A strong brand, robust performance and healthy growth prospects provide comfort, but the IPO pricing caps any near-term gains.
Among the oldest travel companies globally and the largest in India, Cox & Kings (C&K) has a presence in 19 countries and provides international and domestic travel related services through its Indian offices, global subsidiaries based in UK, Japan, UAE and Singapore among others as well as representative offices. The company is coming out with an initial public offer of 1.83 crore shares at a price band of Rs 316-330 per share aggregating to Rs 585-610 crore, which includes an offer for sale of 30.47 lakh shares by three foreign investors, to fund its expansion plans as well as retire some debt.
Operations
Cox & Kings operates both group and tailor-made tours around the world. It generates revenues from three product lines namely, leisure travel, corporate travel and forex. Within the travel business, it operates in three segments namely inbound, outbound and domestic of which, outbound travel contributed around three-fifth of total revenues earned in leisure travel. Leisure travel alone contributed 90 per cent of total consolidated revenues in 2008-09. Since leisure travel is a high margin business, it has also helped the company maintain robust operational performance over the years.
The company offers pre-packaged and tailor-made products through aggregation of service offering like flight and hotel bookings as per the client’s requirements. Efficient usage of technology has aided C&K in introducing dynamic packages that provides a range of choice to its customers, while sustaining better productivity and improved client management for the company. That apart, it has helped C&K offer its services through the online channel. Besides online, C&K has also been expanding its offline presence through the franchise route. In the last nine months, it has opened 30 Cox & Kings outlets across the country; the company has set an ambitious target of 150 stores by December 2009.
| STRONG NUMBERS | |||
| in Rs crore | FY08 | FY09 | Q1 FY10 |
| Net sales | 188.3 | 293.6 | 115.9 |
| EBITDA | 66.9 | 98.3 | 53.9 |
| Net profit | 42.6 | 62.8 | 40.6 |
| EPS (Rs) | 15.2 | 22.4 | - |
| P/E (x) at Rs 316 | 20.8 | 14.1 | - |
| P/E (x) at Rs 330 | 21.7 | 14.7 | - |
| Source: Company | |||
In October 2008, the company forayed into visa processing services for diplomatic missions and got approval from the diplomatic mission of India at Singapore for outsourcing their visa processing activities. That apart, through a 50:50 joint venture with IRCTC (an Rs 70 crore project), C&K has entered into the business of luxury train-based tourism wherein operations are scheduled to start from January 2010.
Financials
C&K’s consolidated revenues have grown at a compounded annual rate of 60 per cent in the last three years, which however is also helped by the five acquisitions it has made across the globe since 2006. Notably, it managed to post robust revenues last year (2008-09) as well as in the June 2009 quarter with operating profit margins in excess of 40 per cent, despite a relatively weak environment. However, in order to fund its growing operations, the company has resorted to higher borrowings, which resulted in a three-fold year-on-year rise in interest costs to Rs 20 crore in 2008-09. Thus, net profit margins were down 300 basis points to 22 per cent in 2008-09. Since the company plans to repay about Rs 130 crore of its total debt of Rs 432 crore (as of June 2009) which are due for repayment to banks and financial institutions, expect the interest costs to subside going ahead.
Conclusion
In light of the global slowdown since 2008, the hospitality and travel sectors whose prospects more or less mirror the economic progress had their share of rumblings. For India, the Mumbai terror attacks and later on the Swine Flu scare did not help matters either.
As per the Ministry of Tourism, the inflow of foreign travellers dropped by 7 per cent to 4.02 million in the first ten months of 2009 compared to same period last year. But, as the situation is seen changing, an economic revival across key countries may open door to a lot more tourist arrivals, even though nothing dramatic is expected in the immediate future. Nevertheless, companies like Cox & Kings would stand to gain in the medium to long-term.
To accelerate growth, C&K had always explored geographies away from India. Today, the company garners around half of its revenues from its overseas subsidiaries at UK, Japan, Dubai and Singapore. Further, it plans to use Rs 62.5 crore of the IPO proceeds for investments in its subsidiaries, which have been churning better profitability compared to the domestic business. Another Rs 150 crore could be spent on strategic-fit acquisitions that could help it to consolidate its position in India as well as expand into geographies like Middle-East. Being a “One Stop Shop” travel services provider with a well-diversified geographic presence, it would ensure that the company grows at a healthy pace in the future.
In terms of grading, CARE Ratings has graded the IPO at four (out of five), indicating above average fundamentals. While there is little doubt regarding the company’s business model, fundamentals and growth prospects, at the upper price-band of Rs 330, the PE works out to 24 times based on its 2008-09 consolidated earnings.
Given its June 2009 quarter earnings and adjusted for the sharp jump in other income of Rs 16.3 crore (as against Rs 6.7 crore in the 12 months ended March 2009) which was on account of forex-related gains, the PE works out to about 20 times its estimated 2009-10 consolidated earnings.
This suggests that the offer price is not cheap leaving limited scope for appreciation in the near-term. Thus, investors with a long-term perspective may consider the IPO.
