Should You Invest in TBO Tek Ltd for the Long Term? Stock Analysis by Finology

​​​​​TBO Tek Ltd., one of India's leading companies in the online travel booking segment, grew at an astonishing 50 %+ CAGR in sales and 90 %+ CAGR in profits over the last 3 years.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether TBO Tek Ltd. is a good long-term stock or not. Find out in this article.

What makes this industry special?

The global travel and tourism industry is big. In 2024, it contributed ~$10.9 trillion to the global GDP, which is 10% of the world's GDP. One in every 10 jobs created worldwide comes from this industry.

The travel and tourism industry is entering a new phase of digitalisation. After a few U.S. and European companies kicked off the online travel market in the mid-1990s, mobile travel apps shook up the digital tourism experience in the second half of the 2000s and now, the recent boom of generative artificial intelligence promises to revolutionise again the way we plan and book trips online. While the use of AI in travel and tourism is still at an early stage, online travel agencies (OTAs) are already experimenting with AI-powered chatbots, mainly focusing on tools that suggest trip itineraries and facilitate bookings.

The digital travel market is expected to grow fast, at a CAGR of 15%, from $400 billion in 2022 to $1,618 billion by 2032. According to a study by Euromonitor in 2023, 66% of all travel bookings were made online. According to Statista's survey in 2023, 75% of travellers said social media posts inspired their trips to a specific destination 2023. With this, companies in the travel and tourism industry are expected to focus more on technological advancements.

Multiple online platforms are available for consumers to make hotel bookings. For example, MakeMyTrip, Yatra online, etc., are available for booking hotels. It becomes difficult for hotels and travel industry companies to simultaneously manage inventories (room availability), pricing, etc., across various platforms. This problem is solved by travel distribution platforms. Travel distributors act as an intermediary between hotels and OTAs, airlines and ticket booking platforms, etc. and facilitate seamless exchange of availability of rates, room availability, etc between hotels and OTAs.

For 2023, the total travel spending enabled by travel distribution platforms was estimated at ~$1.9 trillion, covering global air, hotel, and ancillary markets. This is expected to grow at a CAGR of 8.1% from 2023 to 2027 to reach US$2.6 trillion, mainly driven by the need to aggregate the fragmented global inventory for hotels and airlines for travel buyers and resolve the concerns of travel buyers (OTAs, travel agents, etc.) and suppliers (hotels, airlines, etc.).

The travel industry is highly fragmented, with numerous small and mid-sized providers, leading to complexity in distribution. B2B distribution platforms serve as centralised hubs, streamlining processes for travel buyers and suppliers. For suppliers, distribution platforms provide extensive supply and demand reach by connecting them with multiple travel agencies, thus simplifying inventory management. Secondly, they enhance efficiency by reducing operational costs through streamlined booking and payment processes.

The travel buyer market in India, particularly for airlines and hotels, is experiencing substantial growth driven by factors such as a growing middle-class population, increased disposable incomes, and government initiatives to enhance the travel experience. The market is characterised by four main distribution channels: direct online, direct offline, online platforms, and traditional travel agents. These channels are expected to contribute to the market's growth.

Source: TBO Tek Annual Report FY24

To tap into this theme, we decided to look for key players in the Indian stock market who could benefit from the rising travel and tourism tech market both in India and globally. Our search led us to an interesting company: TBO Tek Ltd.

Business Model of TBO Tek Ltd.

TBO Tek Ltd. is a B2B focused distribution platform company catering to the travel and tourism industry. Started in 2006, the company is one of the leading players in the segment, catering to travel buyers in 100+ countries. It offers a comprehensive travel inventory tailored solutions to suppliers and buyers, enabling them to seamlessly transact through TBO Tek's two-sided technology platform, allowing suppliers to showcase their inventory to the global buyer base while empowering buyers with an integrated, multicurrency, and multilingual solution for discovering and booking travel across leisure, corporate, and religious segments worldwide.

Revenue Mix of TBO Tek

Source: Company

1. Hotel and ancillary: This segment contributes the majority, ~79%, of the total revenues. It includes providing distribution platform services for hotels, car rentals, travel insurance, cruises, etc. The segment contributed the majority, 59% of total gross transaction value (GTV) at a healthy take rate of ~7.5%.

This hotel and ancillary segment is a higher-margin segment for the company. It contributed ~84% of the company's gross profits for FY25.

2. Airlines and others: This segment contributed a minority of ~21% of the total revenues. The company started business with this segment in 2006, providing distribution platform services to airlines. For FY25, the segment contributed ~41% to the total GTV, operating at a take rate of ~2.6%.

Due to the segment's lower take rate of ~2.6% vs. 7.5% for hotels and ancillary segments, the company later expanded into the hotels segment, which now accounts for most of its revenues. The airlines segment is less margin lucrative and contributes only ~16% of the gross profits.

Unit Economics of TBO Tek

Source: Company, Finology Research Desk

For TBO Tek, COGS majorly includes the service fees. These service fees are commissions paid to travel agents or partners when they help sell airline tickets, hotel rooms, or other travel services through TBO's platform.

Employee costs account for ~21% of the company's total revenues. These costs have remained stable over the last few years.

The company has an asset-light business model, thus has lower depreciation and amortisation costs.

Other expenses form the majority, ~33% of the total costs. These majorly include payment gateway charges, business support services, etc.

Net profit margin at ~13% has improved for the company over the years with scale and increased contribution from hotels and ancillary segments.

Porter 5 Forces Analysis of TBO Tek Ltd.

Source: Finology Research Desk

1. Moderate Threat of New Entrants: The distribution platform business faces moderate threats to new entrants. Newer players can enter the segment without any regulatory barriers, but have to infuse high initial capital for technology setup. Thus, new players often have to depend on a higher initial capital requirement.

Also, in this business, a strong network effect is a key strength for any company as it creates a virtuous cycle. As more travel agents and individual travellers use a company's platform, it attracts a wider range of hotels, airlines, and other travel suppliers. This increased selection attracts even more users, thus creating a valuable ecosystem for all. Thus, it becomes difficult for new players to gain market share from established players.

2. Low Bargaining Power of Suppliers: The company does not need to purchase raw materials, as it provides intangible IT services. Hence, it has no supplier power risk.

3. High Bargaining Power of Buyers: The company has low pricing power over its customers. Trade receivables form the majority, 60 %+, of the balance sheet, and the cash conversion cycle is long for the company due to the longer time spent collecting payments from customers.

4.  High Threat of Substitutes: The company faces high threats from its substitutes. The rising trend of AI-driven platforms are increasingly becoming viable substitutes for the traditional travel tech companies. If unable to cope up with the fast technological advancements in the industry, the company’s business model could be disrupted easily from the substitute players.

5.High Competition in the Industry: The competitive intensity is high among the players in the distribution platforms industry. The company faces competition not only from domestic but also from international peers. The competitive environment creates a need for every player to offer services at competitive prices and thus creates price competition.

What led us to reject TBO Tek Ltd. for Finology 30?

1. Risky Financial Position: While the income statement reveals a company's financial performance, it’s the balance sheet that tells the real story — the financial position. For us, TBO Tek’s financial position remains unhealthy despite the company having a low debt-to-equity ratio. This is because ~65% of the balance sheet comprises trade receivables. Such a high % of trade receivables highlights two points:

a. The company is vulnerable to a potential massive hit on its profits if any write-offs or provisions are created for doubtful debts. Basically, if its customers default or refuse to pay the receivables, then the company would have to write-off these receivables. Any potential write-offs can impact its P&L and cash flows and hamper long term sustainability of the business.

b. The company has very low bargaining power over its customers.

The gravity of the impact a company’s financial position may have in case of not being able to recover the large % trade receivables can’t be ignored.

2. Concentration Risks: The company has a concentrated customer base. The company derives ~60 %+ of the total GTV from the top 5 customers. Also, a single customer accounts for ~20 %+ of the company's GTV. If any of the major customers stop doing business with the company, its revenues can be severely impacted. 

The Bottom Line

TBO Tek Ltd., one of India's leading online travel booking companies, grew its profits at an astonishing 90%+ CAGR over the last 3 years. However, we found concerns about its financial position, especially around trade receivables and concentration risks.

For Finology 30, our ideology has been to focus on fundamentally strong business models operating with a strong financial position and with less client concentration risk. For now, TBO Tek Ltd. failed to pass our investment checklist. So, we decided not to go ahead with TBO Tek Ltd.

However, one stock from the travel tech industry made it to the Finology 30. Check it out here.