |
19.46 | 17.24 | 33.86 |
32.88 |
| EBIDTA % |
4.6 |
7.4 | 16.3 | 7.4 |
12.1 |
| Interest |
2.17 |
8.20 | 4.44 | 8.93 |
3.18 |
| Depreciation |
12.96 |
35.88 | 18.95 | 42.70 |
20.22 |
| Net Profit |
-8.34 |
-28.58 | -7.86 | -20.10 |
11.03 |
| Equity (Implied) |
10.67 |
0.66 | 0.66 | 0.66 |
0.66 |
| Reserves (Implied) |
627.55 |
244.12 | 188.99 | 136.98 |
142.49 |
| Borrowing |
109.28 |
98.07 | 113.24 | 100.75 |
3.12 |
Valuation
Promoters and private equity shareholder Wagner will be holding nearly 62% of the equity at negative cost. Avataar Venture Partners has acquired 7,626,960 shares last year only at Rs 144.89 a piece. The company has not earned profit at the net level for the past two and a half years to support the stock price. The pandemic disruptions are not yet over completely. Under such circumstances, the IPO price of Rs 425 for a Re 1 paid-up share is too heavy to hold post-listing.
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HOW RATEGAIN COMPARES WITH ACCELYA SOLUTIONS |
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Financials |
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| (Amount in Cr) |
RateGain Travel |
Accelya Solution |
| Market Cap |
4537 |
1663 |
| Borrowing |
98 |
0 |
| Revenue |
251 |
290 |
| Other Income |
13 |
11 |
| EBIDTA |
19 |
96 |
| Interest |
8 |
4 |
| Net Profit |
-29 |
42 |
| Equity Cap |
11 |
15 |
| Reserves |
628 |
224 |
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Stock Features |
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| Current Price (Rs) |
425 |
1114 |
| Face Value (Rs) |
1 |
10 |
| Book Value |
59.79 |
159.82 |
| Promoter Stake % |
56.58 |
74.66 |
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Profitability |
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| OPM % |
2.5 |
29.5 |
| Net Margin % |
-10.8 |
14 |
| Cash EPS |
0.68 |
51.04 |
| Earnings Per Share |
-2.68 |
28.27 |
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Return |
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| RONW % |
0 |
17.7 |
| ROCE % |
-4.8 |
26.1 |
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Discounting |
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| Price/Earnings |
– |
39.4 |
| Price/Book Value |
7.1 |
7.0 |
| Price/Revenue |
18.1 |
5.7 |
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Distribution |
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| Dividend % |
0 |
520 |
| Yield % |
0 |
4.7 |
| Pay-out % |
0 |
183.9 |
Concern
- One of the most significant factors that continue to affect travel and the global economy is the COVID-19 pandemic, which has already resulted in a significant fall in demand for travel worldwide. The global economy and the financial system currently experience a period of volatility and uncertainty affecting all the markets.
- Rategain IT Solutions, whose IT undertaking was acquired by RTTL, has received a demand cum show cause notice for Rs 5.97 Cr alleging non-payment of service tax by the company on reverse charge mechanism on foreign payments made by the demerged company. The matter is currently pending with CESTAT
- RTTL received a show cause notice in March 2019 for payment of Service Tax liability amounting to Rs 40 Cr, along with penalty and interest, as applicable from Director General of GST Intelligence alleging wrong classification of services provided by RTTL. The matter is currently pending in the High Court.