We initiate coverage on Thomas Cook India (TCI) with a BUY rating and a target
price of Rs66/share. Travel Industry – part of the consumer discretionary segment
– has benefited from the strong economic growth of the past decade that led to a
14-year CAGR of 10% in outbound tourists from India. This trend may moderate in
CY13, owing to the economic slowdown but is unlikely to be impacted severely,
keeping the structural story intact. The fact that TCI’s revenues grew 18% YoY in
H1CY12 supports this thesis. The company is built on an over 130-year-old ‘brick
and mortar’, face-to-face interaction based business model and intends to drive
cost improvements by increasing internet based delivery of products and
services and outsourcing of non core functions. We factor-in revenue CAGR of
12% over CY11-13 and margin expansion by 240bps to 28.2%, driven by the move
into the online space and other cost-cutting avenues, driving an EPS CAGR of
18% over the period. We value the stock at a 1-year forward P/E multiple of 18x
arriving at a fair value of Rs66/share. Initiate with BUY.
Travel business on a secular growth trend: Outbound tourism has been on a
strong growth momentum – growing at 1.5x the GDP growth rate or a CAGR of 10%
(in trip volumes) in India and 1.4x the GDP growth rate (CAGR of 4%) globally.
India’s last 5-year growth has been 1.6x the GDP thanks to growing affluence,
cheaper flights and a growing proportion of internet savvy and globally oriented 25-
35-year-olds in the population. The current economic sentiment has not significantly
dented the growth rate – TCI’s H1CY12 revenue growth was 18% YoY. It may be
lower (9% in CY13) but is unlikely to be impacted severely.
Foreign exchange business to benefit from new products, expanding reach:
TCI’s forex and travel insurance business (based on financially reported
segmentation) accounts for 23% of revenues – and is delinking from the travel
business especially as the company introduces new products (multi-Currency money
storage card) and increases retail outlets (26 new forex outlets to its 215 office
locations). The growth in financial services (part of which gets reported in the travel
business) will lead to overall revenue CAGR of 12% through CY11-13E for TCI.
Well placed to benefit from internet adoption: With internet penetration in India
more than doubling from ~50mn in 2008 to ~120mn in 2011, the end-to-end travel
planning business is likely to witness increasing adoption of internet-based delivery.
Owing to the complexity of international travel planning, a hybrid model of internet
and ‘brick and mortar’ business will likely emerge. This will enable TCI to streamline
costs, improve employee productivity and enhance services. Thus, we expect TCI’s
margins to improve from 25.8% in CY11 to 28.2% in CY13.
Improving core RoEs: The stock trades at ~15x CY13P/E as against its historical
lower band of ~18-24x indicating that the market is already factoring-in a significant
slowdown. The revenue growth in CY13 may be lower than CY09-11, but we note
that core RoE is likely to improve to 16.9% by CY13 from 14.6% in CY11 as EBITDA
margins improve, and there is a significant chance of positive surprise coming from
the forex business. Thus we value the stock at 18x multiple. Initiate with BUY
Investment argument
Our expectation of a 18% CAGR in TCI’s CY11-13 earnings growth is led by 15%/9%
CY12/CY13 growth in revenue and 26.7%/28.2% EBITDA margins as the company
moves from a less productive, capital intensive ‘brick and mortar’ model to a cheaper
‘hybrid’ model that leverages the internet.
This will drive revenue growth of 12% and earnings growth of 18% owing to: i) better
margins, and ii) better working capital, thus higher cash (it is already accepting
bookings for tours to be conducted in the summer of CY13). We value based on 18x
P/E multiple (~30% discount to long term average) on CY13 EPS of Rs3.7 – giving us
an overall value of Rs66/share. Given that 18x has historically been the lower band of
1 year P/E multiple for TCI, we believe our valuations are conservative. We initiate
with a BUY recommendation.
Our P/E estimate is at a significant premium to the average P/E of TCI’s international
peers owing to high growth potential of the outbound tourism industry in India and a
negative net debt status of the company as against peers, even as its core RoE is
likely to improve from 14.6% in CY11 to 16.9% in CY13.
Key risks
• A sharper than expected decline in the travel business as world economy slows
further. As such, travel industry has not been impacted significantly from economic
slowdown yet. However there could be an impact if the Indian economy continues
to slowdown.
• Increasing penetration of internet has led to the emergence of new internet based
competition that is increasingly making forays into Thomas Cook India’s turf – end
to end holiday bookings. Any loss in market share to internet based players will be
a negative but we believe Thomas Cook India can take advantage of the internet
opportunity and has several competitive advantages over the new players.
• The forex business of the company deals in foreign exchange transactions
between several currency pairs. Adverse and volatile fluctuations in currencies
may cause potential losses. The company has a dealing operation that actively
manages its various forex exposures.
• The company is governed under various laws of RBI and Government of India
related to forex transactions. Any change in these laws can have an unforeseen
impact.
Better mix, cost control to improve RoE and EPS,
Initiating with BUY
We expect TCI’s EPS to grow by 18% to Rs3.1/Rs3.7 in CY12/CY13 as improving mix
and cost control in its travel business improves margins from 25.8% in CY11 to 28.2%
in CY13. TCI’s existing management is likely to use technology as a means of
controlling costs – through outsourcing paperwork and using the internet to deliver
some services. Thus, we believe employee costs and administration expenses are
unlikely to increase in tandem with increasing revenue. The effect of this may not be
visible in CY12 when EBITDA margin (26.7%) will be slightly higher than CY11
(25.8%), but is likely to be visible in CY13 (28.2%) when the full effect of TCI’s
increased penetration and cost control exercises starts coming through. CY13 will see
significant RoE improvement, which we believe will continue through to CY15. Our
base case values TCI at 18x P/E for the standalone earnings
Company snapshot
Thomas Cook India (TCI) is one of the largest integrated travel and related financial
services company in India. TCI’s first office in the country was set up way back in
1881, and it offers a wide gamut of travel-related services including inbound and
outbound leisure travel from India, corporate and business travel, travel insurance and
travel-related foreign exchange. It operates through two divisions:
• Foreign Exchange and Financial Services: TCI is an Authorized Dealer (AD-II)
licensed by the RBI and provides various foreign exchange and payment solutions
to retail and corporate clients. It also offers travel-customised credit cards and
travel insurance solutions.
• Travel and Related Services: This predominantly includes outbound leisure travel,
but the company also has inbound and domestic travel businesses, corporate
travel and MICE (Meeting, Incentive, Conference and Exhibition) arrangement
business. It also offers its travel clients other products and services such as visa
and passport services, travel insurance, forex and other travel-related services.
The company acquired LKP Forex Limited and Travel Corporation of India in 2006.
TCI was acquired by Dubai Financial LLC in 2005 from its erstwhile parent, Thomas
Cook PLC. In 2007, Thomas Cook PLC acquired 74.9% stake in TCI which it
subsequently sold to Fairbridge Capital in 2012. Thomas Cook has representative
offices in six countries outside India and subsidiaries in Mauritius.
No comments:
Post a Comment