Cox & Kings: Buy

Cash rich and a proxy for the booming travel and tourism market in India, the stock of Cox & kings appears to be a good investment after its recent falls. The company’s entrenched presence in domestic and international travel, puts it at a distinct advantage in the highly-fragmented tourism industry. Its recently announced potential acquisition of UK-based Holidaybreak Plc too adds to its attractiveness. If successful, the acquisition would catapult C&K into the next growth orbit. Back home, rising disposable incomes, favourable demographics of Indians, with many increasingly seen opting to holiday abroad, and improving trend in inbound and outbound tourism too promise a healthy growth environment for the company. Valuations, given these growth drivers, appear quite attractive. At current market price of Rs 225, the stock trades at about 18 times its likely FY12 per share earnings.

An immediate trigger for the company could come for the potential acquisition of Holidaybreak (HBR), a leader in niche segments with a stronghold in the fast-growing education and activity travel group in UK. The acquisition promises to further diversify C&K’s revenue streams, both on a product and geographic basis. It would also open up a wider customer base for C&K and HBR to cross-sell their products and services. The acquisition will also help C&K to effectively counter the cyclical nature of travel business, as HBR’s revenues typically peak in July-August and September, as against C&K’s business peak from March to the end of June. HBR’s strength in the education segment will also help C&K reduce its dependence on leisure travel, as it can now look to draw students from captive base of customers in India, Japan, Australia, New Zealand and China to fill HBR’s school tours and camps during off-seasons. Valued at about Rs 2250 crore, the acquisition would be funded through a mixture of debt and equity. The company has about Rs 1000 crore cash and has lined up debt from Axis Bank for the remaining amount. The deal however is subject to approvals (expected by September). While the HBR acquisition would be the biggest by C&K yet, it isn’t the first. The company has so far acquired seven companies. That it has successfully managed to integrate operations and extract synergies from then, lends confidence on its ability to efficiently steer the operations of HBR too.

C&K has a network spread across 90 countries and boasts of a product mix (both global and domestic), largely tailor-made to suit travel as well as budgetary requirements. While concerns of a slowdown in the European regions do persist, C&K’s wide geographical presence could keep its business relatively shielded. For instance, in FY11 even as the revenues from UK and Japan suffered due to the political turmoil in Egypt (which attracts tourists from UK) and the Tsunami, the company managed to put in an overall growth helped by the strong show from its India operations. The wide-spread network of its operations also helps it extract bulk buying benefits through tie-ups with airlines and hotels, thus giving it an edge over competition in terms of pricing.

Bulk bookings have also helped the company improve its operating margins, which have in the last three years expanded by about four percentage points to 46 per cent (in FY11). Income and profits, during the same period, reported a compounded growth of 20 per cent and 24 per cent to Rs 497 crore and Rs 122 crore respectively.

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