When NASDAQ-listed MakeMyTrip announced towards the end of February that it was rekindling its partnership with budget hotel aggregator OYO, it raised many an eyebrow. In October 2015, online travel agencies MakeMyTrip, Goibibo, and Yatra had jointly blocked OYO (then OYO Rooms) and ZO Rooms listings on their website to protect market share.

However, with MakeMyTrip’s focus on hotels to boost growth, it makes sense to patch up with OYO, which has a large base of budget, economy, mid-segment, and vacation rental assets across India, Malaysia, and Nepal. The grapevine has it that MakeMyTrip is evaluating investing in OYO, though the former has refused to comment on this.

India has around 4 million rooms across various price points, of which 96-97% are small hotels, according to OYO estimates. “There has been a massive surge in the budget hotels category, igniting growth in the hospitality sector, and we are excited to join hands with OYO and build synergies in the fragmented hotels segment to serve this very promising market,” said Ritwik Khare, chief business officer, hotel and accommodations, MakeMyTrip, on the OYO partnership.

Clearly, there are no permanent friends or enemies in business. And this is not the first time that MakeMyTrip has made a friend of a rival. In 2016, it acquired ibibo (that runs Goibibo and redBus) in an all-stock transaction, creating India’s largest online travel company worth nearly $1.8 billion (Rs 11,370 crore). It also improved its hotel listings; before the deal, MakeMyTrip offered stays mostly at four- and five-star hotels and a few three-star hotels. The acquisition opened access to Goibibo’s stable of three- and two-star hotels.

“The hotel business is a relatively high top-line margin business, compared to the flights business. It is also a lot more defensible because of the fragmented supply—few or a handful of airlines versus hundred thousand hotels. Hence, our value-add in terms of providing platform-related services to hotels is much more in a fragmented market,” Rajesh Magow, CEO-India, MakeMyTrip, tells Fortune India.

MakeMyTrip’s bet on hotels seems to be paying off as evidenced by growth in revenues in the last one year. Its revenues (less service costs) from hotels and packages grew 57.2% in the fourth quarter of FY17 (immediately after the ibibo merger); 139.7% in the first quarter of FY18; 180.4% in the second quarter and 131.5% in the third quarter of FY18, according to MakeMyTrip. Macro factors also seem to favour the company. A report by the World Travel and Tourism Council (WTTC) says travel and tourism contributed $208.9 billion, or almost 9.6% of India’s GDP, in 2016. The contribution is forecast to rise to $424.5 billion (or 10.0% of GDP) in 2027.

In FY11, when it listed on Nasdaq, 85% of the revenue came from the online ticketing business, and the rest from the hotel booking business. Now the company gets about 55% revenue from hotels and holiday packages and about 45% from online ticket booking that includes redBus and intercity cab rides, according to the company. “This is a significant change, and we want to further keep growing on that. We will probably take it to 70:30 in the next three years in favour of the hotels and packages business,” says Magow.

However, even as MakeMyTrip seems intent on staying the course, there are concerns over profitability. Except in FY11 and FY12, MakeMyTrip has been making losses.

In the third quarter of FY18, MakeMyTrip posted $172.4 million in revenue, a near 40% rise from $123.2 million in the year-ago period. It posted a net loss of $45.3 million; the company had posted $16.5 million profit in the year-ago period. In the second quarter of FY18 it posted a revenue of $152.9 million and a loss of $62.3 million.

The firm says marketing and sales promotion expenses increased by 144.6% to $109 million in the third quarter of FY18 from $44.5 million in the year-ago period.

Among the causes for the spike in expenses are customer inducement and acquisition programmes, efforts to push growth in its standalone hotel booking business, and brand advertisement, besides the consolidation of marketing and sales promotion expenses of the ibibo Group.

But Magow is not perturbed. “This is the Internet model,” he says, adding that a lot of capital is spent on acquiring customers and building a brand in this model. When the online penetration (of a business) reaches a particular threshold, “which in our experience is about 25-30%”, that’s when the repeats kick in and the cost of new customer acquisition falls, he says.

The total number of Internet users in India is expected to reach 500 million by June 2018, according to a report by Internet and Mobile Association of India and Kantar IMRB, from 481 million users, at the end of December 2017, up 11.34% from a year ago.

According to Magow, hotel penetration today is at around 13%. “Now, this has to get to about a 25% kind of threshold where you will start to see the cycle playing out in terms of reduction of losses and eventually breaking even and profitability. Our sense is that we will probably hit that profitability level in the next three years, maybe the third year from now,” Magow says.

Meanwhile, analysts say profitability may not be too far-fetched for MakeMyTrip, particularly with the focus on the hotels business. “Hotels are a profitable business, unlike air tickets, but one needs scale, which MakeMyTrip has. After the ibibo merger, it has 60% market share. There is a lot of upside… EBITDA margins can be in the range of 15-30%. Global giants like C-Trip have 95% of their revenues coming from hotels,” says an analyst who tracks the company, requesting anonymity. EBITDA stands for earnings before interest, tax, depreciation and amortisation.

Another set of analysts believes there is a trade-off between growth and profitability in the near term. In their latest report on MakeMyTrip released on February 9, Jefferies’ analysts Arya Sen and Ranjeet Jaiswal say the management comments after the Q3 results indicate a greater focus on the quality of growth and profitability going forward.

“In particular, MMYT is likely to be more selective in customer acquisition in ultra- budget segment of hotels. This is a welcome development in our view—though the extent and pace of profitability improvement and its impact on growth will be key especially in the context of high investor expectations,” they say in the report.

Sen and Jaiswal note that MakeMyTrip’s two main competitors are Booking.com (in the premium hotels segment) and OYO (in the budget category) .

“While it does not do direct discounting, Booking.com has become more aggressive in innovative offers through the Genius programme; in the budget category, OYO has become very competitive in pricing,” the report says. Through Genius, Booking.com connects its best partners with its most loyal guests.

In February, JP Morgan analyst Viju George upgraded MakeMyTrip to overweight from neutral. He also raised his price target for the firm’s shares to $36 from $27, saying the expected decreasing cash burn rate will lead to a better balance between growth and capital investments.

There are those who see choppy waters for MakeMyTrip. Bank of America Merrill Lynch flags the following risks facing MakeMyTrip in a report: integration issues in MakeMyTrip and ibibo, leading to a negative impact on execution; and further equity dilution risks for MakeMyTrip if market growth does not pick up. The investment bank set a price objective of $37.80 for MakeMyTrip’s stock in the report. On April 17, its stock closed at $35.90, up 3.01% on the Nasdaq.

Meanwhile, MakeMyTrip says it is investing heavily in product and technology design to increase its reach and improve customer experience and cut costs. It recently introduced chatbots—Myra on MakeMyTrip and Gia on Goibibo—to handle customer queries. Deep Kalra, founder, group chairman and group CEO, MakeMyTrip, says the firm believes that the “conversational paradigm” is the way forward to reach users across all segments in India given the prevalence of multiple languages in the country and opportunity for growth in tier 3 cities.

Goibibo is using the Alexa Skills Kit to make it easier for customers to book a trip. The Alexa Skills Kit is a collection of codes that allows developers to add skills to Alexa, Amazon’s virtual assistant. Tell Alexa your destination—it will do the rest.

(The article was originally published in the May 2018 issue of the magazine.)

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