march 30, 2012 rating matrix cox & kings ltd...

March 30, 2012

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Betting on synergies…

Cox & Kings (C&K) is one of the leading and oldest (established in 1758) players in the travel & tourism industry that caters to the overall travel needs of Indian and international travellers. The company has a presence in more than 19 countries besides India through subsidiaries and JVs. Opting for the inorganic route to grow exponentially, C&K has done seven acquisitions in the past six years (including the Holidaybreak Plc. acquisition), which has made it an integrated player globally with quality products and services. With its recent HBR acquisition, we expect return ratios to improve post FY12E as it has provided synergies in terms of geographic diversification, widening its product portfolio and cross-selling opportunities, amid challenges in terms of effective integration. We are initiating coverage on the stock with a BUY rating.

Cox and Kings: A well diversified globally integrated player C&K has done seven acquisitions in the past six years (including HBR), which made C&K an integrated player globally with quality products and services. This series of acquisitions brought huge business volume on the book of C&K on a consolidated basis. This, in turn, increased C&K’s bargaining power with vendors due to its large customer base and global presence. The overseas acquisition created value for the company with healthy growth in revenues (CAGR of 51% during FY07-11) and operating margins (i.e. at ~40%) during the same period.

Holidaybreak acquisition: A long-term strategic fit We foresee HBR as a good long term strategic fit for C&K as it has provided synergistic opportunities in terms of geographic diversification, widening its product portfolio and offering cross-selling opportunities. However, medium-term benefits are unlikely on account of a slowdown in UK and European region and seasonally weak first half (i.e. October-March) of HBR.

Valuations At the CMP of | 161, C&K currently trades at 6.4x FY14E EV/EBITDA. The stock has traded at a two-year average band of 7-9x. This discounted valuation mainly factors in depreciating rupee as majority of C&K India’s business is outbound & there is a slowdown in Europe. However, considering the steady & resilient nature of education & adventure business segment of HBR and strong growth momentum in India, we believe, current valuations overlook the long term synergy & growth potential. We have used SOTP valuation and arrived at a target price of | 195, in line with peer valuation (i.e. 7x FY14E EV/EBITDA), reflecting our conservative valuation approach. We are initiating coverage on C&K with a BUY rating. Exhibit 1: Valuation Metrics

FY10 FY11 FY12E FY13E FY14ENet sales (| crore) 399.2 496.7 905.9 1793.4 2052.6EBITDA (| crore) 186.4 230.0 197.5 788.9 882.1Net Profit (| crore) 133.8 129.1 41.8 320.7 404.6EPS (|) 9.8 9.5 3.1 23.5 29.6

PE (x) 15.9 16.5 51.0 6.6 5.3

PBV (x) 2.6 1.8 1.7 1.4 1.1

EV/EBITDA (x) 12.1 8.8 30.6 7.5 6.4

ROCE (%) 13.0 10.3 2.5 12.4 13.6

RONW (%) 16.5 10.7 3.3 20.4 20.5 Source: Company, ICICIdirect.com Research

Cox & Kings Ltd (CNKLIM) | 161

Rating Matrix Rating : BUY

Target : | 195

Target Period : 12 months

Potential Upside : 21%

YoY Growth (%) % FY11 FY12E FY13E FY14E

Net sales 24.4 82.4 98.0 14.5

EBITDA 23.4 -14.1 299.4 11.8

Net Profit -3.6 -67.6 667.9 26.1

Current & target multiple (x) FY11 FY12E FY13E FY14E

P/E 16.5 51.0 6.6 5.3

Target P/E 20.7 63.9 8.3 6.6

EV/EBITDA 8.8 30.6 7.5 6.4

P/BV 1.8 1.7 1.4 1.1

RoNW 10.7 3.3 20.4 20.5

RoCE 10.3 2.5 12.4 13.6

Stock Data Bloomberg/Reuters code COXK IN/COKI.BO

Sensex 17364

Average Volume (Year) 348090

Market capitalisation (| crore) 2129.8

52 week H/L (|) 249/153

Equity Captial (| crore) 68

Promoter's stake (%) 58.7

FII Holding (%) 21.3

DII Holdings (%) 6.2

Comparative return matrix (%) Return 1M 3M 6M 12M

Cox & Kings -4.1 3.3 -15.4 -11.0

Thomas Cook 19.6 95.8 40.3 53.5

Mahindra Holidays -14.2 -11.3 -16.0 -25.0 Price movement

0

50

100

150

200

250

Mar-12Dec-11Sep-11Jun-11Apr-11

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Price (R.H.S) Nifty (L.H.S)

Analyst’s name Rashesh Shah [email protected] Hitesh Taunk [email protected]


Company background Cox & Kings (C&K), one of the leading and oldest (established in 1758) players in the travel & tourism industry, caters to the overall travel needs of Indian and international travellers. The company’s business is broadly categorised as leisure travel, corporate travel, forex and visa processing. Within leisure travel (contributing ~90% to the revenues), it provides services for outbound travel, inbound travel and domestic travel. Its corporate travel segments provide customised business travel solutions to over 200 companies both domestically and internationally. Besides, C&K also offers travel related foreign exchange and payment solutions along with visa processing services as an outsourced business solution to diplomatic missions in various countries. The company was listed on the bourses in December, 2009 and raised ~| 600 crore through an IPO (17x FY10 EPS). In order to scale up the business, the company acquired seven companies in the last five years. Under its major acquisitions, C&K acquired UK-based Holidaybreak Plc by paying ~£312 million (~| 2,200 crore) in September 2011.

Historically, Cox and Kings India remained the major contributor (~50% during FY11) to the topline on a consolidated basis followed by UK Travel (~20% during FY11). Its net sales have grown at a CAGR of ~51% since FY07 to ~| 500 crore in FY11. C&K’s profits have grown at a CAGR of 44% since FY07 to | 129 crore at the end of FY11. The company has maintained its operating profit margin at an average of 40% for the past five years.

Exhibit 2: Business model of Cox & Kings Ltd

Cox & Kings India

Leisure TravelCorporate/Business

TravelForex

Visa Processing Services

Outbound Train ToursDomesticInbound

Group Tours (Duniya Dekho)

Group ToursGroup Tours (Bharat

Dekho)Royale Indian Rail

Tours Ltd

FIT (Bharat Dekho)

MICE

FIT

MICE

FIT (Flexi Ho)

MICE

NRI

Trade Fairs

Source: Company, ICICIdirect.com Research

Shareholding pattern (Q3FY12)

Shareholders Holding (%)

Promoters 58.7

Institutional Investors 27.5

Others 13.9

Promoters and institutional holding trend (%)

25.8

22.7

21.5

18.9 21

.3

6.1 8.

6

9.0

8.17

6.2

05

1015202530

Q3FY

11

Q4FY

11

Q1FY

12

Q2FY

12

Q3FY

12

(%)

FII DII


Exhibit 3: Company History

18th Cent. 19th Cent. 1980 1996-2001 2002 2006-2009 2011

Merged with Henry King & Co. a bank and shipping agency, to form Cox & King's Henry S King & Co had strong links with India manufacturing

Foray into forex business, Launch of "Duniya Dekho", "Bharat Dekho" "Flexi Ho" brands

Acquisition of Clearmine Ltd (UK), Cox & King's Ltd (UK), Cox & Kings (Japan) Ltd, Tempo Holidays Pty Ltd (Aus & NZL), Quoprro Global (Visa Processing), East India Travel Company (US) and JV with Royale Indian Rail Tours

Established by Richard Cox to serve majority of the British regiments

Acquisition of Indian business of Cox & King's (Agents) Ltd.

Takeover of foreign exchange business of Tulip Star Hotel

Acquisition of UK based Holidaybreak Plc. Offers products in education, adventure, camping and hotel segments


Exhibit 4: Product profile of Cox & Kings

Leisure Travel Corporate Travel Visa Processing & Forex

-Outbound Travel-Inbound Travel (Destination Management Services)-Domestic Trvavel-MICE

f

Retail clients in India, UK, Australia, New Zealand, Japan, USA and UAE

Offerings

Markets

Portfolio Sample

-Customised business travel solutions

-200+ companies located in India

-Outsourced business solution provider to diplomatic missions-Licensed retail foreign exchange dealer in India

-Visa for India from Germany, UAE, Hong Kong, Greece, Singapore-Visa's for Malaysia and Singapore from India and French Visa from UK-Fx operations in India

Inbound

Domestic

Business Travel

Outbound

Forex

-Caters to both subsidiaries as well as other tour opertor-Renowned as tour specialist for indian tours

-Marketing products under brand "Bharat Dekho"-Exclusive products religious pilgrimage tours, education tours, activity & Spa holiday, train vacation

-Offers customised solutions for corporate clients-Continued relationship with corporate clientele helps to cross sell

Offers large number of destinations under "Duniya Dekho" Group Tour and "FlexiHo" (FIT Tours) brand

One of the first travel companies to be licensed as the authorised dealer -Category II


Investment Rationale Cox and Kings: Well diversified global player C&K has a presence in more than 19 countries besides India through subsidiaries and JVs. This places the company in a unique position among all regional players to offer multiple travel choices and value for products. C&K provides destination management services in the UK, India and Dubai to clients coming from the US, Japan, New Zealand, Singapore and Australia. Captive destination management services assures C&K of savings in cost in terms of commission and capture the maximum pie of expenditure accrued by customers, right from transportation to sightseeing

Exhibit 5: Geographical diversification to minimise business risk

Source: Company Presentation, ICICIdirect.com Research

The wide network of overseas branches gives the company access to important geographies and markets that help it to gain a strong footing in the offline travel industry. Its global presence also helps to mitigate the seasonality impact faced by the domestic travel and tourism industry. India’s tourism is counter cyclical to the rest of the world as the outbound season is in the first half of the financial year (April-September) whereas the profitability in the second half is taken care of by the overseas subsidiaries and India outbound operations.


Series of acquisitions – key route to become leader in tourism Industry

Opting for the inorganic route to grow exponentially, C&K has done seven acquisitions in the past six years (including HBR). This makes C&K an integrated player globally with quality products and services. This series of acquisitions brought huge business volumes on the book of C&K on a consolidated basis. This, in turn, increased C&K’s bargaining power with vendors due to its large customer base and global presence. The overseas acquisitions created value for the company as the consolidated net revenue of the company has grown at a CAGR of 51% during FY07-11 with healthy operating margins at ~40% during the same period. The overseas acquisitions also provided the company its own destination management services that facilitated the company in saving cost in terms of commission paid and capturing the maximum pie of expenditure accrued by travellers.

Exhibit 6: Historical Acquisition trend to inorganic growth Year Company Country Ammount OfferingsMar-06 Clearmine Ltd UK | 15.6 crore Destinations management services and inbound services in Europe

Sep-07 Cox & Kings UK | 39 croreOutbound services- upmarket leisure client: Wealthy retirees, key destination: India, Latin America, etc.

Sep-07 Cox & Kings Japan | 2 crore Travel wholesaler of products and services to other tour operatorsNov-08 Tempo Holidays Pty Ltd Australia $ 27 mn Outbound European and UAE countries Apr-09 East India Travel Company Ltd USA $ 22 mn Premium outbound travel package in USJan-10 MyPlanet , BenTours International Australia NA Specialised outboundSep-11 Holidaybreak Plc UK ~| 2300 crore Education tour operator

Source: *Approximately Company, ICICIdirect.com Research

Exhibit 7: Debt-equity ratio trend

0.8

1.6

0.6 0.7

3.3

2.6

1.9

0.00.51.01.52.02.53.03.5

FY08 F09 FY10 FY11 FY12E FY13E FY14E

D/E


Exhibit 8: Robust revenue growth since acquisition

97182

287

399

497

0

100

200

300

400

500

600

FY07 FY08 FY09 FY10 FY11

(| c

rore

)

Revenue

CAGR 51%


Exhibit 9: Constant improvement in margin after slowdown in FY08

4140

42

47 46

36

38

40

42

44

46

48

FY07 FY08 FY09 FY10 FY11

(%)

EBITDA Margin (%)



Extending reach through franchise route

The company currently has a presence in over 19 countries with 13 branch offices, 177 agents and 150 franchises. C&K further plans to expand its network of franchise outlets to 200 by FY12 and 250 by FY13 in India mainly in Tier II and Tier III cities to gain market share. The company provides training, site development, advertisement and marketing support with minimal investment. Higher number of franchises provides C&K an edge over competitors to gain market share and brand recognition. In addition, this also gives it better bargaining power to make bulk bookings, which finally helps company to provide a competitive package to customers, thus attracting more traffic in the long run. Exhibit 10: Expansion through franchise route

56

150

200

250

0

50

100

150

200

250

300

FY10 FY11 FY12E FY13E

(Nos

)

Franchise



Entering new educational tour segment in UK In order to add new product areas and markets, which would provide the company an opportunity to leverage its global network, C&K acquired a 100% stake in UK based Holidaybreak Plc (HBR). The acquisition was done under an all-cash deal of ~£312 million (at a valuation of 7.8x FY11 EV/EBITDA, enterprise value of £444 million and EBITDA of ~£58 million) in September 2011 through wholly owned subsidiary Prometheon Holdings (UK). We foresee HBR as a good long term strategic fit for C&K as it has provided synergistic opportunities in terms of geographic diversification, widening its product portfolio and offering cross-selling opportunities. However, medium-term benefits are unlikely on account of a slowdown in the UK and European region. While HBR is present predominantly in the education tourism segment, it also offers adventure tourism and camping services across Europe.

Exhibit 11: Business model and product offering of Holidaybreak

Holidaybreak Plc

Adventure Hotelbreak Education Camping

Provides adventure trip solutions such as wildlife, trekking and scuba diving through its three brands namely Explore, Djoser, and Regal.

Provides domestic short break trips in the UK and the Netherlands through its brands Superbreak and Bookit respectively

Offers educational tours for UK schools and colleges to international destinations. PGL and Meininger has combined capacity of ~14800 beds

Operates under a number of brands offering self catering mobile homes and pre sited tents across various European composits

Offerings

Synergies for

Cox & Kings

- Boost in total volume of the company with the introduction of readily available adventure and eductational tours to its existing markets like India and Australia- Leveraging existing C&K operations to book European hotels through Hotel Breaks, which attracts nearly 0.9 million bookings annually- Balance mix of mid-sized markets along with large and mature European market and geographic diversification to minimise business risk



Exhibit 12: Capitalising on Holidaybreak’s customer base

Source: Company presentation, ICICIdirect.com Research

Exhibit 13: Revenue by each segment

150 141 136 117

110 122 121 119

101 112 107 106

95 98 97 94

0

100

200

300

400

500

2008 2009 2010 2011

(£ m

n)

Hotelbreak Education Camping Adventure


Exhibit 14: Revenue share by each segment

33 30 29 27

24 26 26 27

22 24 23 24

21 21 21 22

0

20

40

60

80

100

120

2008 2009 2010 2011

(%)

Hotelbreak Education Camping Adventure


HBR’s revenue growth has remained stagnant in the past three years. This, we believe, would drag down the organic growth rate of C&K from FY14E onwards as UK’s revenue share in C&K would increase from 18% in FY11 to 67% in FY14E. However, on a segmental basis, despite the tight UK economic conditions, its education and camping divisions have shown resilience by recording revenue growth at a CAGR of 3% and 2%, respectively, for the past three years. On the other hand, its HotelBreak division’s revenue growth has consistently remained under pressure on account of a decline in retail travel agents business due to adverse economic condition and sale of its West End Theatre Booking division in June 2011. As a result, the revenue share of this division has also declined from 33% in September 2008 to 27% in September 2011.


Holidaybreak’s product portfolio

Education This division provides residential outdoor educational school trips in the UK through its three major brands PGL, NST and EST brands. It also provides bespoke school trip accommodation through the Meininger brand. HBR acquired a 50% stake in Meininger for £31.1 million in December 2010.

Exhibit 15: Education division product portfolio

Product Description Capacity

PGLPGL is the market leader in the residential, outdoor educational and adventuresector in over 4,600 UK schools

Operates 28 activity centres in key location across the UK, France andSpain with capacity for 9600 beds

Meininger Provides accommodation to German and UK schools tours and youth groups5600 beds across 15 city centre tourist location (10 in Germany, four inAustraia and one in UK)

NST & EST Educational tours for schools and colleges to a range of destination worldwide


Exhibit 16: Annual performance of education division

110

122121

119

100

105

110

115

120

125

FY08 FY09 FY10 FY11

(GBP

mn)

0

5

10

15

20

25

(%)

Revenue Headline EBITDA Margin


Exhibit 17: Half yearly trends in revenue

40

70

44

78

44

77

41

0

20

40

60

80

100

H1F08 H2FY08 H1FY09 H2FY09 H1FY10 H2FY10 H1FY11

(£ m

n)

Revenue


Exhibit 18: Half yearly trends in EBITDA margin

-13

23 21

-6

24

-10-6

-20

-10

0

10

20

30


(%)

Headline EBITDA Margin


Synergies with C&K:

1. Utilise existing capacities at PGL/Meininger

properties during off peak season from existing

C&K customer markets

2. Introducing PGL/NST brands in existing C&K

markets for international tours into Europe, Use education centres for accommodation

The leadership position and resilient nature of the education business assures steady growth and profitability


Adventure

This division offers worldwide adventure tours through its product Explore and Djoser. The division largely caters to group tours (average size 14-16 people) with couples and affluent families in the 40+ age group. The division has witnessed nearly 70% of repeat bookings due to its strong complementary skills in the exploratory segment.

Exhibit 19: Adventure division

Product Description Key destinations

ExploreUK soft adventure leading tour operators, escorted adventure holiday to over 130countries worldwide

South America, Africa, India, Middle East, Thailand, Turkey

DjoserDutch based small group adventure tour operator, escorted soft adventure tour to85 countries

Regal Drive Leading UK scuba diving operator Largest operators in the Red Sea (more than 10 locations)


Exhibit 20: Annual performance of adventure division

95

9897

94.5

92

93

94

95

96

97

98

99

FY08 FY09 FY10 FY11

(GBP

mn)

2

3

4

5

6

7

8

(%)

Revenue Headline EBITDA Margin



40

54

44

54

41

57

39

0

10

20

30

40

50

60


(GBP

mn)

Revenue



0.7

8.3

-1.8

9.3

-1.5

9.4

-5.2

-10.0

-5.0

0.0

5.0

10.0

15.0


(%)



Synergies with C&K:

1. Introduction of adventure products in existing C&K

markets as it has large outbound operations from

India, rest of Asia and Oceania

2. HBR already has a wide bouquet of adventure

products, which could be immediately launched in

India, Australia and other C&K markets

3. The volume of combined business of C&K and

HBR would give them better leverage with their suppliers and, hence, help improve their margins

The division reported a marginal contraction in topline

growth and margin during FY11 due to political unrest in the Middle East and North Africa (MENA)


Hotel Breaks:

It provides domestic and overseas short-break holidays services primarily to UK and Dutch consumers. Its leading brands include Superbreak, based in the UK, and Bookit, based in the Netherlands. The product range under Superbreak includes hotel, transport options and event tickets. Bookit offers accommodation for weekend stays, overnight accommodation and accommodation at small independent hotels.

Exhibit 23: Hotel break

Product DescriptionSuperbreak Specialises in packaging short trips and provides hotel bookings and packages in

the UK market with invntory of ~2000 hotelsBookit A recognised online short breaks hotel intermediary for the Dutch market


The hotel division of the company remained under pressure since the downturn in 2008 mainly due to the difficult economic environment and decline in discretionary expenditure and reduction in discretionary expenditure in the Netherlands and the UK. Now, after the acquisition, C&K plans to enhance the Hotel Breaks platform to include non-European hotels, viz. hotels in India, Australia, Middle East and the Far East.

Exhibit 24: Annual performance of Hotel Breaks

150141 136

116.6

0

20

40

60

80

100

120

140

160

FY08 FY09 FY10 FY11

(GBP

mn)

0

2

4

6

8

10

12

(%)

Revenue Headline EBITDA margin



76 7465

7765 71

60

0

20

40

60

80

100


(£ m

n)

Revenue



9

12

9 9

7

10

7

02468

101214


(%)



Synergies with C&K:

1. Leveraging existing C&K operations to book

European Hotels through Hotel Breaks

2. C&K outbound currently generates European

hotel bookings worth ~US$51 million. After

using the Hotel Breaks platform for hotels in

India, Middle East and Far East, the combined

hotel booking of the two companies is more

than US$293 million


Camping:

This division primarily provides self-catering holidays in mobile-homes and tents, pre-sited on third party owned camp-sites, through the Eurocamp and Keycamp brands across France, Italy and seven other European countries.

Exhibit 27: Camping Division

Product Description CapacityEurocamp UK's leading provider of family camping and self catering holidays to over 150

holiday parks in 12 countries in Europe

KeycampOperates self-drive family camping and mobile home holidays to nine countries in Europe

EcampOperates in Holland, Belgium, Germany, Denmark, Switzerland and Poland offering value holidays in camp sites and mobile homes

Self catering holidays in pre-sited mobile homes (~7100), tents (-1200) or chalets (150)


Exhibit 28: Annual performance of camping division

101

112

107106.2

949698

100102104106108110112114

FY08 FY09 FY10 FY11

(GBP

mn)

0

5

10

15

20

25

(%)

Revenue Headline EBITDA margin



0.6

100.5

0.3

111.6

0.2

107.2

0.10

20

40

60

80

100

120


(£ m

n)

Revenue



-4467-6200

-12300

222328

-2467

-14000-12000-10000-8000-6000-4000-2000

02000


(%)



Market leadership position and tight control on operations

ensure camping continues to enjoy high margins. The

business is highly seasonal in nature and generates

revenue from April to September

Synergies with C&K

Utilise existing capacities of Holidaybreak’s camping

properties to existing C&K markets like India and Australia


About World Tourism Industry

Indian tourism industry (Outlook: Positive) Tourism is an important sector of the economy and contributes significantly in the country’s GDP as well as foreign exchange earnings. The tourism industry in India is vibrant and is fast becoming a global destination. This is clearly evident from the rise in inbound and outbound tourists by 8.1% and 12.6%, respectively between 2005 and 2010. According to World Travel and Tour Council (WTTC), currently the travel and tourism industry’s direct contribution to Indian GDP is ~2%, backed by growth at ~8% CAGR in FTAs and ~14% CAGR in domestic tourism in India over the last five years. The travel and tourism (T&T) industry plays an important role in foreign exchange earning by growing at ~10% CAGR from | 48,280 crore in 2007 to | 64900 crore in 2010. In 2011, foreign exchange earning increased by ~19.5% YoY to | 77,580 crore backed by ~9% YoY growth in FTAs. Considering the high growth potential, WTTC estimates the size of the Indian tours & travel industry will register growth at a CAGR of 10% from US$42 billion to US$111 billion by the end of 2020.

Exhibit 31: Indian outbound tourism and expenditure

12.5 13

.8 15.4 17

.3 19.4 21

.9452 475 500 530 565604

0.0

5.0

10.0

15.0

20.0

25.0

2010 2011E 2012E 2013E 2014E 2015E

(mn

trips

)

0

100

200

300

400

500

600

700

(| b

n)

Departures (mn trips) Expenditures (| bn)


Exhibit 32: Inbound to India and receipts

5.7 6.0

7.8

6.4

7.2

6.8

619631

647666

689717

0

2

4

6

8

10

2010 2011E 2012E 2013E 2014E 2015E

(in m

n)

560580600620640660680700720740

(| b

n)

Inbound to India (mn) Reciepts (| bn)


Exhibit 33: Outbound tourist composition in 2010

Leisure68%

Business28%

MICE4%


Exhibit 34: Inbound tourist composition 2010

MICE4%

Business35%

Leisure61%


T&T market by size (US$ bn)Year 2010 2020P CAGR (%)China 113 501 16.1India 42 111 10.2USA 511 917 6.0UK 89 148 5.2Australia 50 80 4.8



Outbound tourism to grow annually by 12% during 2011-15E… India is one of the fastest growing outbound travel markets in the world. This can be mainly attributed to growth in international departures from India, which has registered growth at a CAGR of ~12% between 2006 and 2010 to ~1.3 crore. According to Euromonitor, international departure from India is expected to register a CAGR of 12% between 2011 and 2015 while expenditure on outbound travel is expected to register a CAGR of ~6.2% to | 60,400 crore during the same period. The growth in outbound tourism can mainly be attributed to growing disposable income along with a rising young population. Growing disposable income, rising young population to drive growth The major growth in outbound trip volume (CAGR of ~12% in 20011E-15E) is primarily driven by India’s growing openness to the outside world. This stimulated foreign travel, especially among the young generation, which is expected to be ~40% of the overall population by the end of 2021E. According to a McKinsey Global Institute (MGI) 2010 report, India’s fast growing cities will drive a near fourfold increase in the country’s per capita income between 2008 and 2030. As per the report, the number of middle class households (earning between | 200,000 and | 1 million a year) will increase more than fourfold nationwide from 32 million to 147 million in 2030. The per capita disposable income of the urban segment grew at a CAGR of 5.4% between 1990 and 2008 while it is expected to grow at a CAGR of 6.4% between 2008 and 2030. With the rising disposable income, consumer’s discretionary expenditure is also likely to increase significantly. As per the PwC-Ficci report, the discretionary spend (Exhibit 40) has increased by 1000 bps from 2000-01 to 40% of the total spend in 2009-10. This is further expected to go up by 1000 bps by 2019-20.

Exhibit 35: Sustained growth of age group between 25 and 44

42.8 36.1 33.5

37.439.9 40.2

19.8 24.0 26.2

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2006 2016P 2021P

(%)

0-19 20-44 44+

Source: National Commission of Population 2006, ICICIdirect.com Research

Exhibit 36: Household income growth to drive discretionary expense

0

20

40

60

80

100

120

140

160

180

200

220

240

1990 1995 2000 2005 2010 2015 2020 2025 2030

Per capita disposable income, | '000 2008 prices

5.44.3

3.2

6.4

6.1

4.2

Projection

239 Urban

136 All India

67 Rural

Source: MGI 2010 , ICICIdirect.com, Research, Figures in circle represents CAGR growth

The US, Australia and the UK continued to remain popular outbound destinations for Indian tourists with tourist arrivals in these destinations registering a CAGR of 13.5%, 15.4% and 6.1% during 2005-10. Out of the total international departures from India ~68% were leisure travellers and 28% were business travellers while 4% belonged to the MICE segments.

The outbound market size is currently pegged at 80 lakh

departures, which is likely to grow by 12% in the next five years


Exhibit 37: Number of Indian nationals’ departures from India 0.

7

1.0

1.4 1.4

1.2

0.7 0.

7

0.8 0.

9 0.9

0.6 0.

7 0.7 0.8

0.7

0.4 0.

4 0.5

0.5

0.6

0.2 0.

3

0.4

0.6 0.

6

0.3 0.

4

0.6 0.6

0.5

0.3 0.

4

0.3 0.4

0.3

0.1 0.1 0.1 0.1 0.1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2005 2006 2007 2008 2009

(in m

n)

Saudi Arabia China Singapore Thailand Malaysia USA UK Australia

Source: MoT, ICICIdirect.com Research

Exhibit 38: Number of outbound departures from India

0 200 400 600 800 1000 1200 1400

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(in '000)

USA UK Japan Australia


There are many positive factors influencing Indian demand for inbound and outbound travel with factors ranging from growing middle class disposable income to rising airline capacity. Indian travel and tourism (T&T) is one of the largest service industries in India with direct contribution to GDP of ~2% and provides direct employment to ~25 million. With the strong fundamentals of the Indian economy (grew by an average 8% in the last five years) and share of wallet spent on discretionary items, which is expected to grow from 30% to 50% (according to the Ficci-PWC report) provides a considerable push to demand for leisure travel, going ahead.


Exhibit 39: T&T’s direct contribution to GDP expected at ~2% by 2016E

36

62

010203040506070

2011 2016P

(US$

bn)

0500100015002000250030003500

(US$

bn)

T&T direct contribution to GDP India Nominal GDP

`

Source: WTTC, IMF, ICICIdirect.com Research

Exhibit 40: Rising discretionary expenditure

70

60

50

30

40

50

0 20 40 60 80 100 120

2000-01

2009-10

2019-20

(%)

Non discretionary spend Discretionary spend

Source: FICCI-PWC, ICICIdirect.com Research

…While inbound tourism to witness annual growth of 7% during 2011-15E India’s inbound tourism has witnessed significant growth in recent years. During 2005-11, foreign tourist arrivals (FTA) and foreign exchange earnings (FEE) from tourism registered a CAGR of 7.5% and 15%, respectively. Despite the slowdown and recessionary trends in the economies of Europe and America, FTAs in India during 2011 were 6.1 million compared to 5.6 million during 2010, posting a growth of 9%, lower than the growth of 11.5% in 2010. FEEs from tourism in rupee terms during 2011 were | 77,588 crore compared to | 64,889 crore during 2010 with a growth rate of 20%. According to Euromonitor, India’s inbound tourism and FEEs are expected to grow at a CAGR of 7% and 3% between 2011 and 2015.

Exhibit 41: Growth in foreign tourist arrivals

01234567

2005 2006 2007 2008 2009 2010 2011

(in m

n)

-5

0

5

10

15

20

(%)

FTAs %chg

Source: MoT ICICIdirect.com Research

Exhibit 42: Growth in FEEs

0

20000

40000

60000

80000

100000

2005 2006 2007 2008 2009 2010 2011

(| c

rore

)

0

5

10

15

20

25

(%)

FEEs % chg



Exhibit 43: Tourist arrivals from different countries into India in 2009

Others64%

Australia3%

Japan2%

UK15%

USA16%


Exhibit 44: Tourist arrivals from different countries into India in 2010

USA, 18%

UK, 15%

Japan, 3%

Australia, 3%

Others, 70%


Domestic tourism industry witnessing healthy traction Domestic tourism in India is on the rise. This is clearly evident from the data provided by the Ministry of Tourism, which revealed that the number of domestic tourist visits in India has increased to 740 million in 2010 against 220 million in 2000- a CAGR of 13.5% during the 10 year period. We expect the major growth driver for the tourism industry to be the growing disposable income from 2001-02 to 2009-10. This can be clearly figured out through the PwC-Ficci report. It suggests that the number of households earning below | 1.4 lakh per annum declined from 135 million to 114 million in 2009-2010. In contrast, the number of households earning between | 3.1 lakh and | 15.6 lakh in each segment grew at ~12% CAGR (from 11 million to 28 million) between 2001-02 and 2009-10. With rising income levels, we expect discretionary spending to also increase significantly.

Exhibit 45: Rising trend of domestic tourism

220

236 27

0

309 36

6

740

669

563

527

462

392

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

in m

n

No of Domestic tourist visits (in mn)


Domestic tourist visits in India have increased to 740

million in 2010 against 220 million in 2000- a CAGR of 13.5% during the last 10 years


Exhibit 46: Growth in middle class income to drive tourism industry

135114

41759

222

61

4

0

50

100

150

200

2001-02 2009-10

milli

on h

ouse

hold

s

Deprived (AI< INR 140,000) Aspirers (AI INR 140,000-310,000)Seekers (AI INR 310,000-780,000) Strivers (AI INR 780,000-1560,000)Globals (AI>1560,000)

CAGR 21%

CAGR 12%

CAGR 12%

CAGR (2%)

CAGR 17%

Source: Ficci-PwC, ICICIdirect.com Research

India tour operator

Exhibit 47: Fragmented tour operator market

Organised tour operator <20

Tour operators ~5,000

Travel Agents: ~25,000


Exhibit 48: Dominance of unorganised players

Un-organized

91%

Organized9%


Exhibit 49: Total travel gross bookings in India

1580817652

19922

22813

0

5000

10000

15000

20000

25000

2009 2010 2011 2012P

(US$

mm

)

Gross Booking

CAGR 13%

Source: MakeMyTrip ICICIdirect.com Research

The tour operator market is highly fragmented and

organised players only contribute 9% to the total travel

market in India

Total gross bookings in India have registered a CAGR of

12% during 2009-11 and are expected to register ~15% YoY growth in 2012


UK Tourism (Outlook: Neutral) UK Tourism to grow 1.3% in 2012 as per estimates by WTTC The UK travel and tourism industry can be broadly classified into three categories: domestic tourism by UK residents within the UK; outbound tourism by UK residents travelling abroad; and inbound tourism by overseas residents travelling to the UK. According to WTTC, the direct contribution of UK’s travel and tourism industry to GDP was ~2.3% in 2011. Overseas travel and tourism reported a recovery in 2011 after an economic crisis started in 2008. Visits to the UK by overseas residents in 2011 increased ~3% YoY (against 0.3% YoY drop in 2010 and ~6% YoY drop in 2009) to 30.6 million and visits abroad by UK residents increased ~1% YoY (against ~5% YoY dip in 2010 and 15.1% YoY in 2009) to 56.1 million, respectively. After the overall decline due to the economic downturn, there were signs of stabilisation in 2011 wherein leisure tours and travels spending registered a growth of 9.3% YoY (against ~4% YoY in 2010) to US$82.38 billion, according to WTTC. According to WTTC, the industry grew 4.1% in the UK much faster than the overall economy, which grew by 0.7% in 2011. Going forward, for 2012, the WTTC expects the industry to grow by 1.3% supported by the cheap pound, the continued trend for domestic holidays along with the London Olympics, which will have a positive impact on the industry.

Exhibit 50: Outbound tourism from UK and spending

01020304050607080

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

( in

mn)

0

20

40

60

80

100

(US$

bn)

Outbound (mn) Leisure T&T spending (US$ bn)

Source: Office for national statistics (UK) and WTTC, ICICIdirect.com Research

Exhibit 51: UK Inbound tourism

05

101520253035

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(in m

n)

-15

-10

-5

0

5

10

15

(%)

Inbound (mn) (%) change

Source: Office for national statistics (UK), ICICIdirect.com Research

Cox & Kings operates in the UK through its wholly owned subsidiaries namely Cox & Kings (UK) Ltd for outbound travel and Clearmine Ltd for destination management services. This region contributed 18% of total C&K’s consolidated revenues in FY11. Post acquisition of Holidaybreak Plc, its share is likely to go up over 66% in FY14E.

Going forward, for 2012, WTTC expects the industry to

grow by 1.3% supported by the cheap pound, the continued

trend for domestic holidays and the extra Bank Holiday

weekend for the Golden Jubilee along with the London

Olympics, which will have a significant effect on the industry


US Tourism (Outlook: Neutral to positive) Gradual recovery to fuel discretionary expenditure, going forward According to WTTC, the direct contribution of US travel and tourism industry to GDP was US$434.4 billion or ~2.9% in 2011. The year 2011 proved to be another very good year for the US T&T industry. The US welcomed ~62 million international visitors in 2011, a record level of visitors to the US, 2.5 million more than the year before. However, international departures from the US remain subdued (declined ~3% YoY) in 2011, mainly due to lethargic economic condition. However, T&T spending increased ~6% YoY during the same period. Employment in the US has shown signs of recovery since the end of the recession (June 2009) but has not been fast enough to drive down the unemployment rate. The MSCI US consumer discretionary index has declined for September 2011. However, it returned back to normal in February 2012 and March 2012. We believe the economy turning back to normalcy gradually along with a rise in the employment rate would fuel discretionary expenditure, going forward.

Exhibit 52: Outbound tourism and leisure spending trend in US

52

54

56

58

60

62

64

66

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(in m

n)

0

100

200

300

400

500

600

700

(US$

bn)

Outbound (mn) Leisure T&T spending (US$ bn)

Source: ITA, ICICIdirect.com Research

Exhibit 53: US unemployment rate

0

2

4

6

8

10

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

(%)

Unemployement rate

Source: Bloomberg, ICICIdirect.com Research

Exhibit 54: MSCI US Consumer Discretionary index

020406080

100120140

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

MSCI US Consumer Discretionary index



Australia Tourism (Outlook: Positive) Strong economy to provide favourable conditions for outbound travel The Australian economy remains in a strong position compared to other developed economies. The reason behind the growth in the Australian economy can be attributed to the commodities boom and established trade links to Asia. According to WTTC, the direct contribution of Australia’s travel and tourism industry to GDP was AU$34.7 billion or ~2.4% in 2011. Visits to Australia by overseas residents in 2010 increased ~5% YoY to 5.9 million while visits abroad by Australian residents increased by a healthy ~13% YoY to 7.1 million during the same period. Further, according to Tourism Research Australia, outbound departures of Australian resident are forecasted to grow by 9.2% (weak economic condition in the US and UK) to ~7.8 million in 2011. This will be mainly driven by the continued high value of the Australian dollar coupled with growing international air capacity (particularly from low cost carriers in the Asia-Pacific region) that continues to provide favourable conditions for Australian overseas travel in the near term. Inbound visitor arrivals are forecast to increase by 0.4% to reach 5.9 million in 2011. The downward revisions can be attributed to the slower pace of economic growth in the US and Europe and associated global economic uncertainty.

Exhibit 55: Australia outbound tourism and spending

0

2

4

6

8

10

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

P

(in m

n)

0

20

40

60

80

100

(US$

bn)

Outbound (in mn) Leisure T&T spending (US$ bn)

Source: Govt of Australia, ICICIdirect.com Research

Exhibit 56: Australia Inbound tourism growth

01234567

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

P

(in m

n)

-4-20246810

(%)

Inbound (in mn) (% chg)

Source: Govt of Australia, ICICIdirect.com Research

Exhibit 57: Strong correlation between Australia GDP and outbound tourism growth

9.1

5.5

3.6 3.3 3.1 2.9

1.8

3.3 3.4 3.3 3.3 3.3

0123456789

10

2011P 2012P 2013P 2014P 2015P 2016P

(%)

0

1

2

3

4

(%)

outbound tourism YoY Chg GDP growth (RHS)

Source: Govt of Australia, IMF, ICICIdirect.com Research


Japan Tourism (Outlook: Neutral to Negative) To take a longer time to recover According to WTTC, Japan is the third largest travel and tourism (T&T) economy in the world. The direct contribution of T&T to GDP was ~2.1% (~US$123 billion in 2011). Japan’s outbound tourism industry has been severely hit by the economic downturn and natural calamities (tsunami and earthquake in March 2011) in the recent past. This took a toll on Japan’s inbound tourism as tourists visiting Japan drastically declined ~28% YoY to 6.2 million in 2011. However, overseas travel and tourism reported a recovery in 2010 and 2011, after the economic crisis that started in 2008. Visits abroad by Japanese residents increased ~2% YoY (against ~8% YoY growth in 2010) to 17 million. The lower growth in outbound tourism (as compared to the 2010 level) is translating into a slower recovery in outbound travel, in terms of trips, but has also fully recovered losses from the period during and immediately after the disaster.

Exhibit 58: Japan outbound tourism and Leisure T$T spending

0.0

5.0

10.0

15.0

20.0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

P

(in m

n)

150

155

160

165

170

175

(US$

bn)

Outbound(in mn) Leisure T&T spending (US$ bn)

Source: Japan tourism Marketing Co., WTTC, ICICIdirect.com Research

Exhibit 59: Trend in Japan’s inbound tourism

0

2

4

6

8

10

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(in m

n)

-40-30-20-100102030

(%)

Inbound (in mn) % chg

Source: Japan tourism Marketing Co, ICICIdirect.com Research


Financials Growth to moderate in FY14E due to shift in geographic mix, FY13E to witness robust revenue growth With HBR’s acquisition, we expect total revenue to grow at a CAGR of 60% during FY11-14E. We expect India’s business revenue to grow by 23% per annum due to favourable outbound tourism outlook while the RoW business revenue is expected to grow by 14% annually on account of a mix of weak demand in Japan, slow recovery in the US and stable demand from the UK and Australia. The full year revenue of HBR would be consolidated in FY13E. In FY14E, we expect the overall growth rate to moderate to 14.4% due to gaining of a larger pie of revenue (i.e. 67%) in the UK due to HBR acquisition.

Exhibit 60: Net sales CAGR of 60% in FY1114E

2053

1793

906

497399

287182

0

500

1000

1500

2000

2500


(| c

rore

)

CAGR 40%

CAGR 60%


Exhibit 61: Revenue mix

147

176

235 29

6 358 43

3

65 132

224

262

297 339 39

0

313

1097 12

30

118

0

200

400

600

800

1000

1200

1400


(|cr

ore)

India RoW HBR


Exhibit 62: Revenue share

44.0 47.332.7

20.0 21.1

56.0 52.7

32.8

18.9 19.0

34.5

61.1 59.9

0.010.020.030.040.050.060.070.080.090.0

100.0

FY10 FY11 FY12E FY13E FY14E

India RoW HBR


EBITDA margin to see technical correction in FY12E; would come back to normal level from FY13E onwards C&K would consolidate only six months of HBR’s financials (i.e. from September-March 2012) that is typically a lean season of HBR. Thus, its FY12E EBITDA margin is expected to fall to close to 22%. However, its margins are expected to again scale back to the 43-44% range from FY13E onwards as HBR also operates at an average operating margin of 44% (on a like-to-like basis with C&K’s accounting policy) on a full year basis.

India’s share to come down to 21% in FY14 while UK’s share

would increase to 67% during the same period due to HBR’s acquisition


Exhibit 63: EBITDA margin trend

73.0 12

1.3

186.

4

230.

0

197.

5

788.

9

882.

1

40.1 42.346.7 46.3

21.8

44.0 43.0

0100200300400500600700800900

1000


(| c

rore

)

05101520253035404550

(%)

EBITDA EBITDA Margin


Exhibit 64: Half yearly EBITDA trend (Holidaybreak)

553.

9

559.

1

564.

8

(57.

8)

(64.

4)

(54.

6)

-100

0

100

200

300

400

500

600

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12E

|. c

rore

HBR's half yearly EBITDA trend

This would consolidate withC&K in FY12, leading to decline in margins


Exhibit 65: Half yearly EBITDA trend (Ex Holidaybreak)

84.2 102.

3

107.

9

121.

1

119.

0

128.

8

020406080

100120140

Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12E

|.cr

ore

C&K (Excl HBR)


Increase in debt to EBITDA remains a concern over the medium term The higher debt/EBITDA due to HBR’s acquisition remains a concern over the medium term. This, in turn, is expected to impact its profitability ratio, going forward, despite operating at stable operating margins. We expect the debt/EBITDA ratio to increase to 5.1x in FY13E while the same is expected to reduce marginally to 4.3x in FY14E due to part debt reduction.

Exhibit 66: Debt to EBITDA ratio

1.8 2.9 2.7 3.7

20.9

5.1 4.3

0

5

10

15

20

25


(x)

Debt/EBITDA


Operating margins to come down to 22% due to consolidation of six months financials of HBR, that is typically a lean business period in the UK


PAT margins to come down to ~20% due to decline in interest coverage ratio Though net profit would increase over three times during FY11-14E, net margins are expected to come down to 19.7% from an average rate of 27% operated over the past three years due to higher interest burden. Its interest cost is expected to rise from | 54 crore in FY11 to | 325 crore in FY14E due to a sharp increase in the debt burden (i.e. from | 844 crore in FY11 to | 3,818 crore in FY14E). However, the same is expected to improve over the long term with a rise in the operating cash flow.

Exhibit 67: Net profit to take hit in FY12E

63

134 129

42

321

405

0

50

100

150

200

250

300

350

400

450

F09 FY10 FY11 FY12E FY13E FY14E

(| c

rore

)

Net profit to see sharp correction in FY12E due to consolidation of only six months earnings of HBR, which is seasonally a weak period


Exhibit 68: NPM and interest coverage ratio trend

21.9

33.5

26.0

17.919.7

4.6

5.6

6.4

3.9

2.02.4

0.70

5

10

15

20

25

30

35

40

F09 FY10 FY11 FY12E FY13E FY14E(%

)0

1

2

3

4

5

6

7

(x)

NPM Interest coverage Ratio


Return ratios to bottom out in FY12E, to improve gradually from thereon We expect the return ratios to bottom out in FY12E. They are gradually expected to improve, going forward, due to stable earnings. While RoCE is expected to increase to 20.4% in FY13E, it is expected to remain flat in FY14E. RoE is expected to rise to 13.6% from 12.4% due to a part reduction in debt.

Exhibit 69: Return ratios to improve, going ahead

22.519.2

13.010.3

12.4 13.6

25.327.6

16.5

20.5

2.5

10.7

3.3

20.4

0

5

10

15

20

25

30


(%)

RoCE ROE


We expect its return ratios to bottom out in FY12E. It is gradually expected to improve, going forward


Risk & concerns Ability to integrate acquisitions globally C&K has grown rapidly through acquisitions in recent years to increase the breadth of its product offerings. The challenges involved in integration of acquired companies include combining products and service offerings and entering new markets. Increasing competition The market for tour operator services that C&K offers is increasingly and intensely becoming competitive. The company competes with both established and emerging sellers of travel-related services, including traditional tour operators & travel agencies and online travel agencies.

Sensitive to changes in economy The tourism industry may be unfavourably affected by factors such as changes in global and domestic economies. If the economic growth of India or other countries that the company operates in, slows down there may be a gradual decline in the willingness of people to travel. Foreign exchange risk Fluctuations in exchange rates have a direct impact on business. Strengthening of the rupee may increase the number of outbound tourists. However, at the same time, it may affect inbound tourism as travelling to India would become relatively expensive and vice-versa.

Goodwill impairment The company has goodwill worth ~| 2700 crore on its books due to the HBR acquisition. If C&K is unable to optimise the benefits from this acquisition, then there remains a risk of goodwill impairment over the longer run.

Unforeseen circumstances

Occurrence of swine flu, SARS disease and a bird flu epidemic saw a drop in the number of tourist arrivals in affected countries. In addition, natural calamities like the earthquake in Japan and Iceland’s volcanic eruptions have affected the travel and tourism industry in the past. Another reason for people to reduce their travelling is global terrorism (2001 attack in the US, 2009 attack in Mumbai) and any political instability (like Syria) in the country that may cause a drop in the number of tourist arrivals into the country.

Ongoing litigation against sale of Centaur hotel The Centaur, Juhu, was among the first to go under the divestment drive of the government in the early 2000s. The hotel sold for | 153 crore in 2001 to V Hotels. In 2005, the company decided to jointly develop the property with Oberoi Realty's Vikas Oberoi and DB Realty's Shahid Balwa and Vinod Goenka. However, the association of V Hotels with Siddhivinayak Realties (SRPL), an equal joint venture between Oberoi's arm Oberoi Constructions and DB Realty's promoters Balwa and Goenka, ran into trouble. An agreement between V Hotels and SRPL had been terminated by the arbitrator's ruling of July 2011. Against this order, SRPL filed an arbitration petition in Bombay High Court seeking an injunction against V Hotels. Hence, any outcome in favour of SRPL may have a negative impact on C&K as it owns a 15% stake through Tulip Star Hotel apart from owning | 18 crore worth of convertible debentures in V Hotels. Located on approximately 2,66,000 sq ft of land in Mumbai, Centaur Hotel has around 400 rooms and other facilities like restaurants, banqueting, health club, business centre and shopping area.

Cox & Kings owns a 30.42% stake in Tulip Star Hotels. V Hotels Ltd is an associate of Tulip Start Hotels.


Valuations

With HBR’s acquisition, we expect total revenues to grow at a CAGR of 60% during FY11-14E. While India’s business revenue is expected to grow at 23% per annum due to a favourable outbound tourism outlook, RoW business revenue is expected to grow by 14% annually on account of a mix of weak demand in Japan, slow recovery in the US and stable demand from the UK and Australia. FY13E would consolidate the full year’s revenue of HBR. However, in FY14E, we expect the overall growth rate to moderate to 14.4% due to C&K gaining larger pie of revenue (i.e. 67%) from the UK due to the HBR acquisition. India’s share is likely to drop to 21%, although the Indian business would continue to remain strong despite the concerns over a weakening rupee and its likely impact on outbound tourism.

At the CMP of | 161, C&K is currently trading at 6.4x FY14E EV/EBITDA while the stock has traded at a three year average band of 7-9x historically. This is factoring in mainly the depreciating rupee as a majority of C&K’s India business is outbound and there is a slowdown in the European region. However, considering the steady and resilient nature of the education and adventure business segment of HBR despite the economic downturn in the UK, we believe, the current valuations overlook the long term synergies and growth potential. We have used the SOTP valuation method and arrived at a target price of | 195, in line with peer valuation (i.e. 7x FY14E EV/EBITDA). While arriving at the target price, we have also factored in 40% goodwill impairment, thus reflecting our conservative valuation approach. We are initiating coverage on the stock with a BUY rating.

Exhibit 70: Peer group comparison

FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14TUI Travel GBP 2161 14687 14569 14780 15215 685 668 704 725 85 262 283 301 19 8 7 7 2 3 3 3 4 14 16 15Expedia US$ 4545 3449 3737 4069 4338 719 735 813 853 472 384 435 471 12 12 11 10 6 6 6 5 19 19 26 20MakeMyTrip US$ 854 125 88 117 157 6 10 19 29 5 7 16 23 154 106 57 39 163 80 44 29 6 5 10 14Thomas Cook | 14544 3738 4267 4879 NA 887 1039 1186 NA 562 626 716 NA 13 23 21 NA 8 14 12 NA NA 15 15 NAAverage 50 37 24 19 45 26 16 12Cox & Kings | 21298 4967 9059 17934 20526 2300 1975 7889 8821 1291 418 3207 4046 17 51 7 5 9 31 7 6 11 3 20 20

Mcap (in mn)

Cur.Peer groupEV/EBITDA ROESales EBITDA Net Profit PE


Exhibit 71: Valuation summary

Valuation EBITDA FY14E (| crore) EBITDA (x) ValueCox & Kings India 208.8 10 2092HBR 530.9 7 3716Cox & Kings RoW 142.5 8 1140Goodwill Impairement 2738 40% 1095Target EV (| crore) 5852Debt (| crore) 3506 06Cash (| crore) 312 Target Market Cap (| crore) 2658 2658Nos of outstanding Share 14Target Price 195



Exhibit 72: Two year forward EV/EBITDA band

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

(| c

rore

)

4x

6x

8x

10x


Exhibit 73: EV/sales ratio

7.0

5.1

7.2

3.63.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


(x)

EV to Sales


Exhibit 74: Price to book value trend

3.3

2.2 2.1

1.71.3

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5


(X)

Price/Book


The stock is currently trading at 3x FY14E EV/sales ratio

against average of 5.5x, leaving room for upsides, going forward


Table and ratios

Profit and loss statement Exhibit 75: Income Statement

(Year-end March) FY10 FY11 FY12E FY13E FY14ETravel & Tours Commission 390.1 485.2 890.5 1,762.9 2,017.7 Income from forex division 9.5 10.5 13.4 26.4 30.3 Share of interest in JVs (0.5) 1.1 2.1 4.1 4.7 Total Operating Income 399.2 496.7 905.9 1,793.4 2,052.6 Expenditure

Employee Expenses 99.4 129.6 369.9 528.2 613.5 Advertisement expenses 35.7 42.4 136.9 191.4 223.0 Rent - 19.3 104.0 169.7 197.7 Other expenses 77.6 75.4 97.7 115.2 136.4 Total Operating Expenditure 212.7 266.7 708.5 1,004.5 1,170.5 EBITDA 186.4 230.0 197.5 788.9 882.1 Other Income 42.1 36.0 91.6 107.6 124.3 Interest 27.0 54.4 183.0 341.6 324.6 Depreciation 15.1 18.6 60.7 97.6 95.2 PBT before Exceptional Items 186.5 193.1 45.3 457.3 586.6 Less: Exceptional Items - (0.1) (28.0) - - PBT 186.5 193.2 73.3 457.3 586.6 Total Tax 51.7 62.6 38.0 136.6 182.0 PAT before MI 134.8 130.6 35.3 320.7 404.6 Total Tax 51.7 62.6 38.0 136.6 182.0 PAT after MI 134.8 130.6 35.3 320.7 404.6 Profit from Associates (1.0) (1.5) 6.4 - - PAT 133.8 129.1 41.8 320.7 404.6 EPS 9.8 9.5 3.1 23.5 29.6



Exhibit 76: Balance Sheet

(Year-end March) FY10 FY11 FY12E FY13E FY14EEquity Capital 62.9 68.3 68.3 68.3 68.3 Reserve and Surplus 747.3 1,139.5 1,181.2 1,502.0 1,906.5 Total Shareholders funds 810.2 1,207.7 1,249.5 1,570.2 1,974.8 Secured Loan 294.6 544.3 3,118.3 3,068.3 2,968.3 Unsecured Loan 209.7 300.0 1,000.0 950.0 850.0 Total Debt 504.3 844.3 4,118.3 4,018.3 3,818.3 Deferred Tax Liability 4.8 9.1 13.5 17.9 22.3 Liability side total 1,319.3 2,061.2 5,381.3 5,606.5 5,815.4

AssetsTotal Gross Block 133.7 184.1 1,955.1 1,955.1 2,005.1 Less Total Accumulated Depreciation 61.6 81.9 142.6 240.2 335.5 Net Block 72.2 102.1 1,812.4 1,714.8 1,669.6 Total CWIP 20.4 64.1 64.1 64.1 64.1 Total Fixed Assets 92.6 166.2 1,876.5 1,778.9 1,733.7 Goodwill on Consolidation 217.5 217.5 2,737.5 2,737.5 2,737.5 Investments 258.4 211.2 211.2 211.2 211.2 Inventory 8.3 8.6 22.2 38.7 31.0 Debtors 302.1 414.2 806.7 1,375.8 1,574.6 Cash 376.9 961.2 201.2 258.2 311.8 Loans and Advances 271.5 382.5 1,067.0 1,264.4 1,280.8 Total Current Assets 958.7 1,766.5 2,097.1 2,937.2 3,198.3 Total Current Liabilities 211.3 303.1 1,543.8 2,061.2 2,068.1 Net Current Assets 747.4 1,463.4 553.3 876.0 1,130.2 Miscellaneous Expenses not written - 1.7 1.7 1.7 1.7 Assets side total 1,319.3 2,061.2 5,381.4 5,606.5 5,815.5


Exhibit 77: Cash Flow Statement

(Year-end March) FY10 FY11 FY12E FY13E FY14EProfit after Tax 133.8 129.1 41.8 320.7 404.6 Depreciation 15.1 18.6 60.7 97.6 95.2 Cash Flow before working capital cha 148.9 147.6 102.5 418.3 499.8

- - - - - Net Increase in Current Assets (84.0) (223.5) (1,090.5) (783.1) (207.5) Net Increase in Current Liabilities (8.6) 91.8 1,240.7 517.3 6.9 Net cash flow from operating activitie 56.3 16.0 252.7 152.6 299.2

- - - - - (Purchase)/Sale of Fixed Assets (25.3) (92.2) (1,771.0) - (50.0) Net Cash flow from Investing Activiti (341.5) (40.1) (4,286.6) 4.4 (45.6)

- - - - - Inc / (Dec) in Equity Capital 35.0 5.3 - - - Inc / (Dec) in Sec Loan Funds 58.3 249.7 2,574.0 (50.0) (100.0) Inc / (Dec) in Unsec Loan Funds 91.9 90.3 700.0 (50.0) (100.0) Net Cash flow from Financing Activit 599.2 608.5 3,274.0 (100.0) (200.0)

- - - - - Net Cash flow 314.1 584.3 (759.9) 57.0 53.6 Cash and Cash Equivalent at the beg 62.7 376.9 961.2 201.2 258.2 Closing Cash/ Cash Equivalent 376.9 961.2 201.2 258.2 311.8



Exhibit 78: Ratio analysis

(Year-end March) FY10 FY11 FY12E FY13E FY14EPer Share DataEPS 9.8 9.5 3.1 23.5 29.6 Cash EPS 10.9 10.8 7.5 30.6 36.6 BV 59.3 88.5 91.5 115.0 144.6 Operating profit per share 13.7 16.8 14.5 57.8 64.6

Operating RatiosEBITDA / Total Operating Income 46.7 46.3 21.8 44.0 43.0 PAT / Total Operating Income 33.5 26.0 4.6 17.9 19.7

Return RatiosRoE 16.5 10.7 3.3 20.4 20.5 RoCE 13.0 10.3 2.5 12.4 13.6 RoIC 17.2 16.2 2.7 18.6 19.6

Valuation RatiosEV / EBITDA 12.1 8.8 30.6 7.5 6.4 P/E 15.9 16.5 51.0 6.6 5.3 EV / Net Sales 5.7 4.1 6.7 3.3 2.7 Sales / Equity 0.5 0.4 0.7 1.1 1.0 Market Cap / Sales 5.3 4.3 2.4 1.2 1.0 Price to Book Value 2.6 1.8 1.7 1.4 1.1

Turnover RatiosAsset turnover 0.4 0.3 0.2 0.3 0.4 Debtors Turnover Ratio 1.3 1.2 1.1 1.3 1.3

Creditors Turnover Ratio 2.3 1.9 1.2 1.5 1.5

Solvency RatiosDebt / Equity 0.6 0.7 3.3 2.6 1.9 Current Ratio 4.5 5.8 1.4 1.4 1.5 Quick Ratio 2.8 2.7 1.2 1.3 1.4


Exhibit 79: Assumptions

Revenue Growth FY08 FY09 FY10 FY11 FY12E FY13E FY14EIndia 37.7 24.6 20.0 33.8 25.8 21.0 21.0RoW 730.7 104.2 69.6 17.4 13.3 14.0 15.0HBR (UK) 4.0 -4.1 -6.6 5.6 5.8

EBITDA Margin FY08 FY09 FY10 FY11 FY12E FY13E FY14EIndia 44.4 44.3 47.6 50.5 49.7 48.2 48.2RoW (exl HBR) 32.3 39.9 46.0 42.5 33.9 34.6 36.6HBR (UK)* 13.9 13.3 13.5 17.2 13.8 13.8

Source: *Headline EBITDA margin, Company, ICICIdirect.com Research


RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION We /I, Rashesh Shah CA Hitesh Taunk MBA (FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures: ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specific transaction. It is confirmed that Rashesh Shah CA Hitesh Taunk MBA (FINANCE) research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

It is confirmed that Rashesh Shah CA Hitesh Taunk MBA (FINANCE) research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use of information contained in the report prior to the publication thereof.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

march 30, 2012 rating matrix cox & kings ltd...

Documents