RateGain Travel Tech: Stronger balance sheet provides optionality

4 Dec 2023 , 11:52 AM

Recommendation: Buy; Target price: Rs 740

 

Analysts of IIFL Capital Services reinstate coverage on RateGain Travel Technologies (RATE) with a BUY rating and a 12-month TP of Rs740, implying 12% potential upside. They incorporate the QIP issue of Rs6bn and the revised revenue/margin guidance post Q2. RATE’s recent Adara acquisition continues to surprise positively, while its DaaS segment is benefitting from healthy demand. Strong order book in H1 (>3x YoY) and expanded pipeline (+28% YoY) provide comfort for the sustainability of growth momentum. Recently, management upgraded FY24 revenue guidance to ~65% YoY (from 55-58% YoY, 20-25% organic) and margin guidance to 19% (was 17%). RATE continues to aspire to double revenues over FY24-27. Analysts of IIFL Capital Services 12-month TP of Rs740 is based on 2YF P/E of 35x. They believe the QIP has given it ammunition to acquire distressed assets with complimentary capabilities; thereby providing value-creation optionality. Maintain BUY. 

Adara turnaround continues to surprise positively: 

In the most recent quarter, RATE reported revenue growth of 9% QoQ/88% YoY. This was driven by quicker-than-expected turnaround in Adara (>USD10mn quarterly revenue run-rate) and healthy demand for its DaaS offering. Growth in Distribution was muted, but is expected to pick up from Q3, driven by the monetisation of previously won deals. Given RATE’s expanding portfolio of products and >3,000 customers, analysts of IIFL Capital Services believe the company can continue to drive growth from the cross-sell/up-sell opportunities. 

Margin improvement to be more gradual: 

RATE has consistently improved Ebitda margins from 2.5% in FY21 to 19.8% in Q2FY24; driven by operating leverage and change in business mix. Management expects margins to continue to expand and reach ~25% by FY27; however, the rate of expansion may be slow given the sharp rise. 

Strong balance sheet provides accretive-acquisition optionality: 

RATE’s M&A playbook has helped it build capabilities and scale revenues. Given its track record of turning around the acquired entities, analysts of IIFL Capital Services believe the recently-completed QIP provides it with the optionality for another value accretive acquisition, if done at reasonable valuations. Risks: Impact of macro events on travel, M&A integration, competition.