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Investment Rationale
Best placed to capture India’s growth in tourism
We believe Cox & Kings (C&K) is best bet in the growing T&T industry with a 9.2% CAGR in
India’s travel and tourism demand over the next decade (CY11E-21E), the second fastest in the
world. The a) pan-India presence with strong brand recall, b) integrated business model with a
diversified product offering (price and destinations), and c) strong overseas network with
presence in key outbound destinations offer it an edge over competitors to gain market share
and capture a higher pie of the industry growth.
Emergence of a Global Tour Operator
In a short span of four years, C&K has completed seven acquisitions (in the UK, Japan, Australia,
India and the USA) to emerge as a global tour operator. With a strong management bandwidth,
synergies from acquisitions led to an improvement in the consolidated EBIDTA margins. We
believe there is scope for further margin expansion following synergies emanating from: a)
consolidated product sourcing coupled with scale benefits, b) improved product mix (leveraging
the global platform to cross-sell existing products), and c) expansion of captive destination
management services for its various overseas subsidiaries.
HolidayBreak: an acquisition worth the wait
The recent acquisition of HolidayBreak Plc (HBR) offers a host of benefits to C&K which include
a) potential to double revenues in the next two years with margin improvement, b) entry into
the education and camping markets which should improve the market share and the mind space
of consumers and led to increasing volumes and value for C&K, and c) utilization of cash on
books which were earlier resulting in a net outflow of 3% for the company.
The HBR acquisition and timing of consolidation may result in lower profitability for the
company in FY12E as H1 is historically loss making for the company with no revenues from the
camping and adventure segment. However, we expect a sharp rise in revenue contribution in
FY13E with the full year numbers getting consolidated and resulting in an immense growth in
FY13E EPS.
Visa processing and Train tours: Future growth avenues
C&K has also branched out into a) visa processing, where C&K has signed up with six embassies
to process visa applications and expects more than a six-fold increase in volumes in the next
two years, and b) a foray into rail tourism through the Maharajas’ Express, a luxury train in JV
with IRCTC. Though these segments contribute less than 8% to the company’s revenues, we
expect the revenue contribution to increase and with higher margins the company should
benefit on the profit level as well.
Valuation
C&K is currently trading at 12.6x FY13E EPS of `14.5, a 48% discount to its historical one-year
forward P/E band of 24x. The stocks has been de-rated over the last two years due to a decline
in return ratios with huge cash on the books and the uncertainty of its acquisition integration.
However, in view of HBR acquisition and the successful history of integrations of C&K, we
expect the company to report a 23.7% PAT CAGR in the next two years. Consequently, we
believe there is good potential upside in the stock and value it at a 30% discount to its historical
PE due to concerns on its a) huge debt, b) high interest outflow, and c) acquisition integration.
We initiate the coverage with a BUY rating and target price of `243 (16.8x FY13E EPS).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
Best placed to capture India’s growth in tourism
We believe Cox & Kings (C&K) is best bet in the growing T&T industry with a 9.2% CAGR in
India’s travel and tourism demand over the next decade (CY11E-21E), the second fastest in the
world. The a) pan-India presence with strong brand recall, b) integrated business model with a
diversified product offering (price and destinations), and c) strong overseas network with
presence in key outbound destinations offer it an edge over competitors to gain market share
and capture a higher pie of the industry growth.
Emergence of a Global Tour Operator
In a short span of four years, C&K has completed seven acquisitions (in the UK, Japan, Australia,
India and the USA) to emerge as a global tour operator. With a strong management bandwidth,
synergies from acquisitions led to an improvement in the consolidated EBIDTA margins. We
believe there is scope for further margin expansion following synergies emanating from: a)
consolidated product sourcing coupled with scale benefits, b) improved product mix (leveraging
the global platform to cross-sell existing products), and c) expansion of captive destination
management services for its various overseas subsidiaries.
HolidayBreak: an acquisition worth the wait
The recent acquisition of HolidayBreak Plc (HBR) offers a host of benefits to C&K which include
a) potential to double revenues in the next two years with margin improvement, b) entry into
the education and camping markets which should improve the market share and the mind space
of consumers and led to increasing volumes and value for C&K, and c) utilization of cash on
books which were earlier resulting in a net outflow of 3% for the company.
The HBR acquisition and timing of consolidation may result in lower profitability for the
company in FY12E as H1 is historically loss making for the company with no revenues from the
camping and adventure segment. However, we expect a sharp rise in revenue contribution in
FY13E with the full year numbers getting consolidated and resulting in an immense growth in
FY13E EPS.
Visa processing and Train tours: Future growth avenues
C&K has also branched out into a) visa processing, where C&K has signed up with six embassies
to process visa applications and expects more than a six-fold increase in volumes in the next
two years, and b) a foray into rail tourism through the Maharajas’ Express, a luxury train in JV
with IRCTC. Though these segments contribute less than 8% to the company’s revenues, we
expect the revenue contribution to increase and with higher margins the company should
benefit on the profit level as well.
Valuation
C&K is currently trading at 12.6x FY13E EPS of `14.5, a 48% discount to its historical one-year
forward P/E band of 24x. The stocks has been de-rated over the last two years due to a decline
in return ratios with huge cash on the books and the uncertainty of its acquisition integration.
However, in view of HBR acquisition and the successful history of integrations of C&K, we
expect the company to report a 23.7% PAT CAGR in the next two years. Consequently, we
believe there is good potential upside in the stock and value it at a 30% discount to its historical
PE due to concerns on its a) huge debt, b) high interest outflow, and c) acquisition integration.
We initiate the coverage with a BUY rating and target price of `243 (16.8x FY13E EPS).
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