Cox & Kings: Buy

The once-fancied stock of tour operator Cox & Kings (C&K) may be a good addition to your portfolio this holiday season. The company’s acquisition of the UK-based Holidaybreak Plc will help smooth out the seasonality in its business and make a substantial contribution to its profits.

The recent fund infusion into the company may help retire debt and prop up profits too. The stock was de-rated sharply, post-acquisition of Holidaybreak in September 2011.

Cox & King’s PE ratio fell from a peak of around 70 times to around 25 times now, without including Holidaybreak’s financials.

Consensus expectations put C&K’s FY-13 consolidated earnings per share at around Rs 15. This translates into a forward PE of around 9.5 times. This seems to be a good buying opportunity.

Global presence

C&K is a leading global tour operator based in India. It has presence in over 20 countries with operations in Europe, the US, South East Asia, West Asia and Australia. Bulk of its revenues come from offering outbound package tours, which bring in commissions on hotel and air tickets and, to some extent, destination management services for business conferences. Apart from this, the company earns some revenues from visa processing.

The Indian tourism market is highly fragmented. However, established players are gaining market share as small tour operators, which traditionally used to rely on airline commissions, are feeling the heat as airlines have been cutting commissions over the last few years.

While C&K has managed a 43 per cent compounded annual growth rate in revenues over the past three years, its profit fell to Rs 27 crore in FY 12 compared with Rs 130.6 crore in FY 11, due to the inclusion of Holidaybreak’s loss-making period (Oct-Mar).

Revenue growth was partly helped by six small acquisitions in recent years in the range of Rs 15 crore to Rs 110 crore, thanks to which C&K has expanded its product offerings into new segments such as visa processing and destination management.

The company’s most recent acquisition of Holidaybreak Plc for 312 million pounds (around Rs 2500 crore) through its subsidiary, Promethean Holdings, in September 2011, was its largest in recent times.

After this acquisition, C&K is no longer an India-centric business. Europe will account for about 60 per cent of its revenues now.

This buyout fuelled investor concerns that the slowdown in Europe would affect C&K’s prospects. The debt taken to fund the buyout was also sizeable.

To fund this acquisition, C&K raised $330 million (Rs 1,750 crore). This raised its debt-to-equity ratio from 0.67 in FY 2011 to 2.28 in FY 2012 and interest coverage ratio decreased from 4.5 times to 1.5 times.

But a recent development alleviates this concern. C&K has sold a 30 per cent stake in Promethean Holdings to Citi Ventures for $137.5 million in August 2012. These funds will be used to retire part of the debt which was raised for acquiring Holidaybreak Plc.

Steady cash flows

Despite its dependence on European market (mainly UK), Holidaybreak seems to be a strategic fit for C&K. Holidaybreak’s education travel business may remain resilient even during recession. Plus, the peak season for this business is between April and September, neatly complementing C&K’s core operations which peak in October to March.

Holidaybreak has steady cash flows and is not capital-intensive as its assets in the education business are largely leased. Unlike C&K’s corporate travel business, where credit periods are extended to clients, Holidaybreak works largely on advance payments and also benefits from credit terms it receives from its vendors.

Holidaybreak’s revenue has been quite flat since 2009, though its operating profit margin (EBITDA) increased from 32.8 per cent in 2009 to 41.3 per cent in FY-11, slightly lower than C&K’s margins of 46.5 per cent in FY-11.

The integration of Holidaybreak’s education business should enable C&K have a greater share of customer spending. It also provides cross selling opportunities.

For example, Superbreak and Bookit are two portals of Holidaybreak which provide hotel bookings and packages in the European market.

These services can be expanded to include hotels from India, Asia, West Asia and Australia. A wider scale may enable C&K get better terms from its vendors, thanks to an increased customer base. Also, it can be expected that Holidaybreak’s back-office functions such as technology operations and product design will move to India, enabling cost savings.

On a consolidated basis, C&K’s revenue from operations for FY-12 was Rs 1004 crore. This includes only half-year results of Holidaybreak Plc for the October-March period. It has to be noted that this is a lean period for Holidaybreak where it earns only around 35 per cent of its revenue compared to 65 per cent in the April-September period.

Risks

Delay in successful integration of the acquired company, a sustained slowdown in the global or domestic economy, and adverse foreign exchange fluctuations are the key risks to this recommendation. Out of C&K’s FY-12 consolidated total revenue, forex gains contributed around 13 per cent (Rs 130 crore).

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