Cox & Kings - On a growth expedition - IIFL

We initiate coverage on Cox & Kings (C&K) with a BUY based on a combination of robust fundamentals and attractive valuations. We expect >20% growth in C&K's India business combined with stable margin. Acquisition of UK-based HBR brings defensive education travel business, which is in contrast to the more discretionary spending-oriented leisure businesses. Full fledged HBR consolidation from current year is likely to lead to ~5x jump in FY13 PAT and another ~26% yoy jump in FY14. Stock currently trades at the lower end of its historic PE & EV/EBDITA ranges and with the US$138mn equity infusion in HBR parent company, we believe debt concerns have been largely allayed. We project cumulative free cash flows of ~Rs7bn over FY13/14 and recommend BUY with 9-mth target price of Rs185. Key risks to our call include steep FX fluctuation which might impede India outbound travel and significant slowdown in HBR portfolio due to accelerated economic stress in UK/Europe.

India business to clock healthy 21% revenue cagr over FY12-14

C&K India business is dominated by outbound travel which accounts for ~67% of its revenues while domestic tourism and other services account for the rest. India segment revenues posted a robust 26% cagr over past 4 years and we expect the segment to clock a healthy 21% rise in sales over FY13/14.

HBR acquisition expands product offerings, offers synergies to exploit

C&K acquired UK-based HBR for EV of US$730mn and consolidated it wef September 2011 which impacted FY12 PAT as bulk of HBR profits accrue in the Apr-Sep period. HBR brings relatively defensive segments like Education, Camping to C&K fold which sits in contrast to the more discretionary spending oriented leisure businesses. We expect HBR to account for 58% of consolidated revenues and see potential synergies to cross sell HBR assets to outbound clientele from India and other geographies. Ex-India, ex-HBR business is projected to grow at ~10% as we factor in relatively soft spending environment across key markets especially Japan.

Attractive valuation, robust fundamentals bolster case for rerating: BUY

We find C&K FY13/14 PER valuation of 9.2x/7.3x extremely attractive given 1) robust India business potential and an established brand in the organized market 2) complementary nature of HBR business which acts as a relatively defensive bet in contrast to the more discretionary spending- oriented leisure businesses 3) potential synergies between India outbound business and HBR operations; in other words cross selling of HBR assets to India and other outbound clientele. In its earnings call, the company mentioned that synergies can provide up to 15-20% boost to earnings though we have not factored in such benefits in our earnings forecast.

We expect India business to motor along with 20-25% growth and an eventual catch up in margins (though not in our forecast period) as upfront investment in staff in FY12 yields revenue benefits down the line. HBR consolidation for the full year is likely to lead to ~5x jump in FY13 PAT while margin expansion and lower interest expense would drive ~26% yoy jump in FY14 profit. We use PE methodology to value C&K and arrive at a 9-mth target of Rs185, based on 10x FY14 EPS. Key risks to our call include FX fluctuation which might impede India outbound demand and a material slowdown in HBR portfolio due to worsening economic scenario in UK/Europe.

Source : Equity Bulls

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