TBO Tek Limited (TBOTEK) Earnings Call Transcript

Good evening, everyone. I'm Snighter Albuquerque from Adfactors PR Investor Relations. On behalf of TBO Tek Limited, I would like to welcome you all to the earnings conference call for Q2 and H1 FY '26. Today on the call, we have with us from the management, Mr. Ankush Nijhawan, Co-Founder and Joint Managing Director; Mr. Gaurav Bhatnagar, Co-Founder and Joint Managing Director; Mr. Vikas Jain, Chief Financial Officer; Mr. Anil Berera, Head Strategy; Mr. Akshat Verma, CTO; Mr. Pramendra Tomar, General Counsel; and Mr. Shreshth Mahajan, Associate Director, Investor Relations. We will begin the call with a brief opening comments from the management, followed by a Q&A session. Please note that certain statements made during this call may be forward-looking in nature. Such forward-looking statements are subject to certain risks and uncertainties that could cause the actual results or projections to differ materially from those statements. TBO Tek will hold no responsibility for any such actions taken based on such statements and undertakes no obligations to publicly update these forward-looking statements. I would like to hand the call over to Gaurav Bhatnagar now for his opening remarks. Thank you, and over to you, Gaurav.

Thank you, Snighter, and good evening, everyone, and welcome to our Q2 FY '26 earnings call. Just prior to the call, we have shared a detailed shareholder letter on the Investor Relations website, just like we did last time. And we believe that format works better where we give you all the chance to review the numbers and then spend more time on Q&A. So I'll just take a minute to summarize the results, and then we'll jump straight into Q&A. So this was -- Q2 was an exciting and eventful quarter for us. As you all know, this is a peak travel period for most of Northern Hemisphere and which is reflected in our results as well. Historically, Q2 has been our strongest quarter, and it's the same this year as well. We are happy to report that after the macroeconomic headwind and the geopolitical challenges that we faced in Q1, we had a relatively stable and growing quarter in Q2. The GTV grew by 12% and largely aided by a faster growth, nearly 20% growth in the hotels business. GP grew by 19%. GP is growing faster than GTV, again, because the mix is changing towards hotels and there's a slight improvement in retention as well on the hotels business. The EBITDA before M&A cost, as you know, we acquired Classic Vacations this quarter and the cost is appearing in our numbers. But before M&A cost, we delivered an adjusted EBITDA of INR 104 crores, which is a 16% growth compared to same quarter last year. You will see that the gap between GP growth and adjusted EBITDA growth is narrowing down now, which is a reflection of the increasing operating leverage in the business. Apart from this, the other big event in this quarter was the acquisition of Classic Vacations. As of 1st October, the transaction has been closed and Classic Vacations is integrated into the business -- starting to integrate into the business. You will start to see numbers from Classic getting consolidated in our numbers starting Q3. With that, we will open the floor for questions.

[Operator Instructions] Take the first question from Manish Adukia.

Appreciate the detailed shareholder letter and the disclosures. I have a couple of questions. First, congratulations on completing the Classic transaction. Versus the last time we spoke when you had done the call to announce the Classic transaction, would love to get a little bit more detail around how that business may change your growth and margin profile? I think your business, of course, this quarter did mid-20s revenue growth, 20% GP growth. Classic from whatever you've shared in the past, last few years has not shown any meaningful growth at least. So now with Classic integrated from the December quarter, over the next 1 to 2 years, do you see TBO's overall growth profile as resetting lower versus what you were delivering? Maybe the growth may be slightly more profitable, but I just want to get your overall sense on how Classic integration could change the growth profile of the business.

Manish, I think that's a very fair question. And the way we are looking at it is -- so one, it's very early, very, very premature for us to be able to comment on the combined businesses growth profile. The way we are looking at it, Manish, right now is that Classic at a top line at a GTV level would still be contributing roughly $500 million on a basis -- on a GTV basis, on a total base of roughly $3.5 billion, right? So from a GTV profile perspective, Classic adds to the denominator, but not so significantly for us to have a big drag. I think the bigger challenge is going to be to look at the revenue and GP profile of Classic because Classic does operate at a much higher revenue at almost 22% of take rate and 11% of GP. Now 2 things are going to happen over there. Yes, absolutely, this -- from a revenue perspective, it will add meaningfully large number to our existing revenue. On a GP basis, Manish, I think the business is more similar to our business. Yes, it is slightly more accretive in terms of what it generates as a percentage of GTV. But at that line, we should be able to find, one, in the short-term growth synergies to drive GP -- continue to drive GP at a similar rate as before. The other bit is there are a couple of pockets of opportunity, and we'll talk a little bit about it later as well. For example, India is starting to come back from a period of degrowth to flat and more. So that's an open opportunity for us to add up to the overall growth in the subsequent quarters and years. And second is, as a base, U.S. is a very large market, right? So the question that we need to answer is, can we unlock 15%, 20% kind of growth in that business, given that the size of the market is very large and the business is right now owned by a private equity as against a strategic. That is the only bit we need to answer for rest of the engines are shooting at higher than 20% growth, as you would see in our shareholder letter as well, most regions are actually delivering, even maturing regions like Middle East are delivering 20% plus-plus growth. So we remain confident. I don't want to comment that will that overall growth profile remain the same. At the bottom line, absolutely, it should accelerate. At the top line, we are still confident that we will find ways to get similar growth profile, but too early to comment in a definitive manner.

I really appreciate that response. And that statement that you made about ability to unlock that 15% to 20% growth in Classic period of time, whether that happens or not, I mean, I'm sure you have a structure in place in terms of how you think about the growth getting to 15%, 20% for Classic. But like could that be like a 2-year journey, 5-year journey? I mean, for you to get there, would that require a lot of investments in Classic? And could the journey be more like a near term? Or could that be like a much more longer-term journey for Classic to get to those kind of levels of growth if it gets there?

See, Manish, I think in the short term, what I would expect is that we would see a faster synergy realization on the bottom line. And the reason I say this is because -- and which we have seen happen in our previous acquisition as well is that we do have a significantly larger supply pool that will be plugging into the Classic ecosystem. Usually, these synergies first start showing up in margin expansion within the existing business. And hence, the bottom line kind of will show some improvement to begin with. Subsequent to that, again, the same question comes that we have been grappling with as well, how much of that bottom line improvement do you want to push back into the top line. But broad theme -- Manish will remain the same that it is going to be profitable growth. We are not looking at taking any further cash from the core business to accelerate growth in Classic. The Classic investment thesis was that this business will be profitably growing without any further investment, and we stick to that. I don't think it's a 5-year journey. It should be shorter than that. Now whether it's a 1-year journey or a 3-year journey, that's hard to say. But if we -- look, if we don't find growth levers in 2 years, we won't find them.

Very helpful. Maybe just 1 or 2 quick follow-ups. On -- you mentioned GP to EBITDA, that growth has now started to converge. And in your previous call, you had mentioned that a lot of investments will be done by this fiscal year in the core business. So is it safe to assume that, let's say, at least starting next fiscal year, EBITDA growth should start outstripping GP growth for the business -- overall business?

Manish, I think that's a fair assumption for the core business. You would see that -- and I think we've shared it in our shareholder letter as well, year-on-year quarterly SG&A growth is starting to slow down now. We expect that trend to continue for the next couple of quarters as well. So yes, you're right, Manish, that we would expect operating leverage to flow through and EBITDA should start accelerating faster than GP in the subsequent quarters.

Just my last question. India business, of course, encouraging to see the growth now starting to at least stabilize. Do we have any view on the outlook of that business? I mean, it stabilized now from here on, should it accelerate? Should it stay in the current range? And within that, just the hotel versus air bit, like hotel, of course, doing better than air today, but on the air, is there like meaningful scope for acceleration? I would love to get your thoughts.

First, Manish, again repeating hotel business is our core theme of the company, right? I mean, for obvious reasons, which all of us know. So that's something we will keep building on. Air is definitely -- we had to arrest the degrowth because it is a big hope for us first to make sure that our penetration continues in India, plus helps us to sell our non-air business as well. And all of us know the growth which the aviation is going to see in India, being a leader already in that space, we still want to control and ensure that we are a very, very serious relevant player for the airlines, which will obviously help us to penetrate more, create stickiness amongst our travel agents and obviously help us to cross-sell hotel products. So that remains the theme. But yes, it's in the right direction now. We do anticipate growth going forward as we move into this quarter as well as 2026.

We move to the next participant, Karan Uppal from PhillipCapital.

This is Karan Uppal from PhillipCapital. Good quarter. Congratulations on that. Three questions from my side. Firstly, on the monthly transacting buyers, so very smart addition in the international markets. The growth rate is really strong. So can you elaborate which particular markets or countries are doing well, where your SG&A expenses are showing results and where you can catch up? That's the first question.

Okay. So Karan, the good news is that active agent growth has been largely secular across almost every region. It has also translated to new business growth, particularly well in Europe for us right now and parts of Middle East, right? So those are 2 regions where we have actually seen that not only have we added new customers, they have immediately started delivering as well. Part of it is just the nature of those markets because each travel agent is worth much more because these are richer countries with per capita travel spend is much higher. On the other hand, markets like APAC have shown a large growth in the number of transacting buyers pick up, but because each transaction is smaller in value, they are still not very significantly contributing to the top line. Now the hope is that these travel agents as they mature into from a T1 or T5 to T10, T20 transaction, hopefully, Q4, Q1, Q2 next year, they will also start meaningfully delivering. But broadly speaking, I think almost every region has seen a strong growth both on new agent addition as well as business given by the new customers.

Okay. Okay. That's great to hear. Secondly, in terms of the markets, Europe and Middle East are our largest markets and the growth smartly recovered in this quarter. So now post Classic acquisition, how should we think about the growth, let's say, in these 2 markets, which are almost 60% of the GTV contribution for us?

So Karan, I think from a percentage of GTV contribution from a saliency perspective, obviously, U.S. has also become significantly large for us now. I think combined TBO core business and Classic business will be north of $700 million, $800 million GTV. So that will just change saliency a little bit. But the growth profile for Europe and Middle East stand-alone should not be affected at all. Those are fairly -- the way our business operates is that each of these regions run fairly independently while sharing supply and platform as a common lever. So these businesses should continue to see the benefits of all the new agent addition and all the investment we have done over the -- in air in the growing our sales team. So I would not see them getting impacted either way because of addition of Classic. Yes, the share of wallet of the overall TBO business will reduce because we have now added significantly larger GTV in North America.

Okay. A related question to that is since Classic source market is mainly in U.S. So cross-selling it to, let's say, Europe and Middle East. So can we expect these numbers which you are reporting, can they accelerate from here because of Classic integration?

See, the Classic integration will have one supply benefit that Classic has access to about 1,500 luxury, ultra-luxury hotels, which many of them were not directly working with TBO in the past. Those hotels will become available to the broader TBO ecosystem in due course of time. So because Classic's technology still needs to be integrated, which will take some time. But once that happens, yes, we should see overall benefit of that in the entire ecosystem, not necessarily only in Europe and the Middle East. It's very hard to quantify right away, Karan, that how much of that upside is going to be and also not very easy to quantify that how much of that upside is actually margin expansion, bottom line upside and how much of it is just new growth that happens because of it. So very early days, but you're right that the supply that we get access to because of Classic should benefit our overall bigger -- broader TBO ecosystem as well.

Okay. Last question from my side is the gross margin in the hotels and ancillary business, second quarter in a row is in the mid-60s. This number used to be around 70%. Last time you mentioned that the contribution from the commission business was a bit higher. So was that the same phenomenon this quarter as well?

Yes, Karan, you would see that our revenue has grown significantly faster than GP. And we have made a note of this in our shareholder letter as well. Essentially, what is happening is that when the share of wallet of suppliers who work on a commissionable model increases in any specific quarter, then the -- all of that commission obviously flows back into revenue. But then part of that commission gets shared as netted off when we come down to the GP line. And hence, in such quarters, you will see revenue run faster than GP.

Just to add, Karan, if you see as a percentage of GT-- sorry GP, as a percentage of GTV, it has been almost flat, it has marginally grown from 5.5% to 5.6%.

Okay. Just one clarification. So this commission versus take rate, what is the broad split right now in the hotels -- at this point of time?

I think the question is how much is commissionable, how much is net rate?

How much is commission and how much is net? In terms of the GTV contribution approx, it would be, I would say, 35% of GTV is coming from the commission model.

We move to the next participant, Swapnil Potdukhe.

First of all, congrats on a good set of numbers. I would like to start with Classic accounting policies. So what I want to understand over here is like how do you book the GTV in Classic? Do you book it at the time of a customer making the transaction? Or is it at the time of travel? And a related question to that is that how should we see the seasonality playing out in the Classic business, particularly?

So currently, the numbers the Classic has been reporting in the historical financials, the GTV numbers have been reported basis the time of travel. However, considering our accounting policy is that we record GTV based on the booking basis, we are working on to arrive the numbers that we would be reporting in the subsequent quarters based on our accounting policy. So there would be some change in the way that historically Classic has been reporting the numbers and the way it would get consolidated in our numbers.

So how would that affect your seasonality? I mean how should we look at that business affecting your quarterly numbers?

Give us the time for this quarter I still to have those numbers -- exact numbers based on the booking related to the -- near to the last [ thesis and date ], et cetera. So we will share more insights about the same in the next quarter.

Okay. So the next question is on your Lat Am business. Growth over there has been 10%. I mean while the rest of the portfolio is firing good enough, when do we expect the Lat Am growth to recover back to, let's say, 20s or around those -- that growth number?

Swapnil, Lat Am as a region is facing significant headwinds. In fact, some growth has revived, but there have been the structural challenges over there, which is some -- kind of some it is beyond our control. We talked about the IOF tax, which remains an ongoing issue because it does make outbound travel more expensive and harder for us to do that business. The second challenge is that their currencies remain -- still remain volatile. And given their booking windows are very long in the sense they book significantly in advance, it creates a little bit of currency ForEx risk for us. We have taken some actions, and hence, you've seen some growth come back. I would not hazard a guess on how quickly we can get this into, say, 20% kind of growth as yet Swapnil because there are factors which are rapidly changing and which are really beyond anybody's control at this point in time. Having said that, from a saliency perspective, this has not a very major impact on the overall numbers for us. So we are tracking closely. We are driving for higher growth in the -- in Q3, but very hard to say that will it come back to 20% plus, plus kind of a growth very quickly.

Got it. And a question on your margin and -- organic margin given that going ahead, we will have Classic also integrated in our numbers. So let's just assume your business grows 20% in the hotels business next quarter also. Will it be fair to say that ex of Classic, we will still see operating leverage on a Y-o-Y basis? And because I understand Q-on-Q basis, there will be seasonality. But on a Y-o-Y basis, we should expect operating leverage playing out and some bit of margin expansion ex of Classic.

Yes. So the original thesis remains. And really, we've been anchoring around Q4. But yes, you should see -- I think the number that we are tracking right now is that how is SG&A year-on-year slowing down because we had a very strong high 25%, 30% SG&A growth in starting beginning of this calendar year on a year-on-year basis. That is definitely slowing down, much more in our control. The GP growth should continue at a certain pace, minus the seasonality. So yes, you are right to say that ex of Classic, we should see EBITDA catch up with GP and eventually holding GP as well. We are anchoring more around Q4 right now, given that Q3 historically is the leanest of all quarters for us.

Okay. Got it. And one question on your cash flows also. This quarter, it seems your cash flow conversion on OCF to EBITDA seems to have dipped a bit. Any particular reason that you can call out why that has changed from historical trends?

So specifically in the Brazil market, basically, it works on an installment basis. And we earlier used to kind of anticipate those installments to get the funds upfront. But what we have realized is that the cost of anticipation is much higher. But currently, what we have experimented this quarter was basically we don't do anticipation. But instead of that, we obviously have a negative working capital. So instead of anticipating the same, we have kind of done away with that practice and try to hedge our ForEx risk. And that's what has impacted some bit on the working capital side. But we are still evaluating that experiment. And if it makes sense, we will continue with it in the future.

Got it. And just one question on your amortization policy also because I think there has been some bit of amortization in your balance sheet this quarter intangibles. Any -- and that number, I think -- if I look at FY '25 full year and the half year for this, the number seems to be the same. So it seems like there is some acceleration in amortization cost, possibly some R&D-related costs. If you can just help explain that.

So it's primarily -- I would say there is not much increase in the amortization of the intangible per se. I would say, minor increase in the capitalization and that I would have led to some increase in the amortization cost over a period of time. And secondly, at times like some projects would get capitalized and would get amortized over a period of 5 years. But in some time the project life is small -- short, the amount gets amortized over 3 years. So our policy is that amortization of the intangible will happen between 3 to 5 years. And so that would also have some impact on the numbers which we report on the amortization.

Just last one on your ESOP. There has been some decline in the ESOP Q-on-Q, INR 4 crores delta. Is this the new run rate that we should be looking at?

No, no, no. This is actually one-offs due to the reversal of some of the cost because of the resignees in this quarter. The cost that we were seeing in the last quarter around, I would say, INR 7 crores a month should continue in the upcoming quarter based on the grants that have been issued till 30th of September. Obviously, the further grants get issued in this quarter, the cost may change.

[Operator Instructions] We will move to the next caller, Mr. Sucrit Patil.

Am I audible?

Yes. Loud and clear Sucrit.

My name is Sucrit Patil, and I am from Eyesight Fintrade Private Limited. I have a forward-looking question. As travel platforms get more tech-driven and inventory access becomes easier, what is TBO Tech doing to build a strong edge, not just through technology or supply, but through something deeper that makes the platform hard to replace?

So Sucrit, I think we have to look at the platform in totality to understand where it creates [ more so a ] network effect. There are 2 sides. And one is, yes, the supply side, which is increasingly getting tech enabled. But having said that, the suppliers, especially the larger hotel chains and larger hotels are getting very selective in who they want to work with. So the scale allows us to make sure that if they select to work with a handful of players, we are amongst those handful of players. So for a new entrant, it is increasingly harder to get access to that supply. On the demand side, the business is far more fragmented because we are servicing the travel agent market, which is -- millions of travel agencies across hundreds of countries. So to aggregate this demand at a global scale is quite hard, which is a combination of a tech play, but also the feet on street that we set up, the local infrastructure that we set up for local support, local payments, customizing supply and the user experience for different parts of the world. So it is -- it both have to come together and at scale for a business like this to be recreated. So our belief is that as the size of the network grows, especially on the demand side, it becomes harder and harder to recreate this business and the network effects make it that much easier for us to grow faster vis-a-vis competitors who are new to the market or who may be 1 or 2 country players.

Okay. And my final question is to Mr. Vikas Jain. As you invest more in tech and expand globally, how are you making sure the company stays efficient? And what cost levers do you think will help protect the margins over the next few quarters? I'm just trying to understand how you are going to balance growth and innovation with long-term margin stability.

So Sucrit, as Gaurav had pointed out that in coming -- what we have been in investment phase, specifically, I would say, on our sales feet on street across the global markets and as the same is nearing finalization, we will be seeing operating leverage coming in, specifically the SG&A growth would be lower than the growth in our gross profit. And thus, we anticipate that the EBITDA growth should be faster than the revenue or the gross profit growth in future.

Mr. Moez Chandani.

This is Moez, I'm calling from AMBIT Capital. So yes, just my first question was on the APAC markets. So I think you saw a very good growth in the APAC markets, maybe 40% plus. Now given that this is still a small market for you, is this something that you think will continue to keep growing at this 40% rate? Or do you think that, that growth would maybe taper off at some point in these markets?

So Moez, obviously, becoming on a smaller base in a relatively large market, we are seeing high double-digit growth in that market right now. A lot of this growth is driven by new markets, specifically Australia, which we count as part of APAC in our business, where we've seen good traction. It's very hard to comment and give such a specific guidance on where the growth will sit in subsequent quarters. But I can just generally talk about how we see the market. It's a very large -- it's the world's most populated market and the largest travel market in terms of number of passengers, may not be necessarily the largest in terms of travel spend, but in number of passengers. So if you look at the runway for growth in these markets, there are just immense source markets that we have barely touched. So Australia is very small for us, but growing at a very fast pace. We are somewhat penetrated in Indonesia, but again, it's a very large market compared to our presence over there. We have not even touched markets like Japan and Korea as yet and no immediate plans in the next few quarters as well. So if I was to look at a 3- to 5-year view on this market, it should be very large for us because that is how it is eventually going to be one of the larger global markets and hence, our business should mirror that. Today, you will see it's one of the smallest markets for us. So yes, there is a runway for growth, but very difficult to comment that will this specific growth rate continue? Will it accelerate or decelerate over the next few quarters.