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Cox & Kings Ltd
F3Q11: In-line Results; Cash
Continues to Affect Earnings
Quick Comment – Strong revenue growth, margin
affected by phasing of ad spending: Cox & Kings
reported revenue, operating profit, and PAT growth of
37%, 27%, and 6%, respectively vs. our expectations of
28%, 28%, and 6%. The strong revenue growth was
broad-based with both domestic and international
operations performing well. The key highlights of the
result are: 1) higher advertisement expenses; 2) lower-
than-expected financial income; and 3) high levels of
cash continue to depress return ratios for the company.
Key positives: 1) Domestic revenue grew 38%, while
international business grew 37% in F3Q11. 2) C&K
continues to invest for future growth – consolidated ad
spending was up 76% YoY, driven by higher ad
spending in the domestic business (+420bp YoY). 3) As
per management, C2010 arrivals into India were
~15-18% higher YoY and inbound tourism remains
strong in F4Q. 4) Management expects outbound
tourism industry to grow at mid-20s in C2011.
Key Negatives: 1) Interest expenses (Rs167mn in F3Q)
continue to weigh on earnings; 2) Other Income was
lower than expected, as the company is unable to fully
invest the available cash balance (part of it raised as
GDR); 3) staff costs were higher by 110bp, driven by an
increase in costs in the international business; and 4) tax
rate was higher than expected at 32%.
What’s in the price: C&K is currently trading at 17x
F2012 earnings, on our estimates. C&K has Rs12bn of
cash on its balance sheet. Markets seem overly
concerned about it destroying capital through
acquisitions. C&K has a successful record in creating
value from acquisitions, and this cash presents an
attractive option value for investors, we believe. If it can
deploy this cash at even half its current adjusted RoCE,
the returns thereon would double current profits. In our
base case, we value this cash at 0.6x book, given C&K’s
limited operating history since listing.
Long-term story intact; geared to disposable income
growth: We believe Cox & Kings is well placed to capitalize on
a potential inflection in travel expenditure in India and increase
value through synergistic international acquisitions. Indian
operations account for ~50% of consolidated revenue, for
which we expect a 22% CAGR in the next five years. Rising
disposable income, favorable demographics, and travel
aspirations of India’s large middle class, combined with food,
language and cultural barriers, are among the key structural
drivers of growth in outbound group tours from India. We
reiterate our OW rating.
Conference Call Details: Management is hosting a
conference call on Monday, February 7, at 4pm IST. Access
Numbers: +91 22 66290309 / +91 22 30650109. Toll Free:
USA: 1 866 746 2133, UK: 0 808 101 1573.
Valuation and PT methodology: We value C&K at Rs660 per
share based on our base-case DCF model. We assume
NOPAT growth of 15% during F2016-26 and a terminal growth
rate of 5%. We assume that the company will earn a long-term
return on incremental capital employed (ROIC) of around 15%
versus its cost of capital of 11%.
Risks to our price target: 1) Promoter interest in associate
companies; 2) capital investments by C&K in associate
companies; 3) macroeconomic shock; 4) competitive and
fragmented industry; and 5) integrating acquired companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cox & Kings Ltd
F3Q11: In-line Results; Cash
Continues to Affect Earnings
Quick Comment – Strong revenue growth, margin
affected by phasing of ad spending: Cox & Kings
reported revenue, operating profit, and PAT growth of
37%, 27%, and 6%, respectively vs. our expectations of
28%, 28%, and 6%. The strong revenue growth was
broad-based with both domestic and international
operations performing well. The key highlights of the
result are: 1) higher advertisement expenses; 2) lower-
than-expected financial income; and 3) high levels of
cash continue to depress return ratios for the company.
Key positives: 1) Domestic revenue grew 38%, while
international business grew 37% in F3Q11. 2) C&K
continues to invest for future growth – consolidated ad
spending was up 76% YoY, driven by higher ad
spending in the domestic business (+420bp YoY). 3) As
per management, C2010 arrivals into India were
~15-18% higher YoY and inbound tourism remains
strong in F4Q. 4) Management expects outbound
tourism industry to grow at mid-20s in C2011.
Key Negatives: 1) Interest expenses (Rs167mn in F3Q)
continue to weigh on earnings; 2) Other Income was
lower than expected, as the company is unable to fully
invest the available cash balance (part of it raised as
GDR); 3) staff costs were higher by 110bp, driven by an
increase in costs in the international business; and 4) tax
rate was higher than expected at 32%.
What’s in the price: C&K is currently trading at 17x
F2012 earnings, on our estimates. C&K has Rs12bn of
cash on its balance sheet. Markets seem overly
concerned about it destroying capital through
acquisitions. C&K has a successful record in creating
value from acquisitions, and this cash presents an
attractive option value for investors, we believe. If it can
deploy this cash at even half its current adjusted RoCE,
the returns thereon would double current profits. In our
base case, we value this cash at 0.6x book, given C&K’s
limited operating history since listing.
Long-term story intact; geared to disposable income
growth: We believe Cox & Kings is well placed to capitalize on
a potential inflection in travel expenditure in India and increase
value through synergistic international acquisitions. Indian
operations account for ~50% of consolidated revenue, for
which we expect a 22% CAGR in the next five years. Rising
disposable income, favorable demographics, and travel
aspirations of India’s large middle class, combined with food,
language and cultural barriers, are among the key structural
drivers of growth in outbound group tours from India. We
reiterate our OW rating.
Conference Call Details: Management is hosting a
conference call on Monday, February 7, at 4pm IST. Access
Numbers: +91 22 66290309 / +91 22 30650109. Toll Free:
USA: 1 866 746 2133, UK: 0 808 101 1573.
Valuation and PT methodology: We value C&K at Rs660 per
share based on our base-case DCF model. We assume
NOPAT growth of 15% during F2016-26 and a terminal growth
rate of 5%. We assume that the company will earn a long-term
return on incremental capital employed (ROIC) of around 15%
versus its cost of capital of 11%.
Risks to our price target: 1) Promoter interest in associate
companies; 2) capital investments by C&K in associate
companies; 3) macroeconomic shock; 4) competitive and
fragmented industry; and 5) integrating acquired companies.
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