Thomas Cook: Feeling the pinch

Thomas Cook could face margin pressure on rising operational costs

Thomas Cook has reported a lacklustre performance in the quarter ended October 31, 2006, despite Diwali falling this year during the last quarter.

The company's operating margins in the last quarter were under pressure owing to rising operational costs. Last year, Diwali was celebrated in the first week of November.

Meanwhile, the company has seen its consolidated operating profit decline by 26.3 per cent y-o-y to Rs 6.92 crore in the last quarter compared with 34.1 per cent growth in income from operations to Rs 40.9 crore.

Operating profit margin also declined by a staggering 1390 basis points to 16.9 per cent in the October 2006 quarter. The result was declared after the close of Thursday trading and on Friday, the stock declined 3.6 per cent to Rs 522.

Although not strictly comparable given the seasonal nature of the travel business, the company's operating profit margin also declined by 760 basis points y-o-y to 33.15 per cent in the quarter ended July 2006.

The pressure on margins in the last quarter was owing to staff costs surging 63.5 per cent y-o-y to Rs 13.5 crore, coupled with other expenditure rising 50 per cent. Analysts point out that given the well-documented boom in tourism and hospitality sector, an increase in staffing costs for Thomas Cook is inevitable.

Segment revenues of the company's travel and related services division grew by 34.8 per cent y-o-y to Rs 30.27 crore in the last quarter and that was largely driven by improved demand for its domestic holiday schemes.

Also, the company has attempted to rejuvenate its overseas travel packages. An increase in advertising costs for outbound packaged, led to segment profit of this division falling 7.5 per cent y-o-y in the last quarter.

Going forward, demand for its travel package is expected to be strong, given the upcoming winter holidays. Also, once it receives all regulatory approvals for its merger with LKP Forex, it is expected to help grow its financial services division.

However, its margins could continue to be under pressure, given rising operational cost. As a result, with the stock trading at 28.5 times trailing 12-month earnings, it is expensive.

Shopper's Stop: Retail pitch

Much like its peer Pantaloon, Shopper's Stop (SSL), over the past year, has forayed into various retail segments including home furnishing, food and beverage outlets, baby care, cosmetics and even entertainment. The idea ostensibly is to tap a larger share of the consumer's wallet.

While, speciality formats make for good business strategy, it has slowed down the growth in the department store format, which can impact its finances in the future.

It has lined up three stores for the current year, but it needs to add floor space at a faster space""it added 1 lakh sq ft in the September 2006 quarter.

Currently, it has around 1.06 million sq ft across formats and plans to have 3 million sq feet by 2010.

The September quarter was fairly good and SSL managed to grow revenues by 32 per cent to Rs 200 crore with same store sales up by 25 per cent.

Operating profit margin expanded by 210 basis points to 8 per cent, partly due to a higher share of private labels, and also thanks to profits contributed by Crossword""the books and music chain""and operating efficiencies.

In fact, margins could improve further as private labels account for a higher share of sales: they were up from 20 per cent in Q2 FY06 to 22 per cent in Q2 FY07 and the company has a target of 25 per cent by FY08.

However, if SSL scales up rapidly by adding floor space, margins could be under pressure in the near term.

At the current price of Rs 669, the stock trades at 59 times estimated FY07 earnings and 38 times FY08 earnings and is expensive given the scarcity of prime and affordable real estate, execution risks and increasing competition from big players.

Aventis: Under pressure

Aventis Pharma's September 2006 quarter have been adversely affected by rising costs, which offset its improved sales performance.

For instance, the company's operating profit fell 4.5 per cent y-o-y to Rs 68.7 crore in the September 2006 quarter compared with 9 per cent growth in net sales to Rs 243.1 crore.

Also, operating profit margin declined 390 basis points y-o-y to 28.3 per cent in the last quarter.

Aventis' sales growth was powered by a 15.1 per cent surge in domestic sales to Rs 179.5 crore, in product segments such as cardiovascular, vaccines and oncology, say analysts.

However, exports declined 6.2 per cent and that is understood to be on account of reduced sales in Russia and other CIS countries.

Meanwhile, its operating costs rose""other expenditure went up 25 per cent in the last quarter, coupled with staff costs rising 14.7 per cent. Going forward, with domestic sales showing signs of buoyancy, it should drive the company's growth. However, the ability to keep costs under check will be crucial.

The stock gets a discounting of 19 times estimated CY06, given investors; euphoria for multinational pharma stocks.

With contribution from Amriteshwar Mathur and Shobhana Subramanian