COX AND KINGS Earnings momentum continues:: Edelweiss

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􀂄 India spearheading growth; EBITDA margins better
Cox and Kings’ (CNK) consolidated Q2FY11 sales jumped 28.1% Y-o-Y to INR 1.07
bn as Indian operations reported 29% Y-o-Y sales growth. Q-o-Q, however, sales
declined 44% due to seasonal factors. Sales growth at the subsidiaries level was
also robust, at 28%. With H2 being seasonally strong for travel and travel related
services in the West, we expect the earnings momentum to continue. EBIDTA
margins at the consolidated level improved to 45.5% from 44.1% Y-o-Y. For the
same period, EBIDTA margins in domestic operations improved 620bps Y-o-Y as
the company was able to judiciously leverage the marketing spend and other
expenses. We maintain our 27% and 19% sales growth estimates for FY11 and
FY12, respectively, as we are not building in any further acquisitions. We expect
CNK to maintain 45% EBIDTA margins on consolidated basis for FY11E and
FY12E.


􀂄 Gearing for acquisition; working capital requirement rising
For a potential acquisition, during the quarter, CNK raised INR 3.04 bn, issuing
5.3 mn shares at INR 570 each. The company also raised further debt to add to
the cash balance for any acquisition.

During six months period ending September 2010, the net current assets
excluding cash has increased by INR 1.4 bn where debtors increased by ~ INR
600 mn and loans and advances by ~ INR 1 bn. We believe that increasing
working capital (WC) in a traditional negative WC business is a point of concern.
Management has clarified the increased funds requirement is due to corporate
travel, forex, inbound travel and MICE business segments. We would like to
closely monitor the movement of WC over next few quarters.

􀂄 Outlook and valuations: Positive; maintain ‘HOLD’
We continue to like CNK’s business model and the brand’s ability to drive volumes
with margin expansion. With seamless integration of acquisitions and starting of a
luxury train, along with the visa processing facility, we believe the company is in a
sweet spot to benefit from growth in inbound, outbound and domestic travel. At
CMP of INR 531, the company is trading at PE of 25.9x and 20.4x FY11E and
FY12E, respectively. We maintain our price target of INR 520, valuing CNK at 25x
and 20x P/E for FY11E and FY12E, respectively. We maintain ‘HOLD’
recommendation on the stock.