In February 2000, MakeMyTrip founder Deep Kalra walked out of eVentures' office near Churchgate station in Mumbai as he was not happy with the valuation that Neeraj Bhargava, managing partner of eVentures India, offered his startup.
But on his way to the airport, Kalra had a second thought. He picked up his phone and called Bhargava. They again met at a coffee shop inside Crossroads Mall (one of the popular malls in Mumbai at that time). They agreed on the financial terms on a paper napkin and Bhargava agreed to buy a "significant minority stake." That was the humble beginning of MakeMyTrip.
Today MakeMyTrip stands tall as the largest player in the online travel agency (OTA) space in India with the acquisition of its fiercest competitor—ibibo Group.
In a joint call with Techcircle.in Rajesh Magow, India CEO of MakeMyTrip, and ibibo Group founder Ashish Kashyap talk about the joint trip they are about to embark on. Edited excerpts:
What was the thought process behind this deal?
Rajesh Magow: "Our strategic focus has been to grow our hotels and businesses. For the last 9-10 quarters, that strategy was working quite well. We were busy investing in that market and other players like ibibo were also investing because there was momentum.
There were market-making investments in the marketplace, and that is when we started assessing our strategy in terms of gaining market share both as an online travel company and as a player in the hotel segment which was beginning to grow. That is when we raised $180 million from (Chinese travel booking giant) Ctrip.
The idea was that there is an exciting opportunity for growth and we need to start grabbing this market opportunity. The question was what next? Four-five years down the line, where would we like to be?
We were clear that we wanted to be a leader in the hotel segment and the overall travel segment and in the meanwhile goibibo was also growing phenomenally in the hotel segment. Two and three star hotels were their sweet spot and high-end hotels were our sweet spot. They had a distinct brand—redBus. That is how the thought process started on both sides, because there were so many things which were complementary to both the businesses. We together started thinking that if we combine both the businesses, then we would be a force to reckon with.
Ashish, when did you decide to stop fighting it out and choose this more economic option?
Ashish Kashyap: When Rajesh, Deep and I got together, we realised that what we are competing for, is a small 12-15% penetrated market and we said if we come together, we can make that 15% penetrated market to 40% in the long term. That market creation activity can happen faster if we both come together. Looking at it through the prism of opportunity is what drove us.
What would Naspers' role be, from an operational point of view?
Kashyap: Naspers (and Tencent) would own 40% in the combined entity. It is an interesting strategic partner in my experience with it. Naspers plays a good role in giving access to new kind of exposure and knowledge to entrepreneurs and founders of its portfolio companies. But operations are pretty much run by founders and the top management team and that is what we plan to continue to do.
What about investments from Naspers?
Magow: Besides this stock deal, the only cash component is the working capital that would come from them on the closing day. Whatever would be the working capital cash position that we have on MakeMyTrip's balance sheet, Naspers (and Tencent) would bring in pro rata cash, proportionate to their holding which is 40%.
How important is profitability for MakeMyTrip? Or are you still on growth mode?
Magow: As we combine our businesses, there are segments where we see growth opportunities; hotels and accommodation is definitely one of them. We would remain in growth mode, if we continue to see the growth we have seen in the recent past. Relatively speaking, domestic air (segment) is more matured; so growth rate would be relatively lower, but the international flight segment will be on growth mode. Similarly, international hotels and bookings will be on growth mode too. It is going to be a segment-wise blended approach, directly linked with the size of the opportunity.
What about profitability?
Magow: Profitability will fall in place over time. It is not going to happen soon. We haven't done any exercise (in assessing the path to profitability) and we can't do it now, because we don't have the bandwidth to do it now. We can't do it till we close the transaction. We have to consolidate first and then see the overall synergies and what kind of investments will we need in terms of growth opportunities. Factoring all of that, honestly, we are not in a position to talk about it till the end of first quarter of the next calendar year.
Both companies have similar businesses. How is this consolidation going to happen?
Kashyap: There are certain things which will evolve as we move forward with the process of consolidation. We are clear about the fact that the brand franchisees of goibibo, redBus and MakeMyTrip are strong. All of these brands will co-exist. Each of these brands has its strengths in respective segments and we will be constantly building these brands.