Cox & Kings: Buy

The stock of global tour operator Cox & Kings is up more than 50 per cent since December. This has been aided by good results in the recent September quarter followed up with a near 10-fold rise in the company’s consolidated profit in the December quarter compared with the same period last year. Cox & Kings benefited from its subsidiary, the UK-based Holidaybreak’s full acquisition (from 74 per cent earlier) of German hotel group Meininger in February last year. Meininger’s good show boosted the education tour segment’s operating profit nearly six times in the December quarter — traditionally a weak one for this business.

Education tours contributed nearly 30 per cent of the company’s revenue, up from 22 per cent a year ago. Leisure tours (more than two-thirds of the revenue) also grew profits nearly 25 per cent. While the domestic (Indian) leisure business gained from festival season travel, the international leisure tour business offset slowing revenues with cost control. Forex gains also helped.

Cox & Kings should do well in the coming quarters, too. One, it has indicated that forward bookings in the domestic leisure business for the summer months have been healthy. Also, education tours for 2014-15 have already been booked 60 per cent. This is excluding the Meininger business which is going strong and spreading to new geographies such as Australia. There are also plans to bring it to India over the next couple of years. Smaller segments such as camping have also been booked more than 60 per cent for the next year.

These suggest that the inorganic growth path which Cox & Kings adopted over the years is paying off. Its biggest buy so far — education tour major Holidaybreak acquired in 2011 for about ₹2,500 crore — resulted in Cox & Kings deriving close to 60 per cent of its revenue from Europe. Holidaybreak is a good fit given that its busy season complements that of Cox & Kings’ domestic business.

But this debt-fuelled acquisition during difficult economic times in Europe had raised investor concerns and led to the stock being de-rated. The rupee depreciation last year, which raised concerns about the impact on outbound travel, also didn’t help and the stock took a further beating.

Despite the recent rally, the stock trades just a tad higher than the price at which we had recommended a buy in November 2012. At ₹151, it discounts its trailing 12-month consolidated earnings by around six times, lower than levels it had traded in the past (7-22 times).

Investors with a long-term perspective can consider buying the stock. With economic conditions in Europe improving , revenue from this key geography should grow.

While Cox & Kings’ debt remains sizeable (about ₹4,800 crore as of September) due to past acquisitions, the company is now focussing on reducing it and has indicated repaying ₹450-500 crore in 2014-15. Better cash flows from both the domestic and international businesses should aid this. The company’s debt-to-equity ratio as of September was 1.8 times, down from 2.2 times last March.