Cox & Kings a good play on tourism growth

Cox & Kings (C&K), one of the oldest and well-recognised travel and tour operators in the world, would benefit from people spending more money on travel, along with its increasing distribution reach in smaller cities.

Business: Cox & Kings, established almost 250 years ago, offers a one-stop solution for all travel needs of the Indian and international traveller. The company has presence in 20 countries across the globe through a network of its own branch offices and subsidiaries as well as franchise sales shops and sales agents. In India, the company has 13 branch offices, over 150 franchisee sales shops and 177 preferred agents catering to inbound, outbound and domestic travellers. The company’s business can be broadly categorised into four main service offerings, namely leisure travel, corporate travel, foreign exchange and visa processing. 

Leisure travel: This is company’s main segment contributing more than 90% to consolidated revenues, where in it offers inbound, outbound and domestic tourism services. Cox & Kings offers standard and customised tour packages to customers travelling outside the country under its products ‘Duniya Dekho’ and ‘Flexi Hols’ apart from catering to domestic tourists through its product ‘Bharat Dekho’ and serving high end segment of foreign tourists coming into India.

Corporate travel: This segment contributes around 4% to revenues. Cox & Kings offers travel fulfilment services to corporate clients in India and overseas. It derives around 3% revenues from foreign exchange services in India and also provides visa processing services as an outsourced business solution to diplomatic missions in various countries. The company has launched luxury train ‘ Maharajas’ Express’, which undertakes 28 journeys a year.

Investment rationale: The rising income levels, increasing aspirations of Indian middle class and better affordability due to attractive tour deals by various operators, there has been significant jump in overseas travellers. Also the inbound tourism has picked up recently due to various government initiatives to promote tourism and rise in number of business travellers. The travel & tourism industry in India is expected to grow at a compounded annual growth rate (CAGR) of 10.2 % over next 10 years, according to World travel and tourism council 2010 report. This would benefit player like Cox & Kings, which has strong brand value and wide distribution network within India and overseas.

The company intends to increase its franchisee network reaching out to smaller cities, helping it to cater to the middle class segment. The company has quite a diversified revenue stream with Indian operations contributing 48% to consolidated revenues in 2011, while its operations in the UK, Australia, Japan, Dubai and others contribute the rest. The company with its global presence remains unaffected by seasonality factor as it derives most of the revenues in first half of year from outbound tourists while inbound tourists take care of revenues in second half.
Global diversification and resultant high volumes of business also helps the company to maintain good relationship with suppliers and get better bargains, resulting in strong operating margins. The company’s asset light model, where it does not own any major fixed asset, helps the company during the downturn. Its revenues from its standalone operations have grown at a faster pace, which has resulted in share of revenues from India going up from 44% in 2010 to 48% in 2011. This would help to improve its profit growth as company derives better margins in India. The company, which had substantial cash of close to `1,130 crore as at end of fiscal 2011, is looking to make large size acquisition that would compliment its existing offerings.

Concerns: The company faces typical industry risks related to decline in tourist flow due to adverse political, natural or macroeconomic events. It also faces stiff competition from smaller and unorganised sector players. The company failure to integrate its acquired companies or its targeted acquisitions not turning out to be value creative may also affect its earnings.
Valuations: On back of higher travel spend and increase in distribution reach in domestic operations and inorganic growth through synergistic acquisitions, the company’s revenues are expected to grow at CAGR of 20% over FY11-FY13E. The net profits are likely to grow at 21% during the same period as
the share of revenues from higher margin India operations increase.  At current market price of `192.45, the stock is trading at 17.44 times its expected FY12 earnings and 13.83 times its expected FY13 earnings per share, respectively.

One can consider buying the stock on declines from long-term perspective.

Disclaimer: The writer does not hold any shares in the company.