INITIAL COVERAGE: RateGain Travel Technologies Ltd.

Summary

With over 2900 customers and 700 partners working with them in more than 100 countries, RateGain Travel Technologies Ltd. is a leading global provider of SaaS solutions for the travel and hospitality sectors. They assist businesses in accelerating revenue production through customer acquisition, retention, and wallet share expansion. The business provides travel and hospitality solutions to a variety of industry sectors, including hotels, airlines, car rental agencies, online travel agencies (OTAs), vacation rental agencies, package suppliers, and travel management firms, among others.

ABOUT:

With over 2900 customers and 700 partners working with them in more than 100 countries, RateGain Travel Technologies Ltd. (RGTTL) is a leading global provider of SaaS solutions for the travel and hospitality industries. They assist companies in accelerating revenue generation through customer acquisition, retention, and wallet share expansion. The business provides travel and hospitality solutions to a variety of industry sectors, including hotels, airlines, car rental agencies, online travel agencies (OTAs), vacation rental agencies, package suppliers, and travel management firms, among others. The top 25 online travel agencies, the top 23 hotel chains, and the top car rental agencies, including 8 Fortune 500 corporations worldwide, all partner with RateGain.

The business began operations in 2004 with a hotel pricing comparison product from competitive intelligence, and over time it has grown its product line both organically and inorganically. By utilizing its own data lake, it has increased the range of products it offers in the areas of rate intelligence, cognitive revenue management, smart distribution, and brand management across verticals. It is one of the largest data processors in the world, processing data on hotel reservations, price intelligence, and customer travel intentions. It offers dependable, scalable, and creative AI-powered solutions to assist in better decision-making for its clients. With the help of non-organic acquisitions, including DHISCO, BCV Social, MyHotelShop, and Adara, the company has been able to scale its operations. By improving capabilities, giving access to novel market sectors and clients, growing the addressable market, and capturing wallet share from competitors, these purchases are intended to drive growth. Data as a Service (DaaS) (28.6% of sales), Distribution (34.4%), and MarTech (37% of sales) are the company's three verticals and insights across these verticals are driven by the company's strong product interoperability.

Data as a Service (Daas) is a company that offers data and information to businesses like hotels, airlines, online travel agencies, and car rentals. distribution that offers frictionless connectivity between hotels and their demand partners, including OTAs, GDSs, and others. Martech (Marketing Technology), offers a full-service digital marketing package to manage hotel brands on social media and meta-search websites.

The business has the appropriate innovation focus to develop useful products using existing product datasets, AI, and machine learning. As part of its RG Labs strategy, it has created three new AI-powered products: Rev.AI, Content.AI, and Demand. AI. In order to establish its dominance in the fragmented travel technology sector, it is now focusing on providing a "Single Revenue Maximisation Platform." The size of its operations and its analytical prowess have enabled it to expand operations and monetize its offerings.

BUSINESS MODEL:

By utilizing data lake and data analytics capabilities and integrating with other technology platforms, RateGain provides a suite of interconnected products that manage the revenue creation value chain for customers in the hospitality industry, assisting its clients in assessing demand, engaging with prospects, acquiring, and keeping customers, and maximizing revenue.

Data-as-a-Service (DaaS):

The company's primary strengths include demand forecasting, price parity, and rate intelligence. It is one of the major data aggregators for the hospitality and travel sectors globally, tracking 6 billion price points annually from more than 1100 data sources. Prices, rankings, ratings, accommodation descriptions, availability, cancellation and payment policies, discounts, and package items are all examples of price data points. It obtains data from a variety of sources, including purchases, purchases made through strategic partnerships, and web data collecting. Combining an automated AI-powered pricing recommendation platform and a demand forecasting system, it enables hotels, car rentals, and ferries to plan their demand and pricing strategy. Utilizing aggregated real-time travel-intent data, it offers its clients relevant insights and predictive intelligence to improve marketing ROI.

Hotels that use its services can improve their rankings and get more reservations. The company uses a differentiated pricing approach for its customers that is based on historical prices, a business that is currently on the books, pace, demand, competitive context, events, and weather data. Additionally, it offers dynamic pricing recommendations based on its own demand forecasting AI and machine learning algorithms.  While OTA, airline, car rental, and vacation package customers use their services based on a hybrid model where a minimum subscription fee is charged with a pay-per-use fee for accessing additional data, the segment operates on a subscription model for hospitality customers (for Optima and Parity products). With the acquisition of Adara, RateGain would be able to target specific audiences and sway purchasing behavior by integrating its data lake of consumer travel intent with DaaS products.

Distribution:

The company connects the complete ecosystem of hotel chains, OTAs, and GDS (global distribution system) through one of the largest networks of supply and demand partners in the world. It manages distribution for more than 1,90,000 properties, including more than 180 chains globally and 700+ demand partners (such as OTAs, GDS, and tour operators). It provides information on pricing, inventory, and the handling of reservations between top lodging providers and their demand partners. In order to guarantee efficient operations and correct reporting by hotels, it also makes it possible to deliver reservations back to hotel systems. Over 200 billion transactions are processed yearly on the distribution platform of RateGain. Additionally, it has a content distribution technology called Content.AI that monitors KPIs for hotels' content-related KPIs like facilities, pictures, and room kinds to find any potential gaps and offer useful information. On-demand platforms, their ability to change material and enhance images can raise the likelihood of conversion. Within this market, the company primarily offers the management products DHISCO and RezGain. The transaction model used by DHISCO (bought in 2018), which accounts for 80% of its distribution business, caters to the needs of major hotel chains. RezGain is priced on a subscription basis and targets mid-market hotels.

MarTech:

The growing interest in MarTech in the hospitality industry is a result of increased digitization, a focus on customer experiences, and traction in direct reservations rather than depending on third parties for bookings. Through acquisitions, the corporation launched the MarTech division. To manage hotel brands on social media and metasearch engines, RateGain offers a complete digital marketing suite. In order to convert on metasearch sites like Google and TripAdvisor, it interacts with value-driven travelers. It also keeps track of consumers in real-time with round-the-clock social listening, mitigates any unpleasant experiences, and customizes the guest experience. It efficiently runs marketing campaigns and manages hotel social media accounts. To maximize the likelihood of conversions, it also optimizes and updates information across all demand partners. In this market category, it serves over 1,000 active consumers.

In 2019, the business acquired BCV Social, which specialized in managing social media for the hospitality industry. BCV Social provided social listening for reputation management, enhancing sentiment and guest communication, campaign management to boost awareness, engagement, and sales, and the personalization of the guest experience. Another purchase in the MarTech industry was MyHotelShop in September of this year. This company connects hotel partners' websites to all major meta-search engines like Trivago and Google Hotel Ads and manages Google Ads marketing campaigns to encourage hotel partners' websites to be effective distribution channels. Additionally, it provides website optimization to increase the website's potential for conversion (direct booking). Myhotelshop links hotels to important META Search Engines, enabling real-time pricing comparison with a direct booking link.

Martech segment operates on a subscription model, charging an average of $20,000-$27,000 per property per annum. The solutions are tailor-made for each property/ hotel chain and the charges vary based on the number of Social media involved (Facebook, Instagram, Twitter) and depending upon the scope of the work (monitoring, engaging, ad campaigns, etc). MarTech capabilities, coupled with the travel intent data platform capabilities acquired from Adara, could enable the company to run targeted advertising campaigns, enhance ROI on marketing spends and improve client stickiness.

MANAGEMENT:

BHANU CHOPRA, Chairman and Managing Director, said, "As we complete our first full year of listing, I would like to commend and congratulate the entire RateGain family on a record year. We continue to use AI capabilities to advance our mission of building an integrated tech stack that allows our customers to acquire guests, engage & retain them and have a wallet share expansion. The travel industry continues to witness strong demand across key geographies, we are well-positioned to capture and partner with our clients to deliver innovative solutions to optimize their revenue strategy. With continued momentum across all business lines along and our continued investments into RG Labs especially in areas of AI and now Generative AI –we continue to lead the digitization of the industry.”

TANMAYA DAS, Chief Financial Officer, said, "It really has been a standout year for the company in terms of performance across all key areas contributing to record revenue with commendable margin improvement. This is a validation of the underlying business fundamentals and the value we continue to drive for our customers. We witnessed balanced growth across our three verticals with an improvement across all key metrics contributing to a stellar year, which is a true reflection of the efforts of the entire team. Adara integration continues on track, and we are pleased with this new addition to the RateGain ecosystem. With a strong pipeline across verticals, we are well positioned to deliver value to our customers and stakeholders."

SHAREHOLDING PATTERN:

INVESTMENT RATIONALE:

Leading global SaaS provider in hospitality and travel – addressing large high-growth TAM/SAM:

Software as a Service (SaaS) solutions for the hospitality and travel industries are offered by RateGain on a global scale. The total addressable market (TAM) that the company serves is sizable and is predicted to reach US$11.47 billion in 2025 at a CAGR of 18%. The serviceable addressable market (SAM) of enterprise applications focused on guest acquisition, distribution, revenue maximization, and wallet share expansion is also anticipated to grow at a CAGR of 18% to US$ 8.45 bn in 2025 in the third-party travel and hospitality technology space (Source: Phocuswright Report). The company has constructed a data lake employing artificial intelligence, extensive industry knowledge, processing travel pricing data, and transaction processing in a highly fragmented market of travel technology suppliers. Through a number of newly introduced items and acquisitions over the past couple of years, the company has increased the range of products it offers. Interoperable solutions that make use of data from both internal and external sources enable the company to provide value to its customers. RateGain has a significant platform advantage over other travel technology suppliers, who only offer products in a limited number of product categories. The business is also constructing a "Single Platform" in an effort to become the go-to partner for maximizing revenue.

Sticky and high-quality client base:

With 2942 customers, RateGain has a large and diverse customer base that includes 8 F500 companies, 23 of the top 25 OTAs, 23 of the top 30 hotel chains (including Six Continents Hotels, Inc., an InterContinental Hotels Group Company, Kessler Collection, Lemon Tree Hotels & Oyo), all major car rental companies, a number of significant airlines, and significant travel agencies. Product introductions and forays into new market categories through acquisitions have increased the size of the company's target market. In FY22/23, the company acquired 1000/600 new clients. Increased stickiness in its relationship with an already top-notch clientele base is a result of expansion into adjacent industries within the travel and hospitality sector. It normally signs yearly contracts that automatically renew at year's end. Cross-selling is ensured by the company's wide range of product and platform offerings, and it has surpassed independent businesses with constrained product lines in market share. Additionally, the clientele it serves is fairly diverse and there is little client concentration (the top 10 clients account for just 32.2% of total revenue). Client turnover is also quite low, and the company's gross revenue retention (GRR) ratio has stayed consistently high around 90%, generating a lot of repeat business from current clients. With 80+ customer relationships dating back more than ten years and 450+ customers being paired with for more than five years, the company's high-quality clientele has remained loyal to it. LTV-to-CAC, a gauge of value generation from new clients, is four times the industry average.

RISKS:

• Lower discretionary spending: The travel and hospitality industries may be affected by customer concerns about the global economy and excessive inflation. The travel sector could suffer if a pandemic similar to COVID were to recur.
• Increased competition: Increases in corporate market share may be hampered by increased competition in space. Its business growth may be impacted by larger hotel groups' vendor consolidation initiatives. The martech industry is more competitive, which results in slower growth and generally lower profitability.
• Client concentration: A significant amount of its revenue comes from OTAs. Top 10 clients generate 32% of total revenue. Despite the fact that business has been falling, losing important clients could have an impact.
• Technology disruption: Although Rategain uses AI & ML to improve its product offerings, it is vulnerable to this because of the innovative ways in which its rivals and clients are using these technologies.
• Inability to efficiently integrate and cross-sell services: A delay in putting strategies in place to capitalize on opportunities could cause revenue and profit growth to be slower than anticipated.

FINANCIALS:

Key Highlights [SEGMENT WISE]

DISTRIBUTION

• Healthy growth in booking volumes on the back of strong travel demand
• Increasing traction in GDS vertical
• Booking levels into key travel markets are reporting healthy growth as International travel continues to remain strong

MARTECH

• Integrated Digital Marketing offerings to drive higher RoAS; Further strengthened by powerful travel intent-based audiences
• Increased demand for Metasearch Marketing to tackle higher costs
• Paid Digital Media offering – Strong growth in ARPU and improved traction in APAC and ME regions

DAAS

• Strong traction and volume growth were witnessed across OTAs, Airlines, and Car Rentals
• Strong traction in the APAC region with healthy travel demand post the recent reopening
• Healthy growth witnessed in Rev-AI

Quarter

To reach Rs 182.9cr, RateGain reported respectable topline growth of 69.6%/32.3% YoY/QoQ. Adara's financials were consolidated by the firm during the quarter; organic growth was 31.6%/2.6% YoY/QoQ. DaaS and distribution divisions contributed to organic revenue increase while MarTech revenue shrank sequentially. EBITDA of Rs 32.2cr was recorded, up 110.1%, 40.5%, and quarterly. Higher operating margins, up 340bps/102bps YoY/QoQ to 17.6%, were a result of operating efficiency. PAT for the business was Rs 33.8cr, +192%/155.4%. The company has solid visibility and a strong pipeline of Rs 381cr, with high gross revenue retention (GRR) percentage being maintained. The management projects revenue of Rs. 875-890cr in FY24E, which translates to a growth of 55-58% YoY (organic growth of 17-20% YoY).

USE OF FUNDS RAISED FROM IPO:

VALUATION:

Given the low penetration within the addressable market, cross-selling potential with existing services, and excellent positioning by leveraging domain knowledge and platform capabilities, the martech industry has the potential to grow at a quick rate. Additionally, by incorporating a layer of travel intent, the Adara acquisition improves the intelligence and effectiveness of digital marketing and increases return on ad spend. Despite macro uncertainties in the US and Europe, recent comments from travel companies across categories (hotels, airlines, OTAs, cruise lines) remain optimistic about the sustainability of travel demand. With strong volume growth from current clients and ongoing monetization of new brands gained in the last couple of quarters, both DaaS and distribution (high-margin business) continue to experience good traction.

In the hotel technology sector, RateGain is well positioned and anticipated to experience high teen organic growth throughout FY23-25E. The management of the company has projected revenue growth of 55–58% in FY24E (organic growth of 17–20%). Strong order book, pipeline, and high GRR are the foundation of the strong organic growth outlook. Being a SaaS provider, the business gains from favorable operating leverage, which leads to margin expansion. The management prioritizes profitability while focusing on growth. Additionally, its strong financial position permits selective acquisitions of specific businesses, brands, complementary technology, and product lines. Rategain deducts R&D costs in the year of expenditure, so its PAT should be analyzed in this context.

We believe that over the next two to three quarters, the bull case fair value of the stock is Rs 452. Currently, the company is trading at a PE of 65 with median PE of 98.9.

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