Cox & Kings (India) IPO Analysis

Cox & Kings is one of the recognized holiday brands with over 250 years of history. Over the years, it has increased its reach with global presence in 19 countries besides India through subsidiaries, branch offices and representative offices. In India, the company has 255 points of presence covering 164 locations through a mix of branch sales offices, franchised sales shops, general sales agents and preferred sales agents.

Cox & Kings has been promoted by A B M Good and Ajay Ajit Peter Kerker and his associates. Ajit Kerker was a very well known name in the Indian hotel industry and was earlier associated with Indian Hotels group, from where he had a controversial exit some years back.

The business of Cox & Kings can be broadly categorized as leisure travel (which includes outbound travel, inbound travel and domestic travel); corporate travel; and visa processing. The company has products like "Duniya Dekho", "Bharat Dekho" and "FlexiHol". It has increased its geographical presence through acquisitions as well as expanding its own business.

Acquisitions

In March 2006, Cox & Kings acquired the entire shareholding of Clearmine, a company incorporated in the UK. ETN Servicesis a wholly owned subsidiary of Clearmine and carries out destination management services for tours to Europe and also inbound tours in Europe for other tour operators. In September 2007, the company acquired the entire shareholding of Cox & Kings based in the UK and took over 41.17% of the share capital of Cox & Kings (Japan). Cox & Kings Travel, a wholly owned subsidiary of Cox & Kings, is an outbound specialist tour operator and caters to leisure travel market of Europe. Cox & Kings Travel and Cox & Kings Tours LLC holds 33.33% and 25.50%, respectively, of Cox & Kings (Japan). Cox & Kings (Japan) is a dedicated wholesaler of products and services to other tour operators.

The company acquired Quoprro Global Services Pvt. Ltd. and forayed into the business of visa processing. In September 2008, it got approval from the High Commission of India at Singapore for outsourcing their visa processing activities. Recently, it got in-principle approvals from the diplomatic missions of India at Athens, Greece and at Hong Kong for outsourcing their visa processing activities.

In December 2008 the company formed a joint venture with IRCTC, "Royale Indian Rail Tours Limited", to operate a luxury train to be called "Maharajas' Express". This train is currently under manufacturing and is scheduled to commence operations in January 2010. The train will carry nearly 100 passengers in 23 passenger coaches and will have two bars and two restaurants. It will have an ultra modern kitchen and a boutique. The train is expected to operate from September to April, making it a total of 16 journeys per annum.

During FY 2010, the company acquired Tempo Holidays Pty Ltd, based in Australia, with its wholly owned subsidiary Tempo Holidays NZ Ltd. in New Zealand. This would further consolidate its position in Europe as major business of the acquired company is in European countries. It has entered US with its recent acquisition of East India Travel Company Inc., which is in the business of selling up-market tour and travel packages in the US.

Domestic & International mix

The share of domestic revenues to the total operating revenues of the company has come down from 92% in FY2007 to 60% for Q1FY2010. The main reason is acquisition in the overseas markets.

The India business, i.e., the standalone business has reported CAGR over the last 4 years of 38.6% in revenues and 37.6% in profitability.

Public Issue

The public offer includes fresh issue and offer for sale by selling shareholders. The selling shareholders mainly Lehman Brothers Opportunity Limited, Deutsche Securities Mauritius and Merrill Lynch Capital Markets Espana S.A., S.V. are selling off part of their stake bringing it down from 8.23% to 3.39% on post issue equity. The selling shareholders had acquired the stake through purchase from promoters of the company in 2006 and increased its stake through bonus issue in 2007 and through rights issue at Rs 10 in July 2009. The cost for the selling shareholders is about Rs 91.91 per share.

The net proceeds of fresh issue would be utilized towards repayment of debt, acquisitions and strategic initiatives, investment in subsidiaries, in facilities and finally for corporate purposes. Part of the IPO proceeds is towards repayment of debt and for corporate purposes, which includes working capital needs of the Company. This would lead to lower interest costs and lower working capital needs going forward.

Strengths

* Cox & Kings has a good blend of domestic and international business so as to diversify its risk of dependence on one specific country. With presence across 19 countries other than India, e.g. UK, US, Australia, New Zealand and Japan, it has diversified its business. The share of international revenues has increased to 40% for the quarter ended June 30, 2009.

* The company has seen good growth in the domestic business. The revenue for the domestic business has reported CAGR of 38% for the last 4 years with earnings CAGR of 38%. Even in the downturn of 2008-2009, the company was able to grow revenues by 31% and maintain operating margins at 44% in the domestic business.

* The travel & tourism industry has seen a downturn due to the global economic slowdown. However, going forward, World Travel & Tourism Organization predicts the overall travel & tourism economy to grow by 4% per annum in real terms over the next 10 years. For India, the expected growth in travel & tourism demand from 2010 – 2019 would be 8.2%.

Weaknesses

* The company operates in a highly competitive market. It faces stiff competition from other organized players operating in this sector and also from the un-organized sectors. Many Indian and foreign players have entered the market both in the online and offline space.

* The travel and tours industry is cyclical and sensitive to changes in the economy in general. The sector may be affected by such factors as changes in the global and domestic economies. Any occurrence of an epidemic/terrorist acts in the countries may also have an adverse effect on the operations.

Outlook

At the issue price of Rs 316 – 330, on the consolidated EPS of Rs 10 for FY2009, the PE works out to 31.6 – 33 times. Thomas Cook (India) is trading at TTM PE of 47.5 times. However, Cox & Kings is much bigger in terms of global presence, with the listed Thomas Cook (India) being mainly India centric, whereas Cox & Kings is a global player.