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Cox & Kings Ltd. (C&K) is one of the oldest and most reputed travel and tour
operators in India, offering a one‐stop shop for the travel needs of all segments of
travellers. The company with a global presence has 255 touch points in 164 cities
across 4 continents. The company’s business can be broadly divided into four
different segments viz. Leisure, Corporate, Forex and Visa Processing. In the last five
years (FY06‐10), consolidated net sales and PAT have grown at a CAGR of 45% and
50% respectively. The net sales are expected to grow by 25% in FY11.
At CMP of Rs 397, the scrip trades at a P/E of 18.7x and 15.3x based on FY11E &
FY12E consolidated EPS of Rs 21.3 and Rs 25.9 respectively. We initiate coverage with
buy recommendation with a target price of Rs 510 (based on DCF valuation) which is
19.7x FY12E earnings. The target price translates into a potential upside of 28.5%.
Key Highlights
Acquisitions to drive growth: C&K is scouting for global acquisitions to drive its
growth and strengthen its position as the leading tour operator in the country. For this
purpose, C&K has raised Rs. 12 bn through IPO proceeds, GDR and internal accruals.
Acquisitions in the past have remained value accretive and we expect it to continue
this trend in the future.
Asset light model reduces downturn risk: Unlike some of its peers like TUI, Thomas
Cook etc, C&K has an asset light model. It does not own any expensive assets nor
does it commit to buy any inventory from its suppliers. It has only service level
agreements with its suppliers. Thus, C&K does not bear the risk of holding inventory
especially during downturn.
Franchisees to improve distribution network and profitability: It plans to add 150
franchisees in the next 12‐18 months. Franchise model will allow to increase its
presence in more cities without investing in the infrastructure and other associated
costs. Franchisees are expected to contribute 15‐18% of total revenues in next 2‐3 yrs.
Common Buying Group to give bargaining power: The growing business volumes has
given C&K better bargaining power while negotiating with its suppliers for air travel,
hotel accommodations, car rentals and ground handling services. This enhanced
bargaining power with its vendors will generate significant cost savings which will
result in improved operating margins.
Seasonality impact mitigated by geographical diversification: C&K’s business is not
impacted by seasonality. Q1 and Q2 are off‐season for India inbound tourists but it is
peak season for India outbound tourists since its summer vacations in India. Q3 and
Q4 are peak season for India when most of the foreign tourists are visiting India.
Asset light model reduces downturn risk
C&K works on asset light model and does not own fixed assets such as
hotels, aircrafts, cruises etc. Most of the big players like TUI, Thomas Cook,
etc, own large assets. TUI, for instance, has its own aircrafts, hotels, cruises.
During economic downturn companies holding assets will get impacted
even if 5% of their bookings get cancelled since it will be difficult to resell
that inventory later. Thus, the asset light model mitigates the reselling risk
during economic downturn.
C&K procures the inventories (hotel rooms, airline seats, etc.) from
suppliers. It does not buy any inventory in advance. It has only service level
agreements with them. Bookings with suppliers are done at pre defined
rates as well as have pre defined date of release. Up to the date of release
there is no penalty for cancellation of the bookings. After the date of release,
penalties are incurred but it is passed on to the customers in the form of
cancellation fee. Thus, C&K does not bear the risk associated with holding
inventory.
Franchisees to improve distribution network
C&K is a global player with presence in 20 countries through subsidiaries,
branch offices and representative offices as well as through global network
of sales agents. In India, the company has 14 sales offices, 115 franchisees,
143 preferred sales agents. To improve its domestic penetration, it plans to
add 200 franchisees to its network in the next 12 months. The franchise will
be a one stop shop for all travel related services and will sell C&K products
only. C&K provides training, site development, and advertising &
marketing support to the franchise. Franchise model has the following
advantages:
Compared to other growth methods it requires minimal investment in
new premises, equipment and people.
Multiple units can be opened simultaneously, gaining a foothold over
competitors and increasing the company’s competitive advantage
As additional locations are opened, C&K’s brand visibility and brand
recognition will increase.
Purchasing power will also increase as its bookings will increase,
allowing it to negotiate for better rates with suppliers.
Thus, without leveraging its balance sheet C&K can achieve growth in size
and spread its reach through the franchise model.
Franchises are expected to contribute 15‐18% of total revenues in 2‐3 yrs.
Growing Indian economy to boost domestic and outbound tourism
International Monetary Fund in its report on India has projected GDP
growth at 8.4% for 2011 which is above the historical trends. India’s tourism
industry is also expected to witness a strong period of growth. Several
reasons are cited for the growth and prosperity of India’s travel and tourism
industry. The burgeoning Indian middle class, rising income levels,
increased standard of living and availability of low cost transportation
facilities along with the growth in high spending foreign tourists, and
coordinated government campaigns to promote ‘Incredible India’ are
driving domestic tourism growth.
India’s outbound leisure travel is also on an upward trend. The increase in
disposable income of the Indian middle‐class population and the aspiration
to travel to foreign countries for vacation along with easy availability of
attractive tour packages has increased outbound leisure travel from India.
C&K provides a bouquet of international tour packages to meet the needs of
price conscious Indian vacationer. The travel and tourism sector in India is
expected to grow by 6.7% in 2010 followed by 8.5% annually in the next ten
years as per WTTC and ranks fourth in WTTC’s list comprising of all the
countries in the world. China ranks first in the list with 9% annualised 10‐
year real growth in travel and tourism sector.
Common Buying Group to give bargaining power
In the past few years the company has grown organically as well as made
several acquisitions in various countries thus increasing its geographical
presence and customer base. In the last four years the company has acquired
seven companies. Instead of each subsidiary buying inventory on
standalone basis, products are sourced through a common buying group.
This results in bulk buying of inventory and with the growing business
volumes C&K will have better bargaining power while negotiating with its
suppliers for air tickets, hotel accommodations, car rentals and ground
handling services. This enhanced bargaining power will generate significant
cost savings which will result in improved operating margins. It will also
give competitive advantage to C&K as it can leverage upon its reduced cost
of inventory by pricing its products more competitively.
Seasonality impact mitigated by geographical diversification
The Indian tourism sector is highly seasonal. C&K’s global diversification
has helped its business to alleviate the impact of seasonality. Q1 and Q2 are
off‐season for India inbound tourists. But during that time the India
outbound business is at its peak since its summer vacations in India and
C&Ks business is driven by its Indian operations. Q3 and Q4 are peak
season in India when most of the foreign tourists visit. During this time
major business comes from the overseas subsidiaries. Thus, the business
runs throughout the year and the impact of seasonality is mitigated.
Company Background
Cox & Kings Ltd. (C&K) is one of the oldest and most reputed travel and
tour operators in India, offering a one‐stop shop for the travel needs of all
segments of travelers. The company’s business can be divided into four
different segments viz. Leisure Travel, Corporate Travel, Forex and Visa
Processing. Some of their well known products include ʹDuniya Dekhoʹ,
ʹBharat Dekoʹ and ʹFlexiHolʹ. It has subsidiaries in UK, Australia, New
Zealand, Japan, US, UAE and Singapore. It operates from Moscow, Maldives
and Tahiti through its branch offices and from Spain, Sweden, Germany,
Italy, France, South America and South Africa through its representative
offices. The company has a 50:50 JV with Indian Railways Catering &
Tourism Corp incorporated as Royale Indian Rail Tours Ltd to manage and
operate luxury trains in India under the name ‘Maharaja’s Express’. The
train operates on four routes and makes a total of 30 tours in a year carrying
84 passengers per tour.
Business Overview
Cox and Kings’ business can be divided into 4 different segments of
operation, namely Leisure Travel, Corporate Travel, Visa Processing and
Foreign Exchange.
It specializes in leisure travel which contributes 94% of the revenues. Leisure
travel can be further classified into inbound travel service, outbound travel
service and domestic travel.
Leisure- Inbound
Inbound travel services refer to those services that are provided to incoming
foreign tourists. Inbound services include all aspects of ground management
services such as local sightseeing, air/rail/ cruise ticketing, airport transfers,
hotel bookings etc. Inbound operations cater to customers traveling to India,
UK and Dubai. C&K specializes in India inbound services. Revenue from
this segment comes in the form of commission generated on the services
provided. Inbound travel services contribute 14% of the total revenues.
Leisure- Outbound
Under the outbound travel services, C&K offers tour packages to customers
traveling outside their home country. Tour packages could be standardized
packages for group travelers or customized for flexible individual travelers
(FIT). Its Duniya Dekho brand offers readymade packages for group
travelers and its FlexiHol brand caters to FIT customers, offering tailor made
packages based on individual requirements. Outbound operations involve
customers in India, UK, USA, Australia, Japan and Dubai. Income from this
segment is the value of the package after deducting all costs related to the
package such as airfares, hotel and ground‐handling costs. Outbound travel
services are the largest contributor to the revenue of the company with 73%
of the total revenues coming from it.
Leisure- Domestic
C&K also provides domestic leisure packages under the brand Bharat Dekho
for customers in India seeking leisure travel within the country. Various
products sold under this brand include religious pilgrimage tours, education
tours, weekend getaways, activity holidays, spa holidays, budget holidays,
etc. Domestic business forms 7% of the total revenues of the company.
MICE- Meetings, Incentives, Conferences and Exhibitions
MICE forms a part of leisure operations of C&K. It is one of the fastest
growing sectors. It caters to corporate clients for their business cum leisure
trips. It combines annual business meetings, conferences, events, exhibitions
etc. with pleasurable events for delegates and attendants.
Corporate Travel
C&K offers full range of business travel services in India. These services are
customized as per the needs of the clients. It contributes 3.5% of the total
revenues of the company. The margins are low in this segment but it helps
in cross selling leisure products to the business clients.
Foreign Exchange
C&K provides foreign exchange services in India to its leisure as well as
corporate travelers and also on standalone basis to any walk in customers.
Forex services form 2.5% of its total revenues.
Visa Processing Services
C&K provides visa processing services through Quoprro Global Services
Pvt. Ltd., a wholly owned subsidiary. It provides comprehensive processing
services to diplomatic missions. Currently, visa processing services
contribute less than 0.25% of total revenues.
Joint Venture- Train Tours
C&K has formed a 50:50 joint venture with Indian Railways Catering &
Tourism Corp (IRCTC) under the name of Royale Indian Rail Tours Ltd. to
manage and operate luxury trains in India. ‘The Maharajas’ Express’ as the
train is known, runs on four different routes covering some of the most
exotic locations. It carries approx 84 passengers in 23 coaches. Starting from
September 2010, The Maharajas’ Express’ will make 30 tours uptill April
2011.
Revenue Recognition
The company reports revenue in form of commissions and income arising
from tours and other services after deducting all related direct expenditures.
Thus, on the P&L it reports net commission income.
The revenue from tours is recognized from the date of departure and it is
not dependent on whether the booking is certain or not.
Commission on various business verticals
Particulars Commission
Leisure 22%
Corporate Travel 3%
Forex 1%
Source: Company, KJMC Research
For corporate travel, MICE, inbound destination management services and
Forex operations C&K extends credit to the customers, which is an average
of 26 days on gross basis.
Credit given in different clients
Particulars Credit Period (Days)
Inbound Destination Management Service Clients 45
Corporate Clients 30
Forex Clients 10
MICE Clients 22
Source: Company, KJMC Research
GDR
In August 2010, the company issued 5,341,003 Global Depository Receipts
(GDRs) at a price of US$ 12.17 each amounting to USD 65mn. This will be
used to fund its acquisition plans. The GDRs are listed on the Luxembourg
Stock Exchange. The GDR issue constitutes 7.8% of the fully diluted post
issue paid up capital of the company.
Key Risk & Concerns
Acquisition may not be value accretive
C&K has raised Rs. 12bn for acquiring a travel company. If the acquired firm
is unable to generate expected synergies for C&K then the high debt raised
for the acquisition will reduce the profitability of C&K and increase its
indebtedness. Also, any difficulty in integrating the operations of the
acquired firm with its own will adversely affect the on‐going business and
operations of C&K.
Slower than expected growth in economy
Travel and tourism industry is sensitive to changes in the economy. Any
slowdown in the economic growth of India or any other country in which
C&K operates may result in less travel by people which will negatively
impact C&K’s business.
Highly competitive industry
The travel and tour industry is highly fragmented with many regional, local
and unorganized sector players. The organized sector comprises of only
10%. C&K’s market share is only 2.5‐3% in the organized sector. In such a
competitive industry C&K may find it difficult to maintain its existing
market share and also to increase its market share.
Foreign exchange rate fluctuation
Since most of the revenue comes from foreign subsidiaries, C&K faces risk
related to fluctuation in foreign exchange rate. Weakening of the dollar vs.
the rupee may increase the India outbound tours as foreign tours will
become relatively cheaper. But on the other hand, the India inbound tourists
will reduce as the Indian currency will get expensive for the foreigners.
Unexpected levy of service tax on hotel room bills
In the union budget of 2011‐12, 5% service tax has been levied on hotel
accommodation and service tax on airlines has been increased. This cost will
be passed on to the customer, thus increasing the total cost of the tour
packages. As a result there is a risk associated with the marginal drop in
bookings for tour operators.
Unrest in Egypt and other Middle Eastern countries
Egypt and some of the Middle Eastern countries such as Bahrain have been
preferred tourist destinations. The recent political unrest in these countries
has negatively affected the travel to these destinations. Hence there can be a
negative impact on the travel operators catering to these regions.
External factors
External factors such as terrorist attacks, outbreak of an epidemic, political
instability etc could lead to lower than expected growth. Disruptions caused
by ash cloud in Iceland in April’10 resulted in exceptional losses for
European tours. Occurrence of such natural phenomenon in Iceland or else
where in the world can have negative impact on tourism industry.
Financial Analysis
Robust consolidated revenue CAGR of 20% in FY10-13E:
After growing at a CAGR of more than 40% during FY07‐10, we expect the
consolidated net sales which basically comprises of net commission income
to grow at a CAGR of 20% in FY10‐13E led by strong economic scenario of
India which contributes 44% of the total revenues and improving economic
situation in USA, Europe etc. The growth in Indian tourism would be on
account of rising income levels leading to higher disposable income,
increased standard of living and aspiration of going on a foreign vacation
along with cheaper international travel, and better tourism product
offerings.
EBITDA margins to sustain at over 47%:
We expect EBITDA margin will fall from 46.7% in FY10 to 45.7% in FY11E
due to high employee costs and advertising expenses. In FY12E and FY13E
we expect the margins to improve to 47% and 48.2% respectively. The
expansion in the EBITDA margins will be a cumulative effect of 1) lower
inventory prices due to bulk buying 2) various cost control measures
adopted to control direct (advertisement, employee) cost, 3) volume growth
in business due to opening of more franchises.
Due to high interest expenses, PAT margin will fall from 33.5% in FY10 to
29.2% in FY11E, remain at same levels in FY12E and would increase only in
FY13E to 31.5%. We expect a moderate EPS CAGR of 12.8% in FY10‐13E.
Debtor days are high as it is calculated on low net commission income
C&K provides credit to its corporate, MICE, inbound travel and Forex
operations. Credit period ranges between 10‐45 days on gross income basis.
There is no scope of reducing the credit period as the travel and tourism
sector is highly fragmented and competitive. Thus, if C&K tries to give less
days of credit to its corporate clients, the competitors will provide it. This
will result in loss of business for C&K. Also, credit is given on gross income
but we calculate debtor days on reported income on P&L which is net
commission income after deducting all direct travel related costs. Therefore,
the debtor days are very high. Considering the highly competitive nature of
the sector, we expect debtor days to improve only marginally in the future.
Debt & Interest expense remain a concern
C&K has raised Rs. 4175 mn to fund its acquisition plans increasing its total
debt to Rs. 8622 mn. Its average cost of debt stands at 7.7%. As a result the
interest cost for C&K will go up by almost 90% in FY11E. This will impact
the PAT margins. If acquisition does not generate the expected synergies for
C&K then there is great threat that it will destroy value of the company.
Revenue Mix to improve
Owing to better than expected economic revival in India along with rising
income levels and higher disposable income, the Indian travel and tourism
industry is expected to grow at a much faster pace. We expect the
contribution of Indian operations towards the consolidated revenues of C&K
is likely to increase from 44% in FY10 to 48% in FY13E. Revenue
contribution from UK is likely to shrink from 25% in FY10 to 22% in FY13E
primarily due to slower economic revival in Eurozone. Revenue
contribution from Australia is expected to remain constant 13% and from
USA it is expected to increase by 2 percentage points during FY10‐FY13E.
Japan’s contribution will likely reduce by 3 percentage points from 9% in
FY10 to 6% in FY13E
Q3 and 9M FY11 Performance Analysis:
Q3FY11 registered the growth of 37.3% in net income from operations at
Rs.1083.1 on y‐o‐y basis. Franchises have contributed 6% of the total net
income from operations. EBITDA margins have fallen by 280 bps, which can
be attributed to higher advertising and marketing costs and increment in
staff cost. EBITDA grew by 27.3% at Rs. 385.6 mn. PAT increased by 19.4%
at Rs. 230.2 mn, but PAT margins fell by 310 bps due to 251.6% increase in
interest costs compared to last year same quarter.
The nine months results have shown 29.2% growth in top line at Rs. 3386.9
mn on y‐o‐y basis. EBITDA margins have declined marginally by 40 bps and
even though EBITDA has grown by 29% y‐o‐y. PAT for the 9M FY11 fell by
6.1% at Rs.833.9 mn as compared to Rs. 888.6 mn in the same period last year
mainly due to higher interest expense. Other income rose by 81.1% at Rs. 188
mn compared to Rs. 103.8 mn in 9M FY10. The EPS for 9M FY11 stood at Rs
12.2 as compared to Rs 13 in the corresponding period of last year. The
decrease in EPS is due to fresh issue of equity shares during IPO in
December 2009 and GDR in August 2010.
Outlook & Valuation
We believe Cox and Kings is well positioned to capitalized on the growth in
tourism with its unique tour offerings, experienced ground handling
capabilities, growing franchises, established customer relationship and
strategic tie‐ups with corporates.
Acquisitions in the past have been value accretive for C&K and helped the
company to increase its presence around the world. Acquisitions in
Australia and USA allowed the company to enter in these lucrative markets
where it did not have any presence. We believe the new acquisition that the
company is planning will be on the similar lines.
At CMP of Rs 397, the stock is available at P/E of 18.7x and 15.3x of its FY11E
and FY12E earnings of Rs 21.3 and Rs 25.9 respectively. We have valued the
stock using DCF valuation method and arrived at a target price of Rs 510
which is 24x and 19.7x its FY11E and FY12E earnings respectively. We
initiate the coverage on the stock with “BUY” recommendation with
potential upside of 28.5% over CMP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cox & Kings Ltd. (C&K) is one of the oldest and most reputed travel and tour
operators in India, offering a one‐stop shop for the travel needs of all segments of
travellers. The company with a global presence has 255 touch points in 164 cities
across 4 continents. The company’s business can be broadly divided into four
different segments viz. Leisure, Corporate, Forex and Visa Processing. In the last five
years (FY06‐10), consolidated net sales and PAT have grown at a CAGR of 45% and
50% respectively. The net sales are expected to grow by 25% in FY11.
At CMP of Rs 397, the scrip trades at a P/E of 18.7x and 15.3x based on FY11E &
FY12E consolidated EPS of Rs 21.3 and Rs 25.9 respectively. We initiate coverage with
buy recommendation with a target price of Rs 510 (based on DCF valuation) which is
19.7x FY12E earnings. The target price translates into a potential upside of 28.5%.
Key Highlights
Acquisitions to drive growth: C&K is scouting for global acquisitions to drive its
growth and strengthen its position as the leading tour operator in the country. For this
purpose, C&K has raised Rs. 12 bn through IPO proceeds, GDR and internal accruals.
Acquisitions in the past have remained value accretive and we expect it to continue
this trend in the future.
Asset light model reduces downturn risk: Unlike some of its peers like TUI, Thomas
Cook etc, C&K has an asset light model. It does not own any expensive assets nor
does it commit to buy any inventory from its suppliers. It has only service level
agreements with its suppliers. Thus, C&K does not bear the risk of holding inventory
especially during downturn.
Franchisees to improve distribution network and profitability: It plans to add 150
franchisees in the next 12‐18 months. Franchise model will allow to increase its
presence in more cities without investing in the infrastructure and other associated
costs. Franchisees are expected to contribute 15‐18% of total revenues in next 2‐3 yrs.
Common Buying Group to give bargaining power: The growing business volumes has
given C&K better bargaining power while negotiating with its suppliers for air travel,
hotel accommodations, car rentals and ground handling services. This enhanced
bargaining power with its vendors will generate significant cost savings which will
result in improved operating margins.
Seasonality impact mitigated by geographical diversification: C&K’s business is not
impacted by seasonality. Q1 and Q2 are off‐season for India inbound tourists but it is
peak season for India outbound tourists since its summer vacations in India. Q3 and
Q4 are peak season for India when most of the foreign tourists are visiting India.
Asset light model reduces downturn risk
C&K works on asset light model and does not own fixed assets such as
hotels, aircrafts, cruises etc. Most of the big players like TUI, Thomas Cook,
etc, own large assets. TUI, for instance, has its own aircrafts, hotels, cruises.
During economic downturn companies holding assets will get impacted
even if 5% of their bookings get cancelled since it will be difficult to resell
that inventory later. Thus, the asset light model mitigates the reselling risk
during economic downturn.
C&K procures the inventories (hotel rooms, airline seats, etc.) from
suppliers. It does not buy any inventory in advance. It has only service level
agreements with them. Bookings with suppliers are done at pre defined
rates as well as have pre defined date of release. Up to the date of release
there is no penalty for cancellation of the bookings. After the date of release,
penalties are incurred but it is passed on to the customers in the form of
cancellation fee. Thus, C&K does not bear the risk associated with holding
inventory.
Franchisees to improve distribution network
C&K is a global player with presence in 20 countries through subsidiaries,
branch offices and representative offices as well as through global network
of sales agents. In India, the company has 14 sales offices, 115 franchisees,
143 preferred sales agents. To improve its domestic penetration, it plans to
add 200 franchisees to its network in the next 12 months. The franchise will
be a one stop shop for all travel related services and will sell C&K products
only. C&K provides training, site development, and advertising &
marketing support to the franchise. Franchise model has the following
advantages:
Compared to other growth methods it requires minimal investment in
new premises, equipment and people.
Multiple units can be opened simultaneously, gaining a foothold over
competitors and increasing the company’s competitive advantage
As additional locations are opened, C&K’s brand visibility and brand
recognition will increase.
Purchasing power will also increase as its bookings will increase,
allowing it to negotiate for better rates with suppliers.
Thus, without leveraging its balance sheet C&K can achieve growth in size
and spread its reach through the franchise model.
Franchises are expected to contribute 15‐18% of total revenues in 2‐3 yrs.
Growing Indian economy to boost domestic and outbound tourism
International Monetary Fund in its report on India has projected GDP
growth at 8.4% for 2011 which is above the historical trends. India’s tourism
industry is also expected to witness a strong period of growth. Several
reasons are cited for the growth and prosperity of India’s travel and tourism
industry. The burgeoning Indian middle class, rising income levels,
increased standard of living and availability of low cost transportation
facilities along with the growth in high spending foreign tourists, and
coordinated government campaigns to promote ‘Incredible India’ are
driving domestic tourism growth.
India’s outbound leisure travel is also on an upward trend. The increase in
disposable income of the Indian middle‐class population and the aspiration
to travel to foreign countries for vacation along with easy availability of
attractive tour packages has increased outbound leisure travel from India.
C&K provides a bouquet of international tour packages to meet the needs of
price conscious Indian vacationer. The travel and tourism sector in India is
expected to grow by 6.7% in 2010 followed by 8.5% annually in the next ten
years as per WTTC and ranks fourth in WTTC’s list comprising of all the
countries in the world. China ranks first in the list with 9% annualised 10‐
year real growth in travel and tourism sector.
Common Buying Group to give bargaining power
In the past few years the company has grown organically as well as made
several acquisitions in various countries thus increasing its geographical
presence and customer base. In the last four years the company has acquired
seven companies. Instead of each subsidiary buying inventory on
standalone basis, products are sourced through a common buying group.
This results in bulk buying of inventory and with the growing business
volumes C&K will have better bargaining power while negotiating with its
suppliers for air tickets, hotel accommodations, car rentals and ground
handling services. This enhanced bargaining power will generate significant
cost savings which will result in improved operating margins. It will also
give competitive advantage to C&K as it can leverage upon its reduced cost
of inventory by pricing its products more competitively.
Seasonality impact mitigated by geographical diversification
The Indian tourism sector is highly seasonal. C&K’s global diversification
has helped its business to alleviate the impact of seasonality. Q1 and Q2 are
off‐season for India inbound tourists. But during that time the India
outbound business is at its peak since its summer vacations in India and
C&Ks business is driven by its Indian operations. Q3 and Q4 are peak
season in India when most of the foreign tourists visit. During this time
major business comes from the overseas subsidiaries. Thus, the business
runs throughout the year and the impact of seasonality is mitigated.
Company Background
Cox & Kings Ltd. (C&K) is one of the oldest and most reputed travel and
tour operators in India, offering a one‐stop shop for the travel needs of all
segments of travelers. The company’s business can be divided into four
different segments viz. Leisure Travel, Corporate Travel, Forex and Visa
Processing. Some of their well known products include ʹDuniya Dekhoʹ,
ʹBharat Dekoʹ and ʹFlexiHolʹ. It has subsidiaries in UK, Australia, New
Zealand, Japan, US, UAE and Singapore. It operates from Moscow, Maldives
and Tahiti through its branch offices and from Spain, Sweden, Germany,
Italy, France, South America and South Africa through its representative
offices. The company has a 50:50 JV with Indian Railways Catering &
Tourism Corp incorporated as Royale Indian Rail Tours Ltd to manage and
operate luxury trains in India under the name ‘Maharaja’s Express’. The
train operates on four routes and makes a total of 30 tours in a year carrying
84 passengers per tour.
Business Overview
Cox and Kings’ business can be divided into 4 different segments of
operation, namely Leisure Travel, Corporate Travel, Visa Processing and
Foreign Exchange.
It specializes in leisure travel which contributes 94% of the revenues. Leisure
travel can be further classified into inbound travel service, outbound travel
service and domestic travel.
Leisure- Inbound
Inbound travel services refer to those services that are provided to incoming
foreign tourists. Inbound services include all aspects of ground management
services such as local sightseeing, air/rail/ cruise ticketing, airport transfers,
hotel bookings etc. Inbound operations cater to customers traveling to India,
UK and Dubai. C&K specializes in India inbound services. Revenue from
this segment comes in the form of commission generated on the services
provided. Inbound travel services contribute 14% of the total revenues.
Leisure- Outbound
Under the outbound travel services, C&K offers tour packages to customers
traveling outside their home country. Tour packages could be standardized
packages for group travelers or customized for flexible individual travelers
(FIT). Its Duniya Dekho brand offers readymade packages for group
travelers and its FlexiHol brand caters to FIT customers, offering tailor made
packages based on individual requirements. Outbound operations involve
customers in India, UK, USA, Australia, Japan and Dubai. Income from this
segment is the value of the package after deducting all costs related to the
package such as airfares, hotel and ground‐handling costs. Outbound travel
services are the largest contributor to the revenue of the company with 73%
of the total revenues coming from it.
Leisure- Domestic
C&K also provides domestic leisure packages under the brand Bharat Dekho
for customers in India seeking leisure travel within the country. Various
products sold under this brand include religious pilgrimage tours, education
tours, weekend getaways, activity holidays, spa holidays, budget holidays,
etc. Domestic business forms 7% of the total revenues of the company.
MICE- Meetings, Incentives, Conferences and Exhibitions
MICE forms a part of leisure operations of C&K. It is one of the fastest
growing sectors. It caters to corporate clients for their business cum leisure
trips. It combines annual business meetings, conferences, events, exhibitions
etc. with pleasurable events for delegates and attendants.
Corporate Travel
C&K offers full range of business travel services in India. These services are
customized as per the needs of the clients. It contributes 3.5% of the total
revenues of the company. The margins are low in this segment but it helps
in cross selling leisure products to the business clients.
Foreign Exchange
C&K provides foreign exchange services in India to its leisure as well as
corporate travelers and also on standalone basis to any walk in customers.
Forex services form 2.5% of its total revenues.
Visa Processing Services
C&K provides visa processing services through Quoprro Global Services
Pvt. Ltd., a wholly owned subsidiary. It provides comprehensive processing
services to diplomatic missions. Currently, visa processing services
contribute less than 0.25% of total revenues.
Joint Venture- Train Tours
C&K has formed a 50:50 joint venture with Indian Railways Catering &
Tourism Corp (IRCTC) under the name of Royale Indian Rail Tours Ltd. to
manage and operate luxury trains in India. ‘The Maharajas’ Express’ as the
train is known, runs on four different routes covering some of the most
exotic locations. It carries approx 84 passengers in 23 coaches. Starting from
September 2010, The Maharajas’ Express’ will make 30 tours uptill April
2011.
Revenue Recognition
The company reports revenue in form of commissions and income arising
from tours and other services after deducting all related direct expenditures.
Thus, on the P&L it reports net commission income.
The revenue from tours is recognized from the date of departure and it is
not dependent on whether the booking is certain or not.
Commission on various business verticals
Particulars Commission
Leisure 22%
Corporate Travel 3%
Forex 1%
Source: Company, KJMC Research
For corporate travel, MICE, inbound destination management services and
Forex operations C&K extends credit to the customers, which is an average
of 26 days on gross basis.
Credit given in different clients
Particulars Credit Period (Days)
Inbound Destination Management Service Clients 45
Corporate Clients 30
Forex Clients 10
MICE Clients 22
Source: Company, KJMC Research
GDR
In August 2010, the company issued 5,341,003 Global Depository Receipts
(GDRs) at a price of US$ 12.17 each amounting to USD 65mn. This will be
used to fund its acquisition plans. The GDRs are listed on the Luxembourg
Stock Exchange. The GDR issue constitutes 7.8% of the fully diluted post
issue paid up capital of the company.
Key Risk & Concerns
Acquisition may not be value accretive
C&K has raised Rs. 12bn for acquiring a travel company. If the acquired firm
is unable to generate expected synergies for C&K then the high debt raised
for the acquisition will reduce the profitability of C&K and increase its
indebtedness. Also, any difficulty in integrating the operations of the
acquired firm with its own will adversely affect the on‐going business and
operations of C&K.
Slower than expected growth in economy
Travel and tourism industry is sensitive to changes in the economy. Any
slowdown in the economic growth of India or any other country in which
C&K operates may result in less travel by people which will negatively
impact C&K’s business.
Highly competitive industry
The travel and tour industry is highly fragmented with many regional, local
and unorganized sector players. The organized sector comprises of only
10%. C&K’s market share is only 2.5‐3% in the organized sector. In such a
competitive industry C&K may find it difficult to maintain its existing
market share and also to increase its market share.
Foreign exchange rate fluctuation
Since most of the revenue comes from foreign subsidiaries, C&K faces risk
related to fluctuation in foreign exchange rate. Weakening of the dollar vs.
the rupee may increase the India outbound tours as foreign tours will
become relatively cheaper. But on the other hand, the India inbound tourists
will reduce as the Indian currency will get expensive for the foreigners.
Unexpected levy of service tax on hotel room bills
In the union budget of 2011‐12, 5% service tax has been levied on hotel
accommodation and service tax on airlines has been increased. This cost will
be passed on to the customer, thus increasing the total cost of the tour
packages. As a result there is a risk associated with the marginal drop in
bookings for tour operators.
Unrest in Egypt and other Middle Eastern countries
Egypt and some of the Middle Eastern countries such as Bahrain have been
preferred tourist destinations. The recent political unrest in these countries
has negatively affected the travel to these destinations. Hence there can be a
negative impact on the travel operators catering to these regions.
External factors
External factors such as terrorist attacks, outbreak of an epidemic, political
instability etc could lead to lower than expected growth. Disruptions caused
by ash cloud in Iceland in April’10 resulted in exceptional losses for
European tours. Occurrence of such natural phenomenon in Iceland or else
where in the world can have negative impact on tourism industry.
Financial Analysis
Robust consolidated revenue CAGR of 20% in FY10-13E:
After growing at a CAGR of more than 40% during FY07‐10, we expect the
consolidated net sales which basically comprises of net commission income
to grow at a CAGR of 20% in FY10‐13E led by strong economic scenario of
India which contributes 44% of the total revenues and improving economic
situation in USA, Europe etc. The growth in Indian tourism would be on
account of rising income levels leading to higher disposable income,
increased standard of living and aspiration of going on a foreign vacation
along with cheaper international travel, and better tourism product
offerings.
EBITDA margins to sustain at over 47%:
We expect EBITDA margin will fall from 46.7% in FY10 to 45.7% in FY11E
due to high employee costs and advertising expenses. In FY12E and FY13E
we expect the margins to improve to 47% and 48.2% respectively. The
expansion in the EBITDA margins will be a cumulative effect of 1) lower
inventory prices due to bulk buying 2) various cost control measures
adopted to control direct (advertisement, employee) cost, 3) volume growth
in business due to opening of more franchises.
Due to high interest expenses, PAT margin will fall from 33.5% in FY10 to
29.2% in FY11E, remain at same levels in FY12E and would increase only in
FY13E to 31.5%. We expect a moderate EPS CAGR of 12.8% in FY10‐13E.
Debtor days are high as it is calculated on low net commission income
C&K provides credit to its corporate, MICE, inbound travel and Forex
operations. Credit period ranges between 10‐45 days on gross income basis.
There is no scope of reducing the credit period as the travel and tourism
sector is highly fragmented and competitive. Thus, if C&K tries to give less
days of credit to its corporate clients, the competitors will provide it. This
will result in loss of business for C&K. Also, credit is given on gross income
but we calculate debtor days on reported income on P&L which is net
commission income after deducting all direct travel related costs. Therefore,
the debtor days are very high. Considering the highly competitive nature of
the sector, we expect debtor days to improve only marginally in the future.
Debt & Interest expense remain a concern
C&K has raised Rs. 4175 mn to fund its acquisition plans increasing its total
debt to Rs. 8622 mn. Its average cost of debt stands at 7.7%. As a result the
interest cost for C&K will go up by almost 90% in FY11E. This will impact
the PAT margins. If acquisition does not generate the expected synergies for
C&K then there is great threat that it will destroy value of the company.
Revenue Mix to improve
Owing to better than expected economic revival in India along with rising
income levels and higher disposable income, the Indian travel and tourism
industry is expected to grow at a much faster pace. We expect the
contribution of Indian operations towards the consolidated revenues of C&K
is likely to increase from 44% in FY10 to 48% in FY13E. Revenue
contribution from UK is likely to shrink from 25% in FY10 to 22% in FY13E
primarily due to slower economic revival in Eurozone. Revenue
contribution from Australia is expected to remain constant 13% and from
USA it is expected to increase by 2 percentage points during FY10‐FY13E.
Japan’s contribution will likely reduce by 3 percentage points from 9% in
FY10 to 6% in FY13E
Q3 and 9M FY11 Performance Analysis:
Q3FY11 registered the growth of 37.3% in net income from operations at
Rs.1083.1 on y‐o‐y basis. Franchises have contributed 6% of the total net
income from operations. EBITDA margins have fallen by 280 bps, which can
be attributed to higher advertising and marketing costs and increment in
staff cost. EBITDA grew by 27.3% at Rs. 385.6 mn. PAT increased by 19.4%
at Rs. 230.2 mn, but PAT margins fell by 310 bps due to 251.6% increase in
interest costs compared to last year same quarter.
The nine months results have shown 29.2% growth in top line at Rs. 3386.9
mn on y‐o‐y basis. EBITDA margins have declined marginally by 40 bps and
even though EBITDA has grown by 29% y‐o‐y. PAT for the 9M FY11 fell by
6.1% at Rs.833.9 mn as compared to Rs. 888.6 mn in the same period last year
mainly due to higher interest expense. Other income rose by 81.1% at Rs. 188
mn compared to Rs. 103.8 mn in 9M FY10. The EPS for 9M FY11 stood at Rs
12.2 as compared to Rs 13 in the corresponding period of last year. The
decrease in EPS is due to fresh issue of equity shares during IPO in
December 2009 and GDR in August 2010.
Outlook & Valuation
We believe Cox and Kings is well positioned to capitalized on the growth in
tourism with its unique tour offerings, experienced ground handling
capabilities, growing franchises, established customer relationship and
strategic tie‐ups with corporates.
Acquisitions in the past have been value accretive for C&K and helped the
company to increase its presence around the world. Acquisitions in
Australia and USA allowed the company to enter in these lucrative markets
where it did not have any presence. We believe the new acquisition that the
company is planning will be on the similar lines.
At CMP of Rs 397, the stock is available at P/E of 18.7x and 15.3x of its FY11E
and FY12E earnings of Rs 21.3 and Rs 25.9 respectively. We have valued the
stock using DCF valuation method and arrived at a target price of Rs 510
which is 24x and 19.7x its FY11E and FY12E earnings respectively. We
initiate the coverage on the stock with “BUY” recommendation with
potential upside of 28.5% over CMP.
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