Thomas Cook India has been able to make profits in a tough global environment. Now, it needs to sell more holidays and less foreign exchange
It isn’t often that the precarious financial position of a parent can boost the fortunes of its offspring. Yet, in the case of Thomas Cook India—a company that is in the travel services business (holiday packages, visa services) and is also a wholesaler and retailer of foreign exchange—this may very well turn out to be true.
UK-based based Thomas Cook Plc, a 77 per cent owner of its Indian subsidiary, was in deep trouble last year. Laden with £890 million worth of debt, the company was desperate to generate cash. It decided to hawk its chain of hotels in Spain to raise £57.3 million, completed a sale and leaseback deal for 17 aircraft that generated £182.9 million and even decided to sell its office property in the Netherlands. In January 2012, Thomas Cook UK had pledged its entire shareholding in the Indian leisure travel and foreign-exchange company to the Royal Bank of Scotland to secure a £200-million loan.
| THOMAS COOK’S EXCURSION IN INDIA |
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Considering the financial disarray it was, it was only a matter of time before the UK parent decided to part ways with its Indian subsidiary.
Finding suitors for Thomas Cook India was not going to be a problem. After all, while global businesses had been hobbled by a slowdown, its India business had been making profits. For the full year ended December 31, 2011, the company had recorded a net profit of Rs 56 crore on revenues of Rs 402 crore. The travel services share in profits had grown 14.2 per cent over the previous year but margins had fallen 260 basis points. Its wholesale foreign exchange business had done even better, recording a 21 per cent growth in profit in 2011. Margins had been boosted by 390 basis points as rupee depreciation helped its forex operations.
Clearly, this was a prize waiting to be grabbed and a bevy of blue-chip private equity firms from across the globe, recognising the opportunity, lined up to try and do so. These included the likes of TA Associates, the Carlyle group and KKR, as well as eastern heavyweights such as Muthoot Finance, China-based travel and hospitality group HNA and Bravia Capital of Hong Kong.
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Ultimately, the winner was the unlikely Fairbridge Capital, a fully-owned subsidiary of Toronto-based Fairfax Financial Holdings, promoted by Indian-origin investor Prem Watsa, also called the 'Warren Buffett' of Canada for his savvy investments. Fairbridge bought a 77.1 per cent stake in the Indian company for Rs 810 crore in May 22 this year. While the management remains the same and the brand name will be retained for 12-and-a-half years, Fairbridge is rethinking the company's business model to fully leverage the large potential that the travel segment has in India.
Fairbridge gets a company that is not only profitable, but one that has a historic legacy here, having wooed customers in the country since 1881. It is widely networked—has operations in 70 Indian cities across 153 owned locations. It is also supported by a strong partner network—110 gold circle partners and 184 preferred sales agents in over 100 cities throughout India. The company also has overseas operations in Mauritius and Sri Lanka. From all accounts, the private equity player is keen to dig its heels in and grow the company over the coming years. Thomas Cook India MD Madhavan Menon says: "PEs tend to get lost in details but Fairbridge has looked at this deal as a strategic, long-term investor."
Fairbridge is said to have "big plans" for Thomas Cook. What these are is not exactly clear, since Fairbridge officials declined to comment for the report, as the open offer on the deal is still in play. Menon sheds a little light on what this could mean. "We need to look at how Thomas Cook operates and review our strategies. We would want to grow the leisure business," he says.
Menon is alluding to a major shift in the way Thomas Cook will look at the weightage given to its separate businesses—foreign exchange and travel. Over two decades ago, former chairman of Thomas Cook India, Pradip Madhavji, had prophetically said: "We can't survive only on jam and honey (foreign exchange). We need bread and butter (travel business), too."
There's a very good reason for this. Thomas Cook has at least two-thirds of its business generated from foreign exchange operations. "Margins in foreign exchange are wafer thin. The margins are higher in the travel and tourism business. For Thomas Cook, the volume of business is much higher in foreign exchange and adds to the bottom line," a senior industry official says. In foreign exchange, the margins are around 0.5 per cent in wholesale and approximately two per cent in retail trade.
In other words, foreign exchange is gravy and for Thomas Cook to keep pace with its competitors, it needs to be identified more with the kind of work that companies like Cox and Kings are known for—setting up luxury tents at the Kumbh Mela, or organising luxury tiger safaris, for instance—than the more mundane aspects of the business such as cashing in on travellers cheques’ or converting foreign exchange. Cox and Kings' core competence is in the leisure travel segment, which alone accounts for around 65 per cent of its revenues—exactly the reverse of Thomas Cook. For the year ended 2012, Cox and Kings' revenues were Rs 295.87 crore with a net profit of Rs 77.68 crore.
Ramping up leisure travel is a no-brainer. More and more well-heeled Indians are spending large amounts of their paycheques on vacations. Today, India's outbound travel stands at 14 million and inbound at close to six million. By the year 2020, India's outbound travel alone will grow to 50 million, according to the United Nation World Tourism Organisation. The 'Kuoni Travel Report India 2007' predicts that total outbound spending will cross the $28-billion mark in 2020.
It's not that the company hasn't tried to do anything. It earlier attempted to target both the high-end traveller like Cox and Kings does, and also the budget traveller. In 2009, for instance, the company had launched a campaign, calling itself the "Holidaywallahs", but later also launched a product—Indulgence—to cater exclusively to the high net worth individuals' holiday needs.
It needs to do more of this if it wants to fully realise its potential.