Journey to the centre of EaseMyTrip

There’s MakeMyTrip, the big daddy of India’s travel space. Founded nearly two decades ago, it’s the destination for hundreds of millions in venture funding, listed on the NASDAQ, and bringing in over $600 million in revenue annually.

And then there’s EaseMyTrip, in many ways a study in contrasts. Formally registered in 2008 by two brothers, Nishant Pitti and Rikant Pitti, it declared annual revenues of over Rs 1900 crore ($267.5 million) in March 2017 without a Rupee in venture funding. The brothers were just 23 and 21, respectively, when they started out in 2008.

On January 16, India’s largest business newspaper, The Economic Times* reported, citing “people briefed on the matter”, that EaseMyTrip was planning to raise Rs 1,500 crore ($211 million) through an IPO, valuing the young company at between Rs 6,000-7,500 crore ($845 million-$1.05 billion). If successful, EaseMyTrip would be the first company in India’s booming online travel sector to list domestically, said the article. Even though EaseMyTrip’s revenues were just about a quarter of MakeMyTrip’s, the article pointed out, it was profitable.

It was a remarkable story of growth, judging from the company’s past growth.

But just a few days later, EaseMyTrip filed its annual financials for the year that ended March 2018. Its revenue dropped over 93% over the preceding year, and profits, 21%.

But that wasn’t all. Along with its financial results for the year that ended March 2018, it also restated the previous year’s revenue. Which now dropped from Rs 1,904 crore ($268 million) to Rs 71 crore ($10 million).

Based on its revised revenue numbers, EaseMyTrip isn’t 25% of MakeMyTrip’s size by revenue, as The Economic Times article pointed out, but between 2-3%. For FY17, MakeMyTrip reported revenues of $447.61 million.

If the Pitti brothers were worried, they probably didn’t show it. Because they would have been preparing for the 25 January launch of the big-budget period epic, “Manikarnika”, a movie based on the life of one of the leaders of the Indian rebellion of 1857, Rani Lakshmibai.

Which was co-produced by EaseMyTrip.

Don’t be surprised. This wasn’t the first movie produced by the company, but the seventh.

A contrarian travel conundrum

India’s travel space is intensely competitive, forcing even savvy and well-funded companies like Ibibo and MakeMyTrip to call a truce and merge in 2016, rather than keep bleeding and fighting.

How then did a young company like EaseMyTrip, with no domain experience in travel, no funding, and no significant marketing spends end up here? Especially since it disavows the two building blocks of growth—discounts (to bring in customers) and convenience fees (to make money per airline ticket sale, since the airlines don’t offer any).

Counterintuitive as it may sound, the company claims that customers buy air tickets from it because it does not charge them Rs 200-500 ($3-7) extra per ticket as a convenience charge while ignoring the discounts that its peers offer.

Nishant Pitti claims his company is the third largest OTA in terms of airline tickets sold in 2018-19, selling over 20,000 tickets daily. But during weeks of extensive reporting for this story, The Ken was unable to ascertain any third-party numbers that backed up this claim. The Ken also spoke to officials and founders from three of India’s largest OTAs. In a space where competitors study and replicate every decimal percentage of their peers’ revenue margins and business lines, none had a clue about EaseMyTrip’s market share, business model or modus operandi.

Though EaseMyTrip declined to respond officially to a set of questions sent by The Ken for this story, it connected us to an employee claiming to be its finance head, Rounak Mittal. Over a phone interview, he clarified that over Rs 90 crore ($12.5 million) of the company’s Rs 114 crore ($16 million) revenues for FY18 came from target-linked incentives offered by airlines and Galileo, the airline reservation system. EaseMyTrip passes some of this back to travel agents as commission for booking through them.

The reason EaseMyTrip is able to do this, said Mittal, was because it keeps its own costs very low. “Others throw in discounts, we don’t offer discounts. Others operate at 8-9% (of their revenue) as marketing costs, while we are 1-2%,” he claimed. EaseMyTrip later walked their claim on discounts back, saying that they do indeed offer discounts.*

But according to EaseMyTrip’s financials for 2018, it spent Rs 22.2 crore ($3.1 million) on “advertising promotional expenses”. That’s nearly 20% of its revenue. EaseMyTrip later claimed that this was meant to be calculated on GMV rather than revenue. While EaseMyTrip’s claims of marketing costs may hold true for its own GMV figures if we are to take EaseMyTrip’s GMV claims on face value (they do not appear in the company’s FY18 financials), their claim that rivals spend 8-9% of GMV on marketing costs is inaccurate at best.*

Not charging convenience fees to customers is “a very dangerous road to go down” says a senior executive at one of India’s largest OTAs. “On air, anyway the margins are wafer thin. And if you stop charging convenience fees, you still have to pay the payment gateway costs and customer support costs in the business that you need to recover. It’s not sustainable.”

Even the lack of convenience fees on EaseMyTrip, sometimes, is just a ruse. Starting 2016, EaseMyTrip has been charging the fee when necessary. For instance, Pitti explains, if a customer were to use a discount coupon code on EaseMyTrip, they get charged a convenience fee while booking.

Then there’s the small issue of Rs 53 crore ($7.5 million) that it derived from the “sale of products” in 2017.

“How much did you say?” asks Mittal.

Rs 53 crore.

“No, it was Rs 5 crore ($704,000).”

No, it is Rs 53 crore.

“Are you sure?”

Yes, we are. We dictate the numbers back to him. 5-3-0-2-3-4-0-3-7.

The line goes mute.

“Yes, you’re right,” says Mittal finally. “That was the sale of coal.”

Coal?

“Yes, this was related to our coal business. Which we discontinued last year,” he says.

Three brothers, three pivots

Nishant and Rikant Pitti started EaseMyTrip together in a nondescript part of Delhi’s Patparganj back in 2008. Their father had a successful coal business in the eastern part of India. Somewhere along the way, a third brother entered the business, Prashant.

In the early days, the Pitti brothers partnered with offline travel agents who, they claim, deposited advance amounts with them for tickets to be purchased. Using this money, the brothers then bought tickets from the airlines in bulk, getting discounts in the process.

This is how it worked. The travel agents would deposit money into an EaseMyTrip wallet. They could then issue any airline ticket available on the platform. This allowed agents to book tickets without having to pay deposits to the airlines. Instead, EMT would use their deposits and get the airlines to share inventory of their seats directly.

This ingenious arrangement allowed the brothers to solve their cash flow problems and start generating some revenue in one go.

In 2011, it attempted its first pivot, to an offline travel brand. The company claims to have taken out franchisees where 1,800 shops would sport the EMT brand name, and their agents would book tickets exclusively on its platform.

Evidently, it must not have gone well, because a year later, it launched its own website and started selling tickets directly to customers. Today, Pitti claims that 90% of EaseMyTrip’s revenue comes from its website.

But other OTAs aren’t too convinced. They believe that B2B is what continues to make up the majority of EMT’s business. “From our understanding, their B2C part is very small compared to the B2B part,” says the founder of an Indian OTA, who did not wish to be quoted to avoid being seen as dissing a small player. “It’s a little [like] multi-level marketing in a way because you have small agents who will align themselves with bigger agents. And they will align themselves with bigger agents.” When asked what percentage of EaseMyTrip’s overall revenue was contributed by its B2B operations, Mittal claimed he did not know.

The travel executive quoted earlier doesn’t believe the company is in the top three players in the online travel aggregators space, as Pitti claims. “Especially on the B2C side, they aren’t anywhere close.”

What’s black and shiny?

Coal and movies, that’s what. Between 2015 and 2017, EaseMyTrip bought coal (yes, you read that right) worth over Rs 15.8 crore ($2.2 million), and then sold it. Remember the revenue from “sale of products” worth Rs 53 crore? The products were coal.

“That was a simple business we did for helping out the family business,” says Nishant Pitti. “There was certain requirement of cash flows for the family business. We transferred some funds to the business and made certain income on that.”

But, disconcertingly, there are hardly any disclosures about this transaction in the company’s financials under related party transactions in FY17.

In May last year, EaseMyTrip also changed its auditors, appointing S.R. Batliboi, a part of Ernst & Young India. The auditors said the following in EaseMyTrip’s financials, “According to the information and explanations given by the management, transactions with the related parties are in compliance with section 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the notes to the financial statements, as required by the applicable accounting standards.”

If these transactions were disclosed, The Ken could find no mention of them in any of the documents filed by EaseMyTrip.

The 2018 financials filed by EaseMyTrip, and signed off on by S.R. Batliboi, also significantly alter the 2017 financials a year later. The Rs 53 crore made via “sale of products” has disappeared entirely. There is also no explanation for how and why revenue of Rs 1904 crore has subsequently been updated to Rs 71 crore.

A possible explanation was provided by Mittal, who said that up till FY17, EaseMyTrip was recognising the value of all tickets it sold as revenue, but from FY18 onwards it started looking at only commissions earned as revenue.

It is usual practice for auditors to call out any significant changes to accounting practices and its impact on a company’s balance sheet. The Ken could find no such instance from EaseMyTrip’s auditors.

Another area that differentiates EaseMyTrip from its peers is that the biggest chunk of its expenses across most years is “Other expenses”. In its profit and loss accounts, right from 2013-14 to 2016-17, this is the expense head that carries the weight of the company’s spends. And within this, “consumption of stores and spare parts” make up nearly 90% of the expenses—the sort of thing that usually happens in a manufacturing company.

Again, it would be Mittal who offered a possible explanation for what this “consumption of stores and spare parts” was. “These were stocks of coal,” he said.

Since last year, EaseMyTrip claims to have discontinued its coal, film promotion and trading businesses, losing around Rs 10.5 crore ($1.48 million) in the process. It lost another Rs 29.3 crore ($4.1 million) as a write-off on assets, which could include advances.

It still continues with its film production, said Mittal. “Nishant sir looks after it.”

When asked if that meant Nishant Pitti in his personal capacity or as part of EaseMyTrip, Mittal said it was the latter. Mittal, however, claimed he didn’t know much more about the film production business of EaseMyTrip, only the travel side of things. He was also unable to point us to EaseMyTrip’s spends on film production in the company’s financials.

The following text is from S.R. Batliboi’s signed section in EaseMyTrip’s financials.

In our opinion and to the best of our information and according to the explanations given to us, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India of the state of affairs of the Company as at March 31, 2018, its profit, and its cash flows for the year ended on that date.

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