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Cox & Kings (COKI.BO, Rs395, OW, PT Rs655)
Why are we OW?
• C&K is well placed to capitalize on rising disposable
income in India and drive significant value accretion
through synergistic acquisitions.
• C&K’s international business complements its Indian
business, enabling scale, cross-selling of existing
products and for consolidated product sourcing.
• While many investors worry that C&K may destroy capital
through acquisitions, if the company is able to deploy its
cash at even half its current adjusted RoCE, the returns
thereon would nearly double profits, we estimate.
Geared to disposable income growth: 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, 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.
C&K’s international business complements its Indian
business: India’s outbound season starts just as the global
season ends. An international travel operator with a large India
presence is thus able to operate through the year, which
enhances its bargaining power with global vendors (airlines,
hotels, ground transportation providers, etc.). C&K also has
tie-ups at popular tourist destinations such as the Royal
Horticultural Society and the Natural History Museum in the UK
and a private CNK mountain in Switzerland that are
innovatively marketed to offer a differentiated product to
consumers. International business also helps the company
build scale that it can then leverage for cross-selling existing
products and for consolidated product sourcing. Our analysis of
bulk buying and preferred vendor status suggests ~10-40%
discount to hotel rack rates for large travel operators.
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.
F3Q11 – Inline Results – Cash Continues to Impact
Earnings: Strong Revenue growth, margins influenced by
phased ad spending: Cox & Kings reported revenue,
operating profit and PAT growth of 37%, 27% and 6%
respectively vs. our expectation of 28% 28% and 6%. The
strong revenue growth was broad-based with both domestic &
international operations performing well. The key highlights of
the result were:
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 revenues grew at 38%, while international
business grew at 37% in Q3F11
2) C&K continues to invest for future growth - consolidated
ad-spend was up 76% yoy, driven by higher ad spending
in the domestic business (+420bps yoy)
3) As per management, C2010 arrivals into India were
~15-18% higher yoy and inbound tourism continues to be
strong in Q4. 4) Management expects outbound tourism
industry to grow at mid 20s in C2011.
Key Negatives:
1) Interest expenses (Rs167mn in Q3) continue to weigh
down 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 110bps, driven by an increase
in costs in the international business
4) Tax rate was higher than expected at 32%.
Why Overweight
• Drawing parallels with share of
wallet for travel in other Asian
countries, we forecast that
organized offline travel in India will
increase at an 18% CAGR over five
years.
• C&K is well placed to capitalize on
rising disposable income in India
and drive significant value accretion
through synergistic acquisitions.
• While many investors worry that
C&K may destroy capital through
acquisitions, if the company is able
to deploy its cash at even half its
current adjusted RoCE, the returns
thereon would nearly double profits,
we estimate.
Key Value Drivers
• Domestic business revenue growth
driven by leisure travel growth and
gross margins.
• International business revenue
growth driven by synergies.
• Return on incremental capital
invested.
Potential Catalysts
• Effective use of balance sheet for
value-accretive acquisitions.
• Synergies, buying efficiencies and
scale benefits across C&K’s global
operations.
Key Risks
• Promoter interest in associate
companies.
• Capital investments by C&K in
associate companies.
• Macroeconomic shock.
• Competitive and fragmented
industry.
• Integrating acquired companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cox & Kings (COKI.BO, Rs395, OW, PT Rs655)
Why are we OW?
• C&K is well placed to capitalize on rising disposable
income in India and drive significant value accretion
through synergistic acquisitions.
• C&K’s international business complements its Indian
business, enabling scale, cross-selling of existing
products and for consolidated product sourcing.
• While many investors worry that C&K may destroy capital
through acquisitions, if the company is able to deploy its
cash at even half its current adjusted RoCE, the returns
thereon would nearly double profits, we estimate.
Geared to disposable income growth: 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, 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.
C&K’s international business complements its Indian
business: India’s outbound season starts just as the global
season ends. An international travel operator with a large India
presence is thus able to operate through the year, which
enhances its bargaining power with global vendors (airlines,
hotels, ground transportation providers, etc.). C&K also has
tie-ups at popular tourist destinations such as the Royal
Horticultural Society and the Natural History Museum in the UK
and a private CNK mountain in Switzerland that are
innovatively marketed to offer a differentiated product to
consumers. International business also helps the company
build scale that it can then leverage for cross-selling existing
products and for consolidated product sourcing. Our analysis of
bulk buying and preferred vendor status suggests ~10-40%
discount to hotel rack rates for large travel operators.
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.
F3Q11 – Inline Results – Cash Continues to Impact
Earnings: Strong Revenue growth, margins influenced by
phased ad spending: Cox & Kings reported revenue,
operating profit and PAT growth of 37%, 27% and 6%
respectively vs. our expectation of 28% 28% and 6%. The
strong revenue growth was broad-based with both domestic &
international operations performing well. The key highlights of
the result were:
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 revenues grew at 38%, while international
business grew at 37% in Q3F11
2) C&K continues to invest for future growth - consolidated
ad-spend was up 76% yoy, driven by higher ad spending
in the domestic business (+420bps yoy)
3) As per management, C2010 arrivals into India were
~15-18% higher yoy and inbound tourism continues to be
strong in Q4. 4) Management expects outbound tourism
industry to grow at mid 20s in C2011.
Key Negatives:
1) Interest expenses (Rs167mn in Q3) continue to weigh
down 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 110bps, driven by an increase
in costs in the international business
4) Tax rate was higher than expected at 32%.
Why Overweight
• Drawing parallels with share of
wallet for travel in other Asian
countries, we forecast that
organized offline travel in India will
increase at an 18% CAGR over five
years.
• C&K is well placed to capitalize on
rising disposable income in India
and drive significant value accretion
through synergistic acquisitions.
• While many investors worry that
C&K may destroy capital through
acquisitions, if the company is able
to deploy its cash at even half its
current adjusted RoCE, the returns
thereon would nearly double profits,
we estimate.
Key Value Drivers
• Domestic business revenue growth
driven by leisure travel growth and
gross margins.
• International business revenue
growth driven by synergies.
• Return on incremental capital
invested.
Potential Catalysts
• Effective use of balance sheet for
value-accretive acquisitions.
• Synergies, buying efficiencies and
scale benefits across C&K’s global
operations.
Key Risks
• Promoter interest in associate
companies.
• Capital investments by C&K in
associate companies.
• Macroeconomic shock.
• Competitive and fragmented
industry.
• Integrating acquired companies.
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