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Cox & Kings Ltd
Potential Rs2bn cash Inflow
Plus Re-rating Trigger
Quick Comment – What's new: V Hotels, a Cox &
Kings (C&K) promoter group company (in which C&K
has ~25% stake), has won the arbitration proceedings
for the Juhu Centaur Property (Mumbai). According to
the arbitration order, the agreement for sale of the
property is terminated, and V hotels has to return
Rs730mn (principal amount) to Siddhivinayak Realties
Pvt Ltd (SRPL; 50% held by Oberoi Realty and 49.5%
held by Shahid Balwa and Vinod Goenka). SRPL has
filed an arbitration petition in the High Court seeking an
injunction against V Hotels.
Impact on our views: If V Hotels eventually wins, then,
post existing liabilities and taxes, the net accretion to
V Hotels would be ~Rs12bn. According to management,
V Hotels does not have any intention of utilizing this
cash, and it will be paid out to shareholders. After
accounting for dividend distribution tax, we estimate the
net accretion to C&K at Rs2bn (~8% of market
capitalization of C&K). In our view, if the sale proceeds
of Juhu Centaur are eventually paid down to C&K, the
stock would likely be re-rated.
Concern: The holding structure of group companies is
such that it makes the potential cash pay down tax-
inefficient, in our view. Also, given that V Hotels is not
listed, the details of its liabilities are unknown (we
estimate the same around Rs4.5bn).
Investment thesis: C&K is currently trading at 15x
F2012 earnings, on our estimates. C&K has ~Rs10bn of
cash on its balance sheet. In our view, the market seems
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.
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 the 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.
Valuation & PT Methodology – We value C&K at Rs327.5 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
Potential Rs2bn cash Inflow
Plus Re-rating Trigger
Quick Comment – What's new: V Hotels, a Cox &
Kings (C&K) promoter group company (in which C&K
has ~25% stake), has won the arbitration proceedings
for the Juhu Centaur Property (Mumbai). According to
the arbitration order, the agreement for sale of the
property is terminated, and V hotels has to return
Rs730mn (principal amount) to Siddhivinayak Realties
Pvt Ltd (SRPL; 50% held by Oberoi Realty and 49.5%
held by Shahid Balwa and Vinod Goenka). SRPL has
filed an arbitration petition in the High Court seeking an
injunction against V Hotels.
Impact on our views: If V Hotels eventually wins, then,
post existing liabilities and taxes, the net accretion to
V Hotels would be ~Rs12bn. According to management,
V Hotels does not have any intention of utilizing this
cash, and it will be paid out to shareholders. After
accounting for dividend distribution tax, we estimate the
net accretion to C&K at Rs2bn (~8% of market
capitalization of C&K). In our view, if the sale proceeds
of Juhu Centaur are eventually paid down to C&K, the
stock would likely be re-rated.
Concern: The holding structure of group companies is
such that it makes the potential cash pay down tax-
inefficient, in our view. Also, given that V Hotels is not
listed, the details of its liabilities are unknown (we
estimate the same around Rs4.5bn).
Investment thesis: C&K is currently trading at 15x
F2012 earnings, on our estimates. C&K has ~Rs10bn of
cash on its balance sheet. In our view, the market seems
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.
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 the 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.
Valuation & PT Methodology – We value C&K at Rs327.5 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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