>TRAVELS AND TOURISM INDUSTRY: Cox & Kings; Thomas Cook

■  India tourism demand expected to grow 9.2% CAGR, second fastest in the world
India’s Travel and Tourism (T&T) Industry demand is expected to grow by 9.2% CAGR from CY10-20E, to reach US$432bn, the second fastest growth in the world, and emerge as one of the top 10 T&T market globally. This growth is expected to be driven by a) 7.8% CAGR in foreign tourist arrivals (FTAs) to 11.9 mn (inbound tourism), b) 14.1% CAGR in outbound traffic to 45.1 mn, and c) 7.7% CAGR in leisure spending to $137.1 bn in domestic tourism. We expect India’s T&T industry to flourish led by a) the favourable demographics of a burgeoning Indian middle class, b) rising purchasing power with higher disposable income, and c) better connectivity (land, sea, air) with improvements in infrastructure. We believe Cox & Kings (C&K) and Thomas Cook (TCIL), India’s two leading tour operators, are best placed to capture this growth potential with their integrated business model and the structural changes in the industry such as the rising market share of organised players.


■  Cox & Kings: Best bet in India’s tourism industry with strong global footprint
We believe Cox & Kings (C&K) is best placed to capture the 9.2% CAGR in India’s tourism industry with its a) Pan-India presence and strong brand recall, b) Integrated business model with diversified product offering (price and destinations), and c) Strong overseas network with presence in India’s key outbound destinations such as Europe, UAE, and the Far East.


The company has quickly emerged as a global tour operator with a series of overseas acquisitions in last four years (spread across USA, Europe, UAE and Australia), resulting in a strong set of synergies. These includes a) opportunity to capture more travel spend of the customer, b) improve cost competitiveness through consolidated product sourcing, c) build global distribution network and, d) de-risked business model with reduction in seasonality impact and low event risk.


With the acquisition of HolidayBreak Plc (HBR), we expect the company to register a PAT CAGR of 23.7% in FY11-FY13E despite the higher interest outflow and lower profits in FY12E.


■  Thomas Cook: stable forex business and strong traction in travel business
Thomas Cook (TCIL) is the largest forex player and one of the top five tour operators, in India. Its forex business, accounts for 60% of consolidated revenues, and is expected to remain one of the major growth drivers with strong growth in outbound leisure travel, FTAs in India and global inward remittances to India.


However, the travel business is expected to outperform with 15.7% CAGR in revenues, compared to a 10.3% CAGR in forex revenues in CY10-13E, owing to strong growth in India’s tourism industry. Consequently, its PAT is expected to witness a steady growth of 11.1% CAGR in CY10-13E.


The stocks has corrected sharply in the recent past due to its parent company, Thomas Cook Plc (TCG) being burdened with a huge debt and lowering its guidance thrice in the last 18 months. We believe the concerns for TCIL are over done and expect the stocks to witness a strong recovery in the coming months.


■  Valuation and views
Historically, C&K and TCIL have traded at 20-25x one year forward earnings multiple driven by strong growth visibility. We initiate coverage on Cox and Kings with BUY rating and target price of `243/share (16.8x FY13E EPS), a 30% discount to its average historical multiples due to a) huge debt, b) high interest outflow, and c) acquisition integration concerns despite C&Ks strong track record. We initiate coverage on Thomas Cook with BUY rating and target price of `46.5/share (15.2x CY13E EPS), a 30% discount to its historical multiples. We believe the concerns of TCG’s debt position and its impact on TCIL are overdone.


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