Make This Trade

Posted On November 6, 2015 10:39 am

This India based travel firm could be the next takeover target.

I’ve recently been looking takeovers, both some of the candidates and one particular option strategy for speculating takeovers.

Today I want to look at a specific company that I think offers good value and also ranks high as a potential takeover candidate.

MakeMy Trip (MMYT) is an India based online travel service firm whose shares have been in a steady downtrend, down some 41% over the past year, but may have finally found some support. And in the wake of recent deal in which Expedia (EXPE) purchased HomeAway (AWAY) for $3.5 billion or a 25% premium above the recent closing price MakeMy Trip could a takeover candidate.

Even if a bid doesn’t come along I think the stock could be poised for a turnaround and offers a good way to get exposure the emerging Indian consumer.

Low Fuel Will Fire India’s Economy  

India is the world’s fourth largest economy and the second largest importer of oil. At over 3.5 billion barrels per year, or nearly 70% of its consumption, India is the world’s second largest importer of oil behind China. This dependence not only constrains economic activity but also leaves it vulnerable to inflation.

The sharp drop in oil, which has declined some 50% over the past eight months couldn’t have come at a better time. It will President Modi, who was brought into office in the last year with a mandate to effect sweeping economic reform, to implement his initiatives.

Crucial is the ability to reduce debt by lowering social subsidies. Lower oil costs provides the flexibility to continue its extensive food subsidy program, which is crucial for its large population that lives in poverty, and freeing the growing middle class to increase discretionary on things such as travel.

MakeMyTrip is essentially the Priceline (PCLN) India. It is uniquely positioned to leverage the internet and ride the hockey stick growth prospects of both domestic and foreign travel across the region. The company’s services and products include air tickets, customized holiday packages, hotel booking, railway tickets, bus tickets, car hire and facilitating access to travel insurance.

In its most recently report quarter on October 29th the company posted revenue of $94.8 million in up 22.9% (31.3% in constant currency) over the same quarter last year and loss of just $0.29 per share which was narrower than the loss of $0.32 expected. It expects to turn its first profit next quarter.

The drivers were a 27% increase in domestic air and a 52% jump in hotel packages. Overall transactions surges by 106.5% growth in transactions as those conducted by mobile apps more than doubled.

The stock received has displayed increased volatility in the days surrounding the earnings but has basically held support at the $15 level.

MMYT Chart 11.6.15

In addition to the positive fundamentals and improving technical set up I also think there is an outside chance for this company to be a takeover target.   Given MakeMY Trips unique position in the south Indian subcontinent. With a mere $635 million market capitalization it easily digestible for a firm like Priceline to grow its global presence. Priceline has used acquisitions of brands such a Booking.com, Kayak and Agoda to enter and the European and Asian markets. These previous acquisitions, such as Opentable, all commanded premiums of 50% or more.

The Trade

Given all the tailwinds at its back, and the potential kicker for a takeover, I want to position myself for unlimited upside and give sufficient time for the thesis to play out. Therefore I am buying call options outright with a May 2015 expiration.

Buy May $15 calls for $2.50 a contract

This gives us seven months until the May 20, 2016 I have no particular price target but would look to take partial profits by rolling up or paring the position if the calls double to $5.00 a contract.

Set a close below $14 a share as a stop loss to manage risk in case the fundamental picture continues to deteriorate.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.