The road ahead

Improved economy and rising income levels augur well for Thomas Cook

Thomas Cook announced results for the year ended October 31, 2003 earlier this week. Interestingly, the company's stock price has fallen almost eight per cent on the BSE since the results were announced.

Actually, the annual results are far from impressive, with operating profit rising just 1.96 per cent. But what's more important is that the company managed quite a turnaround in the fourth quarter, in which revenues grew 30 per cent and operating profit jumped 116 per cent thanks to a 13 percentage point jump in margins.

The annual performance was inferior because of the rough time the company faced in the first half of the fiscal, owing to the war in Iraq and the Sars epidemic.

The Sars outbreak especially hit outbound travel to the far east and to some extent places like Australia, flights to which had halts in Sars-hit nations.

Thankfully for the company, outbound travel to Europe was not affected much. Besides, the domestic holiday business grew 50 per cent, and made up for the fall in outbound travel. During the first half period, revenues had grown just 1.6 per cent and operating profit had fallen 22 per cent, as margins slumped 920 basis points.

Performance in the third quarter ended July was slightly better as revenues grew 5.9 per cent and margins fell at a lower rate of 190 basis points.

Things got much better in the October quarter, which captures to an extent foreign inbound travel and also the holiday season of Diwali. Revenues grew 29.63 per cent last quarter, and more importantly, operating profit jumped 116 per cent.

The good performance should continue (although earnings growth would be less dramatic) as tourist arrivals have been strong in the December quarter.

Besides, the improvement in the economy and rising income levels augur well for Thomas Cook's domestic business, since holidaying has become more wide-spread among Indians. It was precisely for these reasons that the Thomas Cook stock had more than doubled to Rs 430 since end-September.

The results, per se, had no reason to impact the stock negatively, since the fourth quarter results show that things are improving. But on the other hand, the stock trades at well over 20 times one-year forward earnings, so it was high time there was a check on its non-stop rise.

Capital expenditure revival

Reports indicate that Indian corporates are expected to invest around Rs 50,000 crore over two to three years. The RBI Bulletin for December carries a study on "Corporate Investment: Growth in 2002-03 and Prospects for 2003-04", which has the data for capital expenditure on projects sanctioned by banks and financial institutions. The phasing of capital expenditure every year under these projects has been indicated from 1992-93 to 2003-04. The table is given below:

<table BORDER="0" CELLPADDING="2" width="60%">
  <tr>
    <td HEIGHT="16" colspan="2" bgcolor="#000000">
      <p ALIGN="center"><font face="Tahoma" size="4" color="#FFFFFF">On the rise</font></td>
  </tr>
  <tr>
    <td COLSPAN="2" HEIGHT="32" bgcolor="#8AA4B0">
      <p ALIGN="center"><font color="#FFFFFF"><b><font face="Tahoma" SIZE="2">
      Sanctioned assistance by term-lending institutions / banks for capital expenditure projects
      </font></b><font face="Tahoma" size="1">(<i>Rs crore)</i></font></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1992-93</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>26,777</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1993-94</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>33,362</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1994-95</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>41,948</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1995-96</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>64,319</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1996-97</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>70,691</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1997-98</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>70,724</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1998-99</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>67,131</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      1999-00</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>52,730</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      2000-01</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>53,491</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      2001-02</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>40,887</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      2002-03</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>37,154</b></font></td>
  </tr>
  <tr>
    <td HEIGHT="16" bgcolor="#E4EAED">
      <p ALIGN="LEFT"><font face="Tahoma" SIZE="2">
      2003-04</font></td>
    <td HEIGHT="16" bgcolor="#F1F4F5">
      <p ALIGN="RIGHT"><font face="Tahoma" SIZE="2">
      <b>19,518</b></font></td>
  </tr>
</table><P>

The numbers clearly show the massive decline in investment since the mid-nineties. Note also that these figures are only of loans taken for projects""internal resources used for expansion have not been taken into account, and the study says that it takes into account only investment by the private corporate sector.

Even if Rs 50,000 crore of new investment takes place in the next two years, addition to new capacity will not be at the levels seen in the mid-nineties.

Nevertheless, anecdotal evidence from both corporates as well as bankers indicates that capital expenditure plans are being firmed up, a trend also clearly visible from the full order books of capital goods manufacturers.

The point is that the decline in growth after the mid-nineties is a direct consequence of the slowdown in capital investment and the revival in investment demand is another indication that the economy is on the path of a cyclical recovery.

A revival in capital expenditure will also ensure that the current recovery will outlast the effects of one good monsoon, pointing to a longer-lasting recovery. The last time this happened, in the mid-nineties, we had a gross domestic product growth of over 7 per cent for three consecutive years.

Moreover, the low interest rates and the stock market rally mean a much lower cost of capital this time, encouraging capex.

With contributions by Mobis Philipose