Cox & Kings Ltd. – (Overweight – Rs 229)
In consolidation mode; initiate at OW
We believe that Cox & Kings’ (C&K) standalone business is a proxy for the burgeoning travel and tourism industry in India. Indian tourist exports are expected to increase at a CAGR of 7% (FY13-20E) to reach US$31bn by FY20E. C&K is India’s largest leisure travel operator with an estimated market share of c.30% of the organized travel market (outbound). In addition, the acquisition of HBR has allowed C&K to significantly de-risk its earning with a sizeable share of profits from the non-cyclical segments such as education travel. While balance sheet concerns around the HBR acquisition have resulted in C&K underperforming the broader market, we think those risks are largely behind us. We forecast a steady increase in free cash flows, which will ease investor concerns around leverage. We initiate coverage with an Overweight rating and a price target of Rs229 (based on DCF for core operations and Rs20/share for the international leisure business).
Indian travel on a solid footing: The Indian travel and tourism industry is expected to grow to US$75bn at a CAGR of 10.4% from FY13-20 (source: WTTC), driven by higher disposable income, improving demographics and rising corporate travel (in-line with our strategist’s Urbanization thematic report). We see C&K as the largest beneficiary of these trends with a strong brand and distribution network (30% market share of the organised travel market). We forecast a revenue CAGR of 15% through FY13-16E, along with a PBT CAGR of 35% during the same period.
HBR – Steady cash flows expected: We expect HBR to generate GBP138mn of cash flows (unlevered) from FY14-16E, thereby allowing deleveraging of the balance sheet. We view HBR as a key strategic fit with C&K’s operations as this unit is countercyclical in nature, being focused on education and adventure travel. HBR in turn gains from C&K’s global relationships for cross-selling opportunities.
PT of Rs229, OW rating: Based on our DCF valuation, we ascribe a value of Rs97/share for the standalone operations and Rs112/share for Holiday Breaks, with Rs20 for the international operations at 10x FY15E P/E. Risks: 1) slower growth in leisure operations; 2) higher working capital requirements as share of corporate travel grows; and 3) slower deleveraging if HBR’s performance is muted.