Cox & Kings: Room for growth

Over the last year, the stock of tour operator Cox & Kings has lost more than 40 per cent. This follows a tough fiscal 2015-16 so far for the company, compounded by a relatively stronger rupee vis-à-vis the euro and pound.

A volatile stock market didn’t help too. Adjusted consolidated operating profit for the nine months ended December 2015 grew just 2 per cent year-on-year, compared with the 10 per cent average annual growth over a two-year period. The pain was primarily in the recent December quarter when adjusted operating profit fell 18 per cent Y-o-Y. This was a fall-out of the Paris terror attacks in November, severe weather in the UK, and significant investments in brands.

Europe is Cox and Kings’ largest market, contributing more than two-third of the company’s consolidated sales and profit. The stock, which was making a comeback this month, was put again on the back-foot after last week’s terror attacks in Brussels.

The weakness though presents a good buying opportunity for investors with a long-term perspective. The valuation, for one, is not expensive.

On an enterprise value-to-operating profit (EV/EBITDA) basis, the stock trades at about five times its trailing 12-month earnings, lower than the nearly eight times it traded at in the past three years.

Importantly, the company’s prospects in the long-term look good. The factors that affected its performance in recent times are more in the nature of unfortunate one-offs.

The impact of the Paris and Brussels attacks should hopefully fade over the coming year. This should mean a recovery in the Leisure-International and Education tours businesses; adjusted operating profit in these segments dipped about 12 per cent and 3 per cent respectively in the nine months ended December 2015. Together, these segments account for more than half the company’s profit.

The Meininger hotels segment (about 15 per cent of overall profit) did well despite adverse circumstances — operating profit rose 12 per cent Y-o-Y in the nine-month period; growth in euro terms was much stronger at 22 per cent. The Leisure-India business did quite well too with nine-month operating profit rising 16 per cent; growth is expected to remain robust.

Meanwhile, Cox and Kings is pursuing its inorganic growth strategy. In October 2015, it acquired hotel booking website LateRooms.com for about ₹85 crore — this should aid the Leisure-International business. Alongside, the company continues to hive off businesses it thinks are not core to its operations. It followed up the exit from the camping division in late 2014 with the sale of adventure tour business Explore Worldwide in December 2015 for about ₹258 crore.

The company also continues to pare its earlier acquisitions-fuelled debt. After the sharp debt reduction of ₹1,800 crore in 2014-15, the company’s net debt has been cut by a further ₹70 crore in 2015-16 so far.

Consequently, interest cost reduced by nearly 28 per cent in the nine months ended December 2015, and the debt-to-equity ratio was comfortable at less than 1 time as of September 2015.

Overall, adjusted operating margin for the nine months ended December 2015, while lower than the year-ago period due to business disruptions, was still healthy at 42 per cent.

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