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Equity | India | Travel & Tourism Initiating Coverage Travels & Tourism Industry Exotic package at an attractive price December 12, 2011 10 year Tourism demand growth 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, 25 19.2 to reach US$432bn, the second fastest growth in the world, and emerge as one of the top 10 T&T 20 market globally. This growth is expected to be driven by a) 7.8% CAGR in foreign tourist arrivals 15 9.2 9.1 8.9 % 10 8.5 (FTAs) to 11.9 mn (inbound tourism), b) 14.1% CAGR in outbound traffic to 45.1 mn, and c) 7.7% CAGR 5 in leisure spending to $137.1 bn in domestic tourism. We expect India’s T&T industry to flourish led 0 by a) the favourable demographics of a burgeoning Indian middle class, b) rising purchasing power Zimbawe with higher disposable income, and c) better connectivity (land, sea, air) with improvements in ST&P China India Lithuania 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. FTAs in India Cox & Kings: Best bet in India’s tourism industry with strong global footprint 14.0 11.9 We believe Cox & Kings (C&K) is best placed to capture the 9.2% CAGR in India’s tourism industry with 12.0 its a) Pan-India presence and strong brand recall, b) Integrated business model with diversified 10.0 8.0 product offering (price and destinations), and c) Strong overseas network with presence in India’s key mn visits 8.0 5.6 6.0 3.9 outbound destinations such as Europe, UAE, and the Far East. 4.0 2.7 2.0 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. CY15E CY20E CY00 CY05 CY10 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. Outbound travel from India 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. 50.0 45.1 40.0 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 mn visits 30.0 23.0 20.0 12.1 forex business, accounts for 60% of consolidated revenues, and is expected to remain one of the 7.2 10.0 4.4 major growth drivers with strong growth in outbound leisure travel, FTAs in India and global inward - remittances to India. CY15E CY20E CY00 CY05 CY10 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. Leisure spend in India 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 128 140 believe the concerns for TCIL are over done and expect the stocks to witness a strong recovery in the 120 100 88 coming months. 80 58 $ bn 60 30 Valuation and views 29 40 20 Historically, C&K and TCIL have traded at 20-25x one year forward earnings multiple driven by strong 0 growth visibility. We initiate coverage on Cox and Kings with BUY rating and target price of CY15E CY20E CY00 CY05 CY10 `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. Analyst +91-22- 6614 2690 Sunil Sewhani GEPL Capital Research 1 email@example.com Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Index Sr. No. Contents Page No. 1 India’s Travel and Tourism Industry 3 Growth across segments 5 The Global Travel and Tourism Industry 9 Future outlook 11 2 Cox & Kings: Investment Rationale 12 Best placed to capture India’s growth in tourism 13 Emergence of a Global Tour Operator 15 HolidayBreak Plc- An acquisition worth the wait 20 Visa processing and Train tours: Future growth avenues 23 Financials 24 Key Risks 27 Valuations 29 Company background 30 3 Thomas Cook: Investment Rationale 36 Dominance in the forex business in India 37 Focus on outbound segment to drive travel business growth 38 Synergy potential from parent company 40 Concerns over parent company debt overdone 41 New growth initiatives 42 Financials 43 Key Risks 46 Valuations 48 Company background 49 GEPL Capital Research | Initiating Coverage 2 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 India’s Travel and Tourism Industry The Travel and Tourism (T&T) industry in India contributed 4.5% to our nations GDP and 7.5% to the total employment in India in CY10 making it is one of the largest service industries. The T&T industry is also a great foreign exchange earner for the country with foreign exchange earnings (FEE) of US$14.2 bn in CY10. The industry has strong growth potential, with the World Travel and Tourism Council (WTTC), projecting 9.2% CAGR in India’s T&T demand over the next decade (CY11E-21E), the second fastest in the world. India’s T&T industry is expected to witness an 8.3% CAGR in CY11E-21E in domestic spending, 7.7% CAGR in leisure spending and 9.4% CAGR in business spending in the same period driven by the burgeoning Indian middle class, rising disposable income, and increasing consumer awareness, with various marketing campaigns run by the Indian government, such as “Incredible India!” India T&T Growth projections (CY11E-21E) Particulars CY11E CY21E Avg 10 yr growth (%) Direct contribution of T&T to GDP 1.9 2 8.1 Total contribution of T&T to GDP 4.5 4.9 8.8 Direct contribution of T&T to Employment 5 5.2 2 Total contribution of T&T to Employment 7.5 8.1 2.3 Visitor Exports 3.8 2.1 7.1 Domestic Spending 4.3 4.4 8.3 Leisure Spending 3.7 3.6 7.7 Business Spending 1.5 1.7 9.4 Capital Investment 4.7 4.8 8.7 Source: WTTC, GEPL Capital Research Global Positioning According to the Travel and Tourism Competitiveness Report CY11 by the World Economic Forum, India is ranked 68th out of 139 countries. It is ranked the 8th best tourist destination for its natural resources and 24th for its cultural resources, with many World Heritage sites, both natural and cultural. Moreover, it ranks 28th in the price competitiveness in the T&T industry with a good ground and air transportation system Key characteristics With over 30,000 players spread across India in the form of small, unorganised and localised players, the industry is highly fragmented. The top five organised players in the country control barely 9% of the total market share. Niche travel segments such as adventure tourism, cruises, and spa packages have been gaining in popularity in recent years. As travelers demand custom packages and look for exotic travel experiences, the Indian travel and tourism industry appears to be showing early signs of a mature market. Highly unorganized T&T Industry in India Structure of T&T Industry in India 9 Top 5 Players 9% 5,000 Regional Players 1.1% 25,000 Independent Players 91 89.9% Organised Unorganised Source: WTTC, GEPL Capital Research GEPL Capital Research | Initiating Coverage 3 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Strong growth potential for India’s T&T Industry India’s T&T industry is expected to contribute 8.8% to the Country’s GDP by CY21E and contribute 2.3% to the Country’s employment. These figures are much higher than the World averages of 4.1% and 2.2% respectively. Moreover, India is expected to witness the fourth fastest visitor export growth in the World- at 7.1% as compared to the World average of 4.3%. All of these factors should lead to India becoming the second largest investment centre in the world with a CAGR of 8.7%, highlighting the potential for growth of the T&T industry and the individual players. Second largest growth in T&T contribution to GDP by CY21E Seventh largest growth in T&T contribution to Employment by CY21E 10 9.1 4.5 4.0 8.8 9 4.0 7.5 3.5 8 3.5 6.7 6.6 7 6.4 2.9 5.8 3.0 2.7 2.6 5.4 2.5 6 5.1 5 2.3 2.5 2.0 % 5 W orld Average 2.2 1.8 W orld Average 4.1 % 2.0 4 1.5 3 0.8 2 1.0 1 0.5 0 0.0 Vietnam Thailand Bangladesh China India Cambodia Sri Lanka Malaysia Vietnam Thailand Bangladesh Pakistan Malaysia Cambodia China India Sri Lanka Indonesia Pakistan Indonesia Source: WTTC, GEPL Capital Research Source: WTTC, GEPL Capital Research Fourth largest growth in Visitor exports by CY21E Second largest growth in Investments by CY21E 10 9.2 10 8.8 8.7 8.5 9 9 8 7.4 7.4 7.1 8 6.9 6.6 6.3 7 6.1 7 6.2 6 6 6 5.3 6 5.2 4.9 4.8 W orld Average 5.4 % 5 W orld Average 4.3 3.9 % 5 4 4 3 3 2 2 0.8 1 1 0 0 Vietnam Thailand Bangladesh India China Malaysia Cambodia Sri Lanka Vietnam Thailand Pakistan Bangladesh Indonesia India Cambodia Malaysia China Sri Lanka Pakistan Indonesia Source: WTTC, GEPL Capital Research Source: WTTC, GEPL Capital Research GEPL Capital Research | Initiating Coverage 4 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Classification of Travel Growth across segments The Indian tourism industry can be broadly classified into: INBOUND 1. Inbound tourism: refers to foreign tourist arrivals (FTAs) into India. FTAs in India grew at a CAGR of 7.7% in CY00-10 to 5.6 mn visits and are expected to grow by another 7.8% CAGR in CY10-20E, to 11.9 mn visits. DOMESTIC 2. Outbound tourism: refers to Indians travelling outside India. Outbound travel from India grew at a CAGR of 10.6% in CY00-10 to 12.1 mn visits and is expected to grow by 14.1% CAGR in CY10-20E, to 45.1 mn visits. OUTBOUND 3. Domestic tourism: refers to the travel within India by both foreigners and Indian nationals. The improvement in disposable income has led to 12.9% CAGR (12.9% CAGR by Indians, 11.7% CAGR by foreigners) in domestic tourism to 758 mn visits (740 mn visits by Indians, 17.9 mn visits by foreigners) in CY99-09. A. Inbound tourism: Rise in FTA spending Foreign Tourist Arrivals (FTA’s) in India has grown at a 7.7% CAGR in CY00-10 to 5.6 mn visits in CY10 as compared to 2.65 mn visits in CY00. The inbound tourism has received a major fillip with the government taking several steps to promote “Incredible India” as a destination of choice for leisure travelers who form the majority of inbound arrivals (62%) with meeting, incentives, conferences and exhibitions (MICE) and business making up the rest. In terms of travelers by region In terms of regions US, European countries (UK, France, etc) and Australia form a major chunk of the inbound travelers to India. India’s Inbound traffic India’s market share in World Arrivals 5.6 0.65 6 5.3 30 0.59 0.59 5.1 5.2 0.57 0.58 25 0.60 5 4.5 0.53 3.9 20 0.55 0.49 4 3.5 15 0.50 0.45 mn visits 2.7 % 2.7 2.5 3 2.4 10 % 0.45 0.39 0.40 5 0.37 2 0.40 0.34 0 0.35 1 (5) 0.30 0 (10) 0.25 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 International tourist arrivals in India YoY growth CY10 Source: Ministry of Tourism, GEPL Capital Research Source: Ministry of Tourism, GEPL Capital Research In fact, India has a huge advantage with its strong cultural and natural resources which helps to offer a wide category of tourism. These include history tourism, adventure tourism, medical tourism (ayurveda and other forms of Indian medicine), spiritual tourism, beach tourism (India has the longest coastline in the East), etc. India is one of the world’s most unique and varied countries in terms of its flora and fauna with a vast variety of climates (from snow-capped mountains in Kashmir to desserts in Rajasthan). GEPL Capital Research | Initiating Coverage 5 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Despite the strong CAGR of 7.7%, the share of India in international tourist arrivals has improved just marginally to 0.6% in CY10 from 0.4% in CY00 indicating strong growth potential. With India’s rising economic power and government initiatives such as ‘Visa on Arrival’ and the ’Incredible India‘ campaign, the growth momentum in inbound traffic is expected to continue and FTAs are expected to register 7.8% CAGR in CY10-20E and reach 11.9 mn visits. Projected growth in India’s Inbound traffic 14 10 12 11.0 11.9 9 8 9.3 10.1 10 7 8.7 8.0 6 mn visits 8 7.4 % 6.5 6.9 5 6.0 6 4 4 3 2 2 1 0 0 CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E International tourist arrivals in India YoY growth Source: Ministry of Tourism, GEPL Capital Research Spending power by FTAs increasing Tourism continues to play an important role in earning foreign exchange for the country. Foreign exchange earnings (FEE) from tourism in India have grown at a CAGR of 15.2% from US$3.5 bn in CY00 to US$14.2 bn CY10, due to a sharp increase in spending by visitors. The spending per foreign visitor has witnessed a 6.9% CAGR in CY00-10 to US$2,544. Consequently, India’s share of world tourism receipts has also improved from 0.7% in CY00 to 1.54% in CY10. WTTC projects India’s FEE from tourism will record an 8.5% CAGR, to US$32.1 bn by CY20E from the current US$14.2 bn. Foreign Exchange Earning from T&T in India India’s share of world tourism receipts 16 50 1.80 14.2 14 1.54 40 1.60 12 11.8 11.4 30 1.34 10.7 1.40 1.25 1.26 10 8.6 1.16 20 % 1.10 US$ bn 8 7.5 1.20 6.2 10 % 0.97 6 1.00 0.84 3.5 3.2 4.5 0 4 0.73 3.1 0.80 0.69 0.64 2 (10) 0.60 0 (20) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 0.40 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Fees YoY growth Source: Ministry of Tourism, GEPL Capital Research Source: Ministry of Tourism, GEPL Capital Research GEPL Capital Research | Initiating Coverage 6 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 B. Outbound tourism: burgeoning middle offers strong growth potential There has been a stark rise in the number of Indians travelling abroad with the outbound segment witnessing a 10.6% CAGR in CY00-CY10 to 12.1 mn visits. A major reason for this rise has also been the significant improvement in the affordability because of the sharp rise in per capita income from `20,685 in CY00 to `54,000 in CY10 clocking a CAGR of 10.1%. Share-of-Wallet of Outbound travel across Countries Rise in per capita income in India 4.5 60,000 16 3.8 3.9 4.0 14 50,000 3.5 12 3.0 2.7 2.5 40,000 10 2.5 % % 2.0 30,000 8 Rs 2.0 1.5 1.5 1.1 6 0.9 1.0 20,000 0.8 1.0 4 0.5 10,000 20,685 21,869 23,187 25,309 28,090 31,583 35,844 40,889 46,421 49,639 54,000 2 0.0 0 0 Thailand Phillippines UK Japan India China Australia Indonesia Malaysia USA CY10E CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 Per capita Income YoY growth Source: Euromonitor, GEPL Capital Research Source: Ministry of Tourism, GEPL Capital Research Despite the sharp rise in per capita income, the burgeoning middle class and aspirations to visit countries outside India, the share of wallet (SoW) in India for T&T is still very low, at 0.9%. While this is in line with developed Nations like USA (1%) and Japan (0.8%), China’s SoW of 1.5%, Australia’s 2.7% and UK’s 3.8% indicate a strong growth potential. Led by the favourable macro-economic environment and the increase in purchasing power of the burgeoning middle class, the UNWTO predicts a multifold rise in outbound visits, from 12.1 mn in CY10, to 45.1 mn by CY20E. Projected growth in India’s Outbound traffic 50 25 45.1 39.5 40 20 34.5 30.0 % 30 15 mn visits 23.0 26.3 20.0 20 17.5 10 15.4 13.6 8.3 9.8 10.9 11.1 12.1 10 7.2 5 4.4 4.6 4.9 5.4 6.6 0 0 CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Outbound travel from India YoY growth Source: Euromonitor, GEPL Capital Research GEPL Capital Research | Initiating Coverage 7 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 C. Domestic tourism: Macro factors to lead to rise Driven by rising incomes, an increased standard of living and improved land, rail and air connectivity, domestic travel has grown from just pilgrimages or visits to friends and relatives, to leisure trips which now forming a major share. Domestic tourism has grown at a CAGR of 12.9% in the last decade, from 226 mn visits in CY00 to 758 mn visits in CY10. This includes 740 mn trips by Indians and 18 mn trips by foreigners. In fact, in CY10 the domestic travel by foreigners saw a sharp bounce back with a 24% Y-o-Y growth post a 0.1% Y-o-Y decline in CY09. The growth in the domestic industry is expected to remain strong driven by a) favourable demographics with the sharp increase in working age population (from 56.5% in CY11E to 60% CY21E), b) a change in income class with the increasing size of the middle and upper-middle category, and c) expected strong growth in FTAs. The WTTC projects 8.3% CAGR in CY11E-21E in domestic T&T spending to US$168 bn, 7.7% CAGR in leisure T&T to US$137 bn and 9.4% CAGR in business T&T to US$60.5 bn in the same period. Percentage of Working-age population Domestic T&T Spend in India 180 168 14 155 70 160 143 12 59.2 133 56.5 140 122 60 112 10 46.0 47.2 120 104 50 45.0 43.3 44.3 95 89 8 US$ bn 100 82 % 40 76 % 80 6 30 60 4 20 40 2 10 20 0 0 0 CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E CY61 CY71 CY81 CY91 CY01 CY11E CY21E Domestic Travel & Tourism Spending YoY growth Source: IMF, GEPL Capital Research Source: WTTC, GEPL Capital Research Leisure T&T Spend in India Business T&T Spend in India 160 14 70 14 137 61 140 128 12 119 60 55 12 110 51 120 46 101 10 50 10 94 42 100 88 38 75 82 8 40 8 US$ bn 34 US$ bn 70 % 31 % 80 65 29 6 25 27 30 6 60 4 20 4 40 20 2 10 2 0 0 0 0 CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E Leisure Travel & Tourism Spending YoY growth Business Travel & Tourism Spending YoY growth Source: WTTC, GEPL Capital Research Source: WTTC, GEPL Capital Research GEPL Capital Research | Initiating Coverage 8 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 The Global Travel and Tourism Industry The Global T&T Industry has grown at a rapid pace, with an increasing number of destinations opening up investment in tourism development. As per the WTTC, the recovery in T&T in CY10 has improved with the industry’s direct contribution to global GDP increasing by 3.3% to US$1,770 bn. The WTTC expects the recovery to strengthen further and expects a 4.5% rise to US$1,850 bn, creating an additional 3 mn direct industry jobs. In spite of occasional shocks, international tourist arrivals have shown virtually uninterrupted growth: from 25 mn visits in CY50, to 438 mn in CY90, and the 940 mn in CY10. As growth has been particularly fast in the world’s emerging regions, the share in international tourist arrivals received by emerging and developing countries has steadily risen, from 32% in CY90 to 48% in CY10. World-wide tourist arrivals 1,000 12 900 10 800 8 700 6 600 mn visits 4 % 500 2 400 0 300 200 (2) 100 683 683 703 691 762 803 846 894 917 882 940 (4) 0 (6) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 International tourist arrivals in World YoY growth Source: WTTC, GEPL Capital Research Most tourist travel by air and for purpose of leisure In CY10, leisure and recreation travel accounted for over half of all international tourist arrivals (57.5% or 446 mn arrivals). Corporate and business travel accounted for 15% of international tourists while ~27% traveled for specific purposes, such as visiting friends and relatives (VFR), religious reasons and pilgrimages, health treatment, etc. Most of the travelers arrived at their destination by air transport (~90%) in CY10, while the remainder traveled over the surface (9%), whether by road (7%), rail (1%) or over water (1%). The share of air transport is gradually increasing due to a faster pace of growth when compared to land or sea. Purpose of visits in CY10 Mode of visits in CY10 7.6 15.1 2.2 9.2 1.0 17.6 57.5 89.8 Business/ professional Leisure/ holiday Visiting friends and relatives Medical treatment Air Land Sea Others Source: UNWTO, Ministry of Tourism, GEPL Capital Research Source: UNWTO, Ministry of Tourism, GEPL Capital Research GEPL Capital Research | Initiating Coverage 9 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Recovering from the CY09 slowdown Worldwide international tourism rebounded strongly with international tourist arrivals (ITA) up 6.7% to 935 mn in CY10, following an exceptional 4% decline in CY09. The increase more than offset the decline caused by the economic downturn, with 22 mn arrivals more than the previous peak of CY08. All world regions posted positive growth in ITA over CY09. However, as a reflection of the economic conditions, recovery was particularly strong in emerging economies, where arrivals grew faster (+8%) than in advanced economies (+5%). International tourist arrivals growth rate across regions Middle East -10 14 North Africa -9 6 Central America 15 10 North America 1 7 South East Asia 9 12 North East Asia 3 14 Mediterianean 5 3 Central Europe 12 5 3 Western Europe 3 Northern Europe 2 1 4.7 World 6.6 -15 -10 -5 0 5 10 15 20 CY10 CY11E Source: UNWTO, GEPL Capital Research Regional results Asia and the Pacific: the first region to recover and also witness the fastest growth in CY10, with international tourist arrivals at a new record of 204 mn in CY10 (growth of 13%). The region saw its pace slow down (+6%) in the first two months of CY11. Europe: The effect of the crisis slowly faded away in the hardest hit region, resulting in 3% growth in CY10. But the closure of its airspace in April and uncertainty about the economy have not helped to speed up recovery in the region. Outstanding performances of some major destinations like Germany and Turkey as well as the temporary redistribution of travel from Middle East helped the region clock a better than expected growth rate (+6%) so far. Middle East: The region witnessed a rapid growth of 14% in CY10, but on a depressed CY09 figure. With the slowdown and the crisis in Middle East the region has witnessed a (-10%) de-growth in tourism demand. America: Though the region saw a growth of 7% in CY10, currently the rate has slowed down to (+5%) which is in line with the World average. The increasing regional integration in Central and South America also favoured the recovery from CY09. Africa: This region saw 6% growth, which is an increase on the positive results of CY09. However, with the developments in Africa around its health concerns and epidemic, the North Africa region has witnessed. The results so far confirm that the international tourism industry is consolidating, in spite of the existing challenges by the recent developments in North Africa, Japan (Earthquake and Tsunami) and the Middle East (crisis). However the overall impact of tourism is expected to be limited to the destinations directly involved with alternative destinations picking up most of the slack. GEPL Capital Research | Initiating Coverage 10 Equity | India | Travel & Tourism Travels & Tourism Industry December 12, 2011 Future outlook Following a year of global recovery in CY10, tourism sector growth is expected to continue in CY11E, but at slower pace. UNWTO predicts ITA will grow at 5% in CY11E, slightly above the long-term average. However, by CY20E, UNWTO expects international arrivals to reach 1.6bn visits from 935 mn visits in CY10 implying a CAGR of 5.3%. Of these worldwide arrivals in CY20E, 1.2bn will be intra- regional and 0.4bn will be long-haul travellers. Region wise breakup for CY10 Region wise breakup for CY20E 21.8 26.6 45.9 5.2 50.6 4.9 6.4 4.4 16.0 18.1 Asia Pacific Africa M iddle East Asia Pacific Africa M iddle East America Europe America Europe Source: UNWTO, GEPL Capital Research Source: UNWTO, GEPL Capital Research In terms of regional outlook, the Asia Pacific region is expected to witness the strongest growth (7.4% CAGR), with its share expected to increase to 26.6% from to 21.8% followed by America and Europe at 6.5% and 4.2%, respectively. Region-wise arrivals in CY20E Region wise CAGR in CY10-20E 1,800 1,600 1,561 M iddle East 1.4 1,400 1,200 Europe 4.2 mn visits 1,000 935 Africa 4.6 800 717 World 5.3 600 416 473 America 6.5 400 282 204 200 150 Asia Pacific 7.4 49 77 60 69 0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 World Asia Africa Middle America Europe Pacific East % CY10 CY20E Source: UNWTO, GEPL Capital Research Source: UNWTO, GEPL Capital Research GEPL Capital Research | Initiating Coverage 11 Equity | India | Travel & Tourism Cox & Kings Ltd. Initiating Pain in FY12E with plenty of gains in FY13E December 12, 2011 Coverage BUY CMP (`) Target (`) Investment Rationale 182 243 Best placed to capture India’s growth in tourism Potential Upside Absolute Rating We believe Cox & Kings (C&K) is best bet in the growing T&T industry with a 9.2% CAGR in 33% BUY India’s travel and tourism demand over the next decade (CY11E-21E), the second fastest in the world. The a) pan-India presence with strong brand recall, b) integrated business model with a Market Info (as on 9th December 2011) diversified product offering (price and destinations), and c) strong overseas network with BSE Sensex 16,213 presence in key outbound destinations offer it an edge over competitors to gain market share Nifty S&P 4,866 and capture a higher pie of the industry growth. Stock Detail Emergence of a Global Tour Operator BSE Group B In a short span of four years, C&K has completed seven acquisitions (in the UK, Japan, Australia, BSE Code 533114 India and the USA) to emerge as a global tour operator. With a strong management bandwidth, NSE Code COX&KINGS synergies from acquisitions led to an improvement in the consolidated EBIDTA margins. We Bloomberg Code COXK IN believe there is scope for further margin expansion following synergies emanating from: a) Market Cap (`bn) 24.86 consolidated product sourcing coupled with scale benefits, b) improved product mix (leveraging Free Float (%) 45% the global platform to cross-sell existing products), and c) expansion of captive destination 52wk Hi/Lo 566 / 177 management services for its various overseas subsidiaries. Avg. Daily Volume (NSE) 66803 HolidayBreak: an acquisition worth the wait Face Value / Div. per share (`) 5.00 / 0.50 Shares Outstanding (mn) 136.5 The recent acquisition of HolidayBreak Plc (HBR) offers a host of benefits to C&K which include a) potential to double revenues in the next two years with margin improvement, b) entry into Shareholding Pattern the education and camping markets which should improve the market share and the mind space Promoters FIIs DII Others of consumers and led to increasing volumes and value for C&K, and c) utilization of cash on 58.66 18.90 8.18 14.26 books which were earlier resulting in a net outflow of 3% for the company. The HBR acquisition and timing of consolidation may result in lower profitability for the Financial Snapshot (`mn) company in FY12E as H1 is historically loss making for the company with no revenues from the Y/E Mar FY10 FY11 FY12E FY13E camping and adventure segment. However, we expect a sharp rise in revenue contribution in Net Sales 3,992 4,967 7,070 10,963 FY13E with the full year numbers getting consolidated and resulting in an immense growth in EBITDA 1,865 2,301 1,509 5,117 FY13E EPS. PAT 1,344 1,291 (346) 1,973 EPS 11.2 10.7 9.5 (2.5) Visa processing and Train tours: Future growth avenues ROE (%) 25.9 12.8 (2.9) 15.7 C&K has also branched out into a) visa processing, where C&K has signed up with six embassies ROCE (%) 16.3 9.9 1.6 5.1 to process visa applications and expects more than a six-fold increase in volumes in the next P/E 22.5 21.9 (73.0) 12.8 two years, and b) a foray into rail tourism through the Maharajas’ Express, a luxury train in JV EV/EBITDA 16.9 11.8 38.6 9.9 with IRCTC. Though these segments contribute less than 8% to the company’s revenues, we Share Price Performance expect the revenue contribution to increase and with higher margins the company should 110 benefit on the profit level as well. 105 100 95 Valuation 90 C&K is currently trading at 12.6x FY13E EPS of `14.5, a 48% discount to its historical one-year 85 80 forward P/E band of 24x. The stocks has been de-rated over the last two years due to a decline 75 in return ratios with huge cash on the books and the uncertainty of its acquisition integration. 70 65 However, in view of HBR acquisition and the successful history of integrations of C&K, we 60 expect the company to report a 23.7% PAT CAGR in the next two years. Consequently, we Jul-11 Jan-11 Feb-11 Apr-11 Jun-11 Aug-11 Sep-11 Nov-11 Dec-10 Mar-11 May-11 Dec-11 Oct-11 believe there is good potential upside in the stock and value it at a 30% discount to its historical Cox & Kings Ltd BSE SENSEX PE due to concerns on its a) huge debt, b) high interest outflow, and c) acquisition integration. Rel. Perf. 1Mth 3 Mths 6Mths 1Yr We initiate the coverage with a BUY rating and target price of `243 (16.8x FY13E EPS). Cox&Kings(%) (18.9) (17.1) (10.7) (29.1) SENSEX (%) (6.6) (3.9) (11.8) (15.7) Source: Company data, GEPL Capital Research Analyst +91-22- 6614 2690 GEPL Capital Research 12 Sunil Sewhani firstname.lastname@example.org Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Investment Rationale Best placed to capture India’s growth in tourism Shift towards organized players visible India’s T&T industry is highly fragmented with 25,000 independent agents; 5,000 regional players and the organized (Top 5) players accounting for a mere 9% of the total retail travel in India. While smaller players are usually restricted to the regional front, C&K serves a wider array of customers due to its pan-India presence. The benefits of its Pan-India presence are multiple folds. Due to it, C&K has been able to maintain its advantage over other smaller tour operators by using its brand, penetration and scale to negotiate better deals with vendors with bulk and advance buying. This helps it to provide better variety of packages at much lower costs. This also enables C&K to increase its scale of operations and offers complete travel solutions, acting as a one-stop shop for all travel requirements. Player’s markets share Fragmented market share 9% 91% Category Players Market share Independent agents 25,000 90% Regional players 5,000 1% Organised players Top 5 9% Source: Company data, GEPL Capital Research Organised un-organised Source: Company data, GEPL Capital Research Growth intact despite higher internet penetration Since C&K is mainly involved across the spectrum and specializes in selling complex packaged holidays and creates complex multiple destinations products, hotels and forms of transport; even big players like Expedia Worldwide, Makemytrip have not succeeded in really harnessing the demand in this sector. Moreover, C&K has an online portal which provides better rates compared to peers, a move that, we believe, will help to boost revenues. To add to this, the submission of original documentation for visas and part payment for packages in foreign currency limit the use of online transaction modes. Thus, we do not expect the recent emergence of online tour operators to threaten the business model of C&K. GEPL Capital Research| Initiating Coverage 13 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Expansion through the franchisee model C&K is currently looking at expanding its geographical presence to improve its reach and capital efficiency. It already has 175 franchises and expects to have 200 franchised outlets under its belt by the end of the current year. C&K plans to take the total franchisee count to ~300 by the end of FY13E most of which are expected to be in Tier II and Tier III cities. C&K also provides training, site development and advertising and marketing support to franchises. This helps the franchisees grow with minimal investment in premises, equipment and people. Moreover, a higher number of stores are able to gain an edge over competition and improve brand visibility and recognition. Such initiatives further insulate C&Ks purchasing power with increase in bookings, and making room for negotiating rates. Given the fact that franchise stores require a lower capital outlay (no infrastructure or salary expenses, except those of the store manager and accountant) on the part of C&K and that franchisees are remunerated with commissions, margins are expected to improve due to a higher revenue contribution from franchises in India (15-18% by FY13E to 7% of total revenues in Q2FY11). Benefits of franchisee model Minimal investments Higher Edge over presence competition Benefits of Franchisee model Margin Purchasing improvement power Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 14 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Emergence of a Global Tour Operator With the series of successful acquisitions in the past, we believe C&K has emergence as a Global tour operator. Consequently we expect it to be the biggest beneficiary of the strong growth in the T&T sector across countries especially (UK, Australia, Japan, USA and UAE) where it has a significant scale and size of operation. Series of acquisitions in the past Year Company Country Acquisition price FY07 C&K UK `390 mn (share swap) FY07 C&K Japan Japan `20 mn (share swap) FY07 Clearmine UK `163 mn FY08 Tempo Holidays Australia A$$27 mn FY09 East India Travels USA US$22 mn FY10 Bentours Australia Earn out mechanism FY10 MyPlanet Australia Earn out mechanism Source: Company data, GEPL Capital Research US: High margins with concentration on volumes The outbound traffic in USA has witnessed a 1.5% CAGR in CY00-CY10 to 66.5 mn visits despite a decline in CY02-CY04 due to ‘9/11’ followed by a decline in outbound traffic in CY09-CY10 due to the global financial turmoil. Considering that USA is the single largest outbound tourist market worldwide and that WTTC expects the leisure travel and tourism spend in to witness a 3.7% CAGR in CY11E-21E, from US$666 bn to US$956 bn. Outbound visits from USA Leisure spend projections in USA 68 66.50 12 1,200 6 66 64.0 63.6 10 63.5 1,000 956 5 64 8 870 899 929 61.4 691 814 841 61.3 788 62 61.8 6 800 666 727 759 4 59.1 59.4 % mn visits US $ bn 60 58.1 4 % 600 3 58 56.3 2 400 2 56 0 54 (2) 200 1 52 (4) - 0 50 (6) CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Outbound visitors (mn) YoY growth Leisure spend (US $bn) YoY growth Source: ITA, GEPL Capital Research Source: WTTC, GEPL Capital Research C&K entered the US markets with its US$22 mn East India Travels acquisition in FY09. The acquisition gave C&K entry into the US markets and also provided it with an elite customer base of celebrities and high-net-worth individuals (1,500-1,700 clients per annum). With key destinations like Africa, Latin America, Asia and the Middle East and with a focus on the niche high end segment, commission margins are relatively high at ~40%. Moreover, C&K plans to expand the market share without compromising on margins and hence has launched premium group tour products by leveraging its global platform (similar to those offered by the UK C&K) and hopes to add more than 500 clients over the next two years. GEPL Capital Research| Initiating Coverage 15 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 UK Division: Outbound focus with high end customers to drive revenues and margins While the slowdown in the economy in UK and the uncertainties across the European region, the outbound visits have dropped to a decade low of 54.9 mn visits in CY10 from 69 mn visits in CY08. Due to this the WTTC expects the leisure travel and tourism spend to grow at a mere 3.5% CAGR in CY11E-21E from US$86.5 bn to US$122 bn. However, we expect C&K to continue to gain market share in this segment as most of their clients are high end retired people who take a fixed holiday each year allocating a fixed budget on travel spend. Outbound visits from UK Leisure spend projections in UK 80 10 140 6 69.5 69.5 69.0 127.8 122.0 70 64.2 66.4 120 5 58.8 59.4 61.4 58.6 5 110.9 116.3 4 54.9 101.1105.6 60 100 92.4 89.8 92.2 96.4 3 0 87.9 50 2 mn visits % 80 US $ bn 40 (5) 1 % 60 0 30 (10) 40 (1) 20 (2) (15) 20 10 (3) 0 (20) 0 (4) CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Outbound visitors (mn) YoY growth Leisure spend (US $bn) YoY growth Source: Office of National Statistics, GEPL Capital Research Source: WTTC, GEPL Capital Research C&K entered the UK markets in CY06 with the acquisition of ETN Services (ETN) for `156 mn, followed by the acquisition of C&K, UK (CKUK) in FY07 for `390 mn and a share swap. In FY11, these subsidiaries contributed 21% of the consolidated revenues. Both these companies are outbound tour operators catering to the high–end, niche market operators. ETN further provides inbound destination management services (DMS), including comprehensive ground handling services, transportation and sight-seeing services, thereby capturing a larger share of the travel spend per customer. These companies focus on exclusive interest-focused packages in the UK such as: a) guest- lecture-based tour programmes with The Natural History Museum, b) a tour of the gardens of the world in association with the Royal Horticultural Society, c) wine tours for Green bee, a part of the John-Lewis Partnership, and d) as a travel partner for various exhibitions conducted by the Royal Academy of Arts along with the traditional destination-focused packages. UAE: Low base but high growth potential C&K Dubai was incorporated in February CY07, to provide both inbound and outbound services. It offers destination management services for various tours originating from its UK, US, Australia, New Zealand, India and Japan subsidiaries in the inbound segment, while in the outbound segment, it offers tour packages to the large expatriate Indian population in the UAE. In FY11, this region comprised ~8% of international revenues. However, the margins are lower in this segment as C&K operates as a mass market player. According to the WTTC, the leisure travel and tourism spend in the UAE is expected to grow at 5.4% CAGR in CY11E-21E, from US$25.4 bn to US$43 bn. GEPL Capital Research| Initiating Coverage 16 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Australia Division: Series of acquisitions to boost size and scale of operations Australia ranked number one for the number of World Heritage natural sites and fifth for its cultural resources enabling its outbound tourism to witness a 7.6% CAGR in CY00-10 to 7.2 mn visits. As per the WTTC estimates, the leisure travel and tourism spend in Australia is expected to grow at a 4% CAGR in CY11E-21E from US$27.7 bn to US$ 41.2 bn With an A$27 mn acquisition of Tempo Holidays in FY08 and ‘Earn-out-mechanism’ acquisitions of BenTours and MyPlanet in FY09, enabled C&K to get a strong foothold in the Australian region. These companies contributed 12% to the consolidated revenues in FY11 and ~13.5% in H1FY12. Outbound visits from Australia Leisure spend projections in Australia 45 41.2 7 8 7.2 35 38.6 40.0 40 35.7 37.1 7 6.3 30 33.0 34.4 6 5.8 35 30.8 31.9 6 4.9 5.5 25 27.7 29.4 5 4.8 30 mn visits 5 20 % 4 % 4.37 25 US $ bn 3.49 3.44 3.46 3.39 4 15 20 3 3 10 15 2 2 5 10 1 0 5 1 0 (5) 0 0 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E Outbound visitors (mn) YoY growth Leisure spend (US $bn) YoY growth Source: Australian Bureau of Statistics, GEPL Capital Research Source: WTTC, GEPL Capital Research Tempo Holidays provides C&K with outbound mid-market position catering to the FIT segment with key destinations like Europe (65% of outbound travel to Europe) and the Middle East (15% of business from the Middle East). Similarly, Ben Tours and MyPlanet with focus on Scandinavian countries have helped improve C&K’s outbound share in the continent. As a part of its business strategy to build presence across all consumer segments, C&K plans to launch premium travel products under the Cox & Kings brand in Australia, which will complement the existing Tempo Holidays product portfolio that caters predominantly to the mid-tier segment. GEPL Capital Research| Initiating Coverage 17 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Japan Division: Earthquake tremors to be felt till FY13E. The inbound tourism growth in Japan has been strong over the last decade witnessing a 6.0% CAGR from 4.8 mn visits in CY00 to 8.6 mn visits in CY10. However, with the Tsunami and Earthquake in CY11, the tourism has been impacted. Consequently, WTTC has revised its leisure travel and tourism spend growth to 2.7% CAGR in CY11E-21E to US$206.6 bn. Inbound visits to Japan Leisure spend projections in Japan 10 30 250 5 9 8.3 8.4 8.6 206.6 4 196.2 200.2 20 187.8 192.0 8 7.3 200 179.1 183.4 169.9 174.6 4 6.7 6.8 7 158.5 164.6 6.1 10 3 US $ bn 6 150 mn visits 4.8 5.2 5.2 3 % % 5 4.8 0 2 4 100 (10) 2 3 50 1 2 (20) 1 1 0 0 0 (30) CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E 2021E CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 Inbound visitors (mn) YoY growth Leisure spend (US $bn) YoY growth Source: Japan Tourism, GEPL Capital Research Source: WTTC, GEPL Capital Research C&K acquired C&K Japan (CKJ) in FY07 for `20 mn and a share swap deal giving C&K the status of an outbound wholesaler selling white-label premium overseas tour packages to major tour operators in Japan. CKJ offers destination management services for travelers from Japan to the Indian sub-continent and Europe with most products being FIT in nature. Being a wholesaler, the margins were comparatively low at 9%. With the Earthquake and Tsunami in Japan, we expect the business to be severely impacted in FY12E and de-grow by 50%. The FY11 numbers did not see the complete impact as the peak travel season in Japan was over before the earthquake struck. As the revenue contribution from Japan is not very significant (8% of consolidated revenues in FY11), we do not expect any major impact on C&K’s overall profitability. Moreover, the company plans to utilize its Japanese staff to set up base in the Far East (Singapore), which is currently witnessing strong demand. GEPL Capital Research| Initiating Coverage 18 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Benefits of Inorganic growth C&K has been able to increase its revenues by 5.5 times in last five years from `891 mn in FY07 to `4.97 bn in FY11. These acquisitions (seven) have helped C&K emerge a global tour operator. While its outbound travel services involve customers in India, the UK, Australia, Japan, Dubai and the US; its inbound travel services include destination management services covering all aspects of ground-tour arrangements, for customers traveling in India, Europe and Dubai. Highlighted below are the benefits of the strong integration and inorganic growth by C&K 1. Cross selling of products The series of acquisition have led to C&K becoming a global integrated service provider of travel and travel-related products to all customer segments (inbound, outbound and domestic). This has enabled C&K to cross-sell its existing products by leveraging the global platform. Through this the company has managed to launch premium travel products in Australia similar to those offered in the UK to tap the high-end segment. 2. Ready markets to expand The acquisitions have provided C&K with a ready market to expand existing services. This includes offering destination management services in Singapore to its various overseas subsidiaries, similar to those offered in the UAE etc to capture a higher travel spend from customers. In addition, the acquisitions have enabled C&K to build a strong distribution network, which is a pre-requisite for customer-base expansion. 3. Better bargaining power Due to its global presence and increased customer base, C&K enjoys a better bargaining power. This has enabled them to offer competitive travel packages with significant cost savings from consolidating buying for air travel, hotel accommodations, car rentals and ground handling services. 4. Higher margins with Destination Management Services (DMS) C&K provides inbound destination management services in India, Europe and the UAE along with services for its subsidiaries in the UK, Australia, New Zealand, Japan, the US, and Singapore. This helps C&K to: a) improve cost by saving on the commission to be paid to other local DMSs and earn higher margins for its own DMSs, b) capture a larger share of travel spend per customer, and c) earn revenues from subsidiaries in the form of inbound commissions. For example, the India inbound tourism includes 19% business from the Europe subsidiary, 18% from its USA and AUE subsidiaries and 15% from the UK subsidiary. 5. Reduced seasonality impact India’s tourism season is counter-cyclical to that of the other Nations, which helps to mitigate the seasonality impact faced by the travel and tourism industry. Indians generally travel during the schools’ annual summer holidays which last from in March and extend to June end. In Europe and the US, the peak holiday season starts in October and lasts until March while in Australian the peak season starts slightly earlier (July) than that in Europe and the US and lasts till September. This results in an all year round demand for C&K and its products. Series of acquisitions in the past Region Peak season India March-June Australia and Other Nations July-September USA and Europe October- March Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 19 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 HolidayBreak Plc- An acquisition worth the wait C&K had `11.7 bn on books in the form of cash and investments by the end of FY11 after raising money for acquisitions through a series of debt and GDR issue (in August 2010). Since 50% of the cash was outside India (mainly GDR proceeds and foreign currency loans), the yield on surplus cash was 470bps lower than the cost of servicing the debt, resulting in a net cash outflow. This had led to a negative re-rating of the stock over the last two years. However, with the acquisition of HolidayBreak Plc (HBR) the return ratios and revenues prospects are expected to improve substantially. HBR is an established specialist holiday group operator with a leading market share in the outdoor education, camping and short-haul travel market segment. The company generated gross revenues of £436 mn and EBIT of £46 mn for the year ended September 2011. HolidayBreak Revenues mix (year ended Sept’11) HolidayBreak EBIT mix (year ended Sept’11) 23% 26% 27% 44% 21% 30% 21% 8% Education Adventure Education Adventure Hotel breaks Camping Hotel breaks Camping Source: HolidayBreak Plc, GEPL Capital Research Source: HolidayBreak Plc, GEPL Capital Research HolidayBreak- A Specialist travel company HolidayBreak is a specialist holiday group in Europe with leading market position in A) Education: The education segment accounted for 26% of the gross revenues and 44.5% of HBR’s EBIT for year ended Sept CY11. The division provides residential outdoor education and adventure trips for school children through the market leading ‘PGL’ brand and educational travel tours for schools and further education students through ‘NST and EST’. HBR’s started expansion under the Education division with the acquisition of ‘PGL’ in June CY07 for £100 mn which operates 28 activity centres across UK, France and Spain with a capacity of 9,600 beds. This was followed by the acquisition of UK and Ireland educational tour organizer, ‘NST and EST’ in Sept CY07 for £47.2 mn. The company hence became the leader in the UK group travel market for schools and colleges and in Dec CY08 acquired a 50% interest in ‘Meininger’ which provides accommodation for Germany and UK school tours and youth groups with centres across Germany, UK and Australia. B) Adventure: The segment accounted for ~21% of the gross revenues and ~7.5% of the EBIT for year ended Sept CY11 of HBR. The division comprises of three separately run brans- ‘Explore’, ‘Djoser’ and ‘Regal Dive’. While ‘Explore’ is a UK based soft adventure leading tour operator, ‘Djoser’ is a Dutch based group with strong local brand recognition. ‘Regal Dive’ on the other hand is a leading scuba diving operator. GEPL Capital Research| Initiating Coverage 20 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 C) Hotel Breaks: This division accounted for ~30% of the gross revenues and 21% of HBR’s EBIT for year ended Sept CY11. The division operates under ‘Superbreak’ in UK and ‘Bookit’ brand in Netherlands and specialises in packaging short trips. The division witnessed a 35% decline in gross revenues led by the impact of extreme winter weather. D) Camping: This division accounted for ~23% of the gross revenues and 27% of HBR’s EBIT for year ended Sept CY11. This division offers self-catering mobile-homes and tents on third party pre-site camps. The division has its presence across 200 sites and is a cyclical business as people prefer not to camp during the winter season. However, the management believes this that the business model is stable as customers down trade from hotels to mobile homes during adverse economic conditions. Since the camping and education divisions are asset heavy models (contrary to C&K’s model), one can expect higher depreciation in the next couple of years. The camping business is highly cyclical with negligible revenues in October- March due to the winter season in Europe. Benefits of HolidayBreak acquisition We believe that there is a significant strategic rationale for combining the business of C&K and HBR. We expect the revenues of C&K to double over the next two years with the integration the acquisition and the benefits attached with it. 1. Acquisition in-line with company strategy The acquisition is in line with C&K’s strategy to expand its business through selected acquisitions. The series of acquisition in the past (seven in four years) have helped C&K emerge a global tour operator. This has led to a 5.5 times growth in revenues, from `890 mn FY07 to `4.97 bn in FY11. 2. Utilisation of funds Through the acquisition, C&K will be able to utilize the funds that they have raised over the last two years. In view of the management’s successful record of acquisitions, we believe this strategy could substantially improve returns on capital, especially with the huge surplus cash on the balance sheet currently yielding only 3%. 3. Increase volume and value size for C&K HBR is led by a dynamic management team and operates in differentiated markets. The acquisition represents a transformational step for C&K. It will enable C&K to maximize its offerings to a larger customer base and help expansion in adjacent business areas. The UK and European markets in particular could benefit with a greater access to certain markets and customers. 4. Further diversify C&K’s revenues stream Its global presence helps C&K to mitigate the seasonality impact faced by the travel and tourism industry. India’s tourism season is counter-cyclical to that of most of the world as Indians generally travel during the schools’ annual summer holidays. 5. Accelerate HolidayBreak business Being a niche operator, the business areas of HolidayBreak are complementary to C&K, and shall help offer a unique range of leisure activities to its existing clientele. HBR itself has growth through a series of acquisitions in the past and given the scale and skill benefit of C&K, we expect the company to receive a platform to expand internationally. GEPL Capital Research| Initiating Coverage 21 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Impact of HolidayBreak on Financials The HBR business is highly cyclical in nature with the Oct-Mar period accounting for a mere ~31% of the annual revenues. This period (H1 for HBR earlier which will now become H2 due to consolidation with C&K) also witnesses a sharp decline in sales from the education and camping business. This is due to the severe winter season during which the education business witnesses a 30% decline and the camping revenues plunge by nearly 99%. Education division half yearly revenues Camping division half yearly revenues 7.0 10,000 6.1 8,677 5.8 8,297 6.0 5.4 5.3 5.4 7,516 7,441 7,627 8,000 5.0 4.0 6,000 Rs bn Rs bn 3.3 3.3 2.9 2.9 2.9 3.0 4,000 2.0 2,000 1.0 22 15 7 5 5 0.0 0 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E H1 H2 H1 H2 Source: HolidayBreak Plc, GEPL Capital Research Source: HolidayBreak Plc, GEPL Capital Research With a) ~55% decline in revenues in the Sept-March quarters, and b) stagnant expenditure on salaries, rentals etc; the company usually reports an operating loss in the Sept-March period. Hence in FY12E, we expect C&K to report a loss led by a) the `1.0 bn operating loss of HBR which will get consolidated into the parent company’s account, and b) the higher interest outflow driven by the sharp rise in debt. However, the full impact of the acquisition and the peak season numbers would only reflect in FY13E. We hence expect the revenues and operating profits to rise sharply in FY13E. HolidayBreak half yearly revenues HolidayBreak half yearly operating profit 30.0 5.0 4.3 24.7 24.9 3.6 3.6 3.7 25.0 4.0 21.8 21.1 21.4 3.0 2.4 20.0 2.0 Rs bn Rs bn 15.0 11.3 11.1 10.0 10.4 11.0 1.0 10.0 0.0 5.0 (1.0) (1.0) (0.9) (1.0) (1.0) (1.0) 0.0 (2.0) FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E H1 H2 H1 H2 Source: HolidayBreak Plc, GEPL Capital Research Source: HolidayBreak Plc, GEPL Capital Research GEPL Capital Research| Initiating Coverage 22 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Visa processing and Train tours: Future growth avenues Visa processing: the next high-growth business vertical C&K entered visa processing service business with the acquisition of Quoprro in CY09. Quoprro functions independently as a separate business unit, with the parent group providing the senior members of the team, though it’s part of the C&K group. C&K have six embassies for services from Greece, Germany, Singapore, Hong Kong, India and the UK. The company has also started visa processing services in Dubai through a 100% subsidiary called Cox & Kings Global Services (CKGS). The company provides Dubai Visa services in India for passengers arriving and departing at Dubai International Airport. The company has formed C&K Marhaba Dubai Visa (CNKMDV) for the same. C&K requires low working capital in this business because it already has established software and a team that can set up the visa facilitation services. Though the visa processing business contributes less than 2% of C&K’s total revenues in FY11, we see a huge growth potential and expect annual processing to cross 2.5 mn in FY13E as compared to the current ~350,000. Foray into rail tourism: the Maharajas’ Express C&K started the Maharajas’ Express, a luxury train, in March CY10 in a 50:50 JV with the IRCTC, called Royale Indian Rail Tours. The train has a capacity of 86 passengers in 23 coaches, offers four different itineraries, and features five carriages for deluxe cabins, six for junior suites, two for suites and one for a grand presidential suite. The all-inclusive costs begin at US$895 (`40,000) per person per day, going up to US$2,500 (`125,000) per person per day. With 45% occupancy currently, the Maharajas’ Express seems to have garnered great interest in its first year of operations. We expect the venture to become profitable for C&K at above 55% occupancy. However, although we expect a significant upside in this business with over 40% margins, we have not factored in the growth from this business in our estimates. GEPL Capital Research| Initiating Coverage 23 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Financials Consolidated commission revenues to grow at 48.6% CAGR in FY11-FY13E We expect C&K’s consolidated commission revenues to grow at 48.6% CAGR in FY11-13E to `10.96 bn, driven by a 27.2% CAGR in Indian operations, a 15.2% CAGR in its overseas subsidiaries (Rest of the World - RoW) and the inclusion of HBR into the consolidated numbers. FY12E should reflect only H2 numbers which historically account for 33% of the annual revenues while the full year revenue impact will be seen in FY13E. Due to the big ticket acquisition of HBR, the revenue mix is expected undergo a major change, with India’s contribution at ~35%, HolidayBreak’s contribution at 33.5% RoW contribution at ~31% in FY13E. We expect India’s blended commission margin to improve by 40bps from 16.3% in FY11 to 16.7% in FY13E and RoW margins to improve 120bps to 20.6% in FY13E led by a stronger product mix. We believe the commission margin in India’s leisure business is sustainable due to: a) a strong brand and robust distribution network, b) a sharp improvement in cost competitiveness through consolidated product sourcing and c) the better distribution of fixed overheads due to increased scale of operations (major expansion in India via the franchisee route). In overseas operations, we expect the blended commission margin to marginally improve led by the improvement in the product-mix in USA and Australia. Commission revenues Geographical margin 12 60 45.0 40.0 40.0 35.0 10 50 35.0 3.68 8 40 30.0 25.0 1.18 Rs bn 6 30 % 17.5 17.0 16.7 3.43 % 20.0 2.80 12.3 4 20 15.0 10.0 2.58 9.0 7.5 2.23 10.0 2 1.32 3.86 10 3.5 2.38 3.09 5.0 1.47 1.76 0 0 0.0 Australia Camping Adventure UAE India USA Hotel break UK Japan Education FY09 FY10 FY11 FY12E FY13E India revenues RoW revenues Holidaybreak YoY growth Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research Revenue mix in FY11 Revenue mix in FY13E 4% 2% 10% India India 34% 12% 48% 6% USA USA 3% UK 8% UK Japan Australia Japan 14% UAE Australia Visa Processing 2% Education UAE 4% 21% Adventure 5% 3% 9% Visa Processing 3% 12% Hotel break Camping Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 24 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 The margins for HBR however are expected to decline by 10bps despite a margin improvement in education and the camping division. We expect the adventure division and the hotel division to witness a decline in margins. Moreover, with a higher contribution of HBR to the consolidated revenues and a lower margin (10.4%) as compared to the India operations (16.7%), the consolidated blended margins for C&K are expected to decline by 320bps in FY11-FY13E to 14.6%. EBITDA margin to grow at 49.1% CAGR in FY11-FY13E We expect this growth despite a 34% decline in EBITDA in FY12E to `1.5 bn led by a) consolidation of HBR’s half year revenue into the FY12E results, b) losses of HBR in October- March with negligible revenues from the camping and education business led by the winter season across Europe and c) higher expenses of HBR in the period. Consequently we expect the EBITDA margin to decline sharply in FY12E to 21.3% from 46.3% in FY11. However, with the full year numbers being reported in FY13E, we expect to see a sharp rise in margins and the EBITDA to double in FY13E as compared to the previous year. Margin are expect to bounce back driven by a) overseas operations based on the improved product mix, resulting in an increase in blended commission rates, scale benefits with consolidated product sourcing, and the expansion of captive destination management services, b) operating efficiencies in India, with major additional expansion through the franchisee route, and c) full reflection of HBR numbers hence negating the seasonal impact which will be seen in FY12E. Consequently, we the EBITDA to witness a 49.1% CAGR In FY11-FY13E to `5.12 bn and the margins to improve by 40bps to 46.7% in the same period. EBITDA and EBITDA margin 6000 50.0 5000 5,117 40.0 4000 30.0 Rs mn 3000 % 2,301 1,865 20.0 2000 1,509 1,213 1000 10.0 0 0.0 FY09 FY10 FY11 FY12E FY13E EBIDTA EBITDA margin Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 25 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 PAT to witness a 23.7% CAGR in FY11-FY13E However, since HBR is an asset heave model, the consolidation of its balance sheet should result in depreciation charges rising to as high as `1.48 bn in FY13E compared to `186 mn in FY11. Moreover, interest charges are expected to rise `1.15 bn in FY13E as compared to `544 mn in FY11. Led by a sharp rise in depreciation and interest charges and a constant other income component, the Profit before tax is expected to witness a 21.4% CAGR in FY11-13E to `2.85 bn. However, the effective tax rate for the company is expected to come down over the next two years (31% vs 33% earlier). With a current 22% tax rate for HolidayBreak which is expected to come down to 19% due to the interest payments, the consolidated tax rate should drop to 30%. We hence expect the PAT to witness a 23.7% CAGR in FY11-13E to `1.97 bn. Net Profit 2500 1,973 2000 1,344 1,291 1500 Rs mn 1000 628 500 0 -500 (346) FY09 FY10 FY11 FY12E FY13E Source: Company data, GEPL Capital Research Working capital is expected to improve C&K’s working-capital requirement is mainly driven by the corporate segment where average receivables are 30-45 days. In the retail (leisure) segment, C&K enjoys a negative working capital cycle as customers pay upfront and vendors are paid later. As the growth in the leisure segment (27.5% CAGR) is expected to be higher than in the corporate segment (20% CAGR), we expect the working-capital cycle to improve in the future. Retail working cycle Corporate working cycle 100,000 80,000 100,000 80,000 80,000 70,000 70,000 50,000 50,000 30,000 30,000 0 10,000 0 0 (10,000) Rs (10,000) Rs (50,000) (50,000) (45,000) (100,000) (100,000) (70,000) (70,000) (100,000) (100,000) (100,000) (100,000) (150,000) (150,000) 60 days 30 days 0 days 15 days after 45 days 30 days 15 days 15 days 30 days before before before before before after after Customer deposits Vendor payments Customer deposits Vendor payments Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 26 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Key Risks Company Specific concerns • Concerns about investment in Ezeego One and Tulip Hotels C&K owns 14.99% in Ezeego One Travel & Tours (Ezeego1), through a `100 mn investment in FY10 and owns 30.42% in Tulip Group of Hotels. Though Ezeego1 is making losses, the management claims that these losses are reducing every year and the investment is a strategic one. Currently the company does not require publishing results as the stake is below 15% (below threshold limit). However, C&K has invested in FCD (Fully Convertible Debentures), the conversion of which could raise its effective stake to over 20%, making it an associate, and hence, would require consolidation. The C&K management claims to be reducing its exposure to Ezeego1 while the exposure to debtors and advances has reduced from the earlier `800 mn. • Pending arbitration against V Hotels Ltd (VHL) C&K holds 15% in V-Hotels who had filled litigation against Siddhivinayak Realties Private Limited (SRPL) due to nonpayment of purchase price. In March 2005, SRPL had agreed to buy Tulip Star Hotel (owned by V Hotels) for a sum of ~3 bn and paid a deposit of `750 mn for the same. As per the verdict, the dispute between the two parties has been settled and the contract has been repudiated. However, SRPL has filed an arbitration petition in the high court. Since Cox & Kings owns 15% in V-hotels through Tulip Star Hotels Ltd (Tulip has a 50% stake in V-Hotels and C&K holds 30.4% in Tulip Star Hotels ltd), we believe the case judgment is positive for C&K even with the appeal by SRPL due to the property appreciation and a favourable judgment in the High Court. According to the management, the exposure will be fully recovered, irrespective of the case’s outcome. • Integration risk from acquired companies and the ability to grow C&K has made rapid acquisitions in the last few years which have helped its revenues grow multi-fold. Unsuccessful integration of any acquisition can result in revenues declining or a downfall in brand perception and lead to mounting losses. However, given the successful track record of the C&K management over the last few years we do not believe the integration risk to be a major threat for the company. • Fluctuating currency could affect reported earnings Having presence and revenue contribution from various countries can impact its consolidated numbers. The company may grow in the local currency but when converted the results may indicate a decline or lower growth depending on the currency movement. However, we expect the company to meet its EPS targets despite currency fluctuations due to its complete global exposure. Moreover, the expenditure in local currencies acts as a natural hedge for the company. GEPL Capital Research| Initiating Coverage 27 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Industry related concerns • Fluctuating exchange rates Any fluctuation in the foreign exchange rates can impact business as most regulations of most countries require tour operators to fix and quote prices on brochures throughout the offer period. This can pose a risk if the currency fluctuates and if operator’s over/under- book tours. • Brand building Being a fragmented industry, continued investments are needed to maintain a high brand recall and retain traveler, supplier and advertiser’s mind share. A past bad experience can impact future earnings for the company. • Negotiating favourable rates with travel suppliers It is important for the company and other industry players to maintain and improve margins by enhancing relations with suppliers and GDS partners and try and achieve maximum scale benefits. • Employee retention and satisfaction Being a highly service-oriented industry, people are the most important resources for the industry and hence a faster than expected attrition rate can lead to de-motivated employees and hence impact the business. • Competition The industry is intensely competitive, with the unorganised sector forming over 70% of the tourism market. Moreover, the fragmented nature of the business can lead to revenue losses. • Unforeseen conditions and the industry’s cyclical nature The industry is cyclical; hence, any changes in economic or political stability may adversely affect the industry. Events such as natural calamities (the Japanese earthquake), terrorist attacks (Mumbai 2008), and economic downturns, political disturbances (Egypt, Bahrain, and Libya) may lead to reduced demand for such products and services. Tourism is the first to be hit if an economy slows down. GEPL Capital Research| Initiating Coverage 28 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Valuations C&K is currently trading at 12.6x FY13E EPS of `14.5. This works out to a 48% discount to its historical one-year forward P/E band of 24x. The stocks has been de-rated over the last one year due to a) the decline in return ratios with a huge cash on the books, b) the huge debt position and the interest outflow with the acquisition of HBR, c) uncertainty with respect to the impact of HBR’s acquisitions on the company’s future earnings, and d) expectations of a net loss in FY12E with the consolidation of HBR’s Sept-March quarter which historically reports an operating loss. However, in view of a) the strong demand visibility with 23.7% PAT CAGR in the next two years, and b) the strong probability of an improvement in return on capital in view of successful track record of past acquisitions, we believe there is good potential upside in the stock. With concerns on its a) huge debt, b) high interest outflow, and c) acquisition integration we value C&K at a 16.8x P/E, a 30% discount to its historical one-year forward P/E band of 24x. We initiate the coverage with a Buy rating and target price of `243 (16.8x FY13E EPS). 1 year forward P/E 400 350 300 250 200 150 100 50 0 Jul-10 Jul-11 Jan-10 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Jan-11 Feb-11 Apr-11 Dec-09 Dec-10 Jun-11 Aug-11 Oct-11 Mar-10 Nov-10 May-10 Sep-10 Mar-11 May-11 Sep-11 Nov-11 Price 20.0x 25.0x 30.0x 35.0x Source: Bloomberg, GEPL Capital Research 1 year forward EV/EBITDA 900 800 700 600 500 400 300 200 100 0 Jul-10 Jul-11 Dec-09 Jan-10 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Jan-11 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Mar-10 May-10 Sep-10 Nov-10 Mar-11 May-11 Sep-11 Nov-11 Price 5.0x 15.0x 25.0x 35.0x Source: Bloomberg, GEPL Capital Research GEPL Capital Research| Initiating Coverage 29 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Company Background Cox & Kings (C&K) is one of the oldest and largest T&T companies in India. It has its operations spread across 20 countries and 164 cities, with significant presence in India, the UK, Australia, Dubai, Japan and the US. C&K’s broad distribution network and global reach offer an array of products and services and a comprehensive travel and tourism solutions for individuals and group leisure travelers. Its Indian operations accounted for ~48% of the total sales (leisure 46% and corporate 2%) in FY11. Other subsidiaries together brought in 52% of revenues in FY11 with UK (21%) and Australia (12%) having the maximum contribution. Geographical Diversification The company would further combine HolidayBreak’s local UK customer base with the strength of C&K’s outbound travel agency network. Source: Company data, GEPL Capital Research Revenue mix in FY11 8 21 48 52 12 5 4 2 India USA UK & EU Japan Australia UAE Visa Processing Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 30 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Company Structure COX & KINGS OTHER INDIA COUNTRIES Leisure Outbound Outbound Inbound Corporate Inbound UK UK Visa Processing Domestic Australia UAE Foreign Train tours Japan Exchange US UAE Source: Company data, GEPL Capital Research Indian Operations C&K’s India (domestic business) consists of a mix of 14 branch sales offices, 150 franchised sales shops (spread across 20 states covering 70 cities), and 175 general sales agents (GSAs), and preferred sales agents (PSAs). C&K’s domestic business is organized under the following four main service offerings: 1. Leisure travel Leisure travel is the core business (accounted for 46% of the consolidated revenues in FY11) through which C&K provides outbound, inbound, domestic (both foreigners and Indians) travels and train tours. a) Outbound travel: refers to sales of tour packages to customers traveling to destinations outside their home country. The outbound segment accounted for ~63% of Indian revenues in FY11. Outbound travel can be further classified into: free independent traveler (FIT) and group individual traveler (GIT). C&K sells travel-related products under the brands ‘Flexihol’ and ‘Duniya Dekho’ to these sub-segments, respectively. b) Inbound travel: refers to foreign tourists arriving (FTA’s) in India. C&K caters to high end customers in this segment for whom they provide destination management services to both subsidiaries as well as other tour operators in this segment. Inbound leisure travel comprised ~14 5% of consolidated revenues in FY11. . MICE (Meeting, Incentives, Conferences, and Exhibitions): is another concept which is fast picking up and C&K has taken great care to enhance its presence in this segment by catering to various corporate aspects like organisation conferences, arranging business meetings, managing events, setting up seminars and exhibitions. c) Domestic travel: refers to travel within the country of origin (India). C&K’s domestic travelers can be further divided into FIT and GIT. C&K sells domestic-travel-related products under the brand ‘Bharat Dekho’. C&K’s NRI division caters to travelers primarily from the Middle East, Europe, US, Australia, Sri Lanka and Hong Kong. Domestic travel comprised 4% of Indian revenues in FY10. GEPL Capital Research| Initiating Coverage 31 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 d) Train tours: refers to C&K’s 50:50 JV with the Indian Railways Catering and Tourism Corporation Ltd (IRCTC) called Royale Indian Rail Tours. The trains started in March CY10 by launching its luxury train, the Maharajas’ Express. The train has a capacity of 86 passengers in 23 coaches and offers four different itineraries. Segmental revenues in India 100% 13 14 12 10 90% 17 80% 20 19 24 22 21 70% 8 8 60% 8 8 8 50% 40% 30% 60 63 55 56 54 20% 10% 0% FY07 FY08 FY09 FY10 FY11 Outbound Domestic Inbound Non-lesiure Source: Company data, GEPL Capital Research . 2. Corporate travel Corporate travel formed 2% of FY11 consolidated revenues and involves providing organisation business travel solutions to corporate clients and to over 200 companies through a team of dedicated relationship managers. The segment provides good brand value for C&K and helps to create a strategic partnership by organisation the total travel budget for a firm and yet maintaining service standards. 3. Visa processing C&K provides visa processing services as an outsourced business solution to diplomatic missions in various countries, including Germany, Greece, Hong Kong, the UK and Singapore. The company has also started visa processing services in Dubai through a 100% subsidiary called Cox & Kings Global Services (CKGS). The company provides Dubai Visa services in India for passengers arriving and departing at Dubai International Airport. The company has formed C&K Marhaba Dubai Visa (CNKMDV) for the same. Visa services by C&K Country of operation Services Singapore Visa and passport services to India from Singapore UK Visa to France from UK Greece Visa to India from Greece India Visa services to Malaysia from India India Visa services to Singapore from India Hong Kong Visa to India from Hong Kong Dubai Visa services to India from Dubai Germany Visa services to India from Germany Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 32 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 4. Foreign exchange: C&K is a licensed Authorised Dealer-Category II under the new licensing regime and provides foreign exchange services either as a part of its leisure travel and corporate travel packages, or by itself. C&K is among the leading retail forex dealers in India. The enhanced status (from FFMC to Authorised Dealer-Category II) helps it transact outward remittance requirements. Remittances or other exchange facilities for students pursuing studies abroad, medical treatment overseas, migrant travelers, salary and wages for crews on ships visiting India, and subscriptions to overseas publications, seminars, organisation memberships are some possible business avenues that can lead to growth in this segment. International operations C&K has operations across 20 Nations with significant presence in UK, Australia, UAE (visa processing), Japan, and USA, due to its subsidiaries. The company started its Singapore operations a year back and has seen a strong traction in the outbound segment. C&K’s international operations have grown over the last few years due a series of acquisitions which has increased its presence across the value chain. The outbound business for C&K remains its core focus area (especially Europe and USA) while the inbound segment has not currently seen a sharp destinations additions. The International operations accounted for 52% of the total revenues in FY11 and with the integration of its new foreign acquisition (HolidayBreak Plc) we expect the revenue contribution from the foreign business to rise to ~65% by FY13E. Growth in International Revenues International revenue contribution in FY11 3,000 4% 10% 2,600 8% 2,500 2,233 2,000 23% Rs mn 1,500 1,318 40% 1,000 645 500 15% - USA UK & EU Japan Australia FY08 FY09 FY10 FY11 UAE Visa Processing Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 33 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Operational Highlights Subsidiary Operational Highlights Premium long-haul outbound tour operator, Cox & Kings UK Ltd, UK Target segments: wealthy retirees, Key destinations: India, Latin America etc. Provides destination management services in Europe, C&K Destination Management Services Mid-market to premium positioning, (Earlier ETN Services Ltd., UK) Services to group companies and other tour operators Outbound wholesaler selling white-label packages to other tour operators, Cox & Kings Japan Ltd., Japan Caters to business delegations and leisure travelers, Provides destination management services to Japanese travelers Outbound; mass-market-oriented travel packages, Synergies with ETN and Tempo Holidays Pty Ltd, Australia; C&K Dubai as key tourist destinations are Europe and the Middle East, Tempo Holidays NZ Ltd, New Zealand Uniquely positioned as one of the few large independent tour operators MyPlanet Australia Pty Ltd, Australia; Specialist in outbound travel, Serves tourists from Australia and New Bentours International Pty Ltd., Australia Zealand, Leading outbound tour and travel operator to Scandinavia Inbound: Service provider to a tourists from Cox & Kings India, Outbound: Cox & Kings Tours LLC, UAE Initially tapped expat Indian population; subsequently also became a local tours operator Premium outbound luxury packages for celebrity clientele, East India Travel Company Inc., USA Outbound tours to Africa, Latin America, Asia and the Middle East Quoprro Global Services Pte. Ltd., Singapore; Quoprro Global Services Pvt. Ltd., Hongkong; Provides visa processing services Cox & Kings Gmbh, Germany; Cox & Kings Hellas, Greece Cox & Kings Global Services Pvt. Ltd., India Education & Adventure: Provides residential outdoor education and adventure trips for school children as well as worldwide adventure tours, language travel and gap year trips; HolidayBreak Plc Camping: Provides outdoor family holidays on third-party owned camp-sites in Europe; Hotel Breaks: Provides domestic short break trips in the UK and the Netherlands Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 34 Equity | India | Travel & Tourism Cox & Kings Ltd. December 12, 2011 Income Statement Balance Sheet Y/E march (`mn) FY09(A) FY10(A) FY11(A) FY12(E) FY13(E) Y/E March (`mn) FY09 FY10 FY11P FY12E FY13E Equity capital 279 629 683 683 683 Total net revenues 2,869 3,992 4,967 7,070 10,963 Reserves & Surplus 1,994 7,472 11,396 11,018 12,832 COGS 0 0 0 0 0 Preference Capital 0 0 0 0 0 Net worth 2,274 8,101 12,079 11,700 13,515 Gross Profit 2,869 3,992 4,967 7,070 10,963 Minority interest 0 0 0 0 0 Employee Cost 791 994 1,296 2,591 2,721 Deffed tax liability 17 (14) (79) (79) (79) Advertising Expenses 333 357 423 1,237 1,316 Total debt 3,542 5,043 8,443 45,443 38,443 Total Liabilities & Equity 5,815 13,144 20,522 57,144 51,958 Other Expenditure 532 776 948 1,732 1,809 Net block 715 722 1,021 19,057 18,081 EBITDA 1,213 1,865 2,301 1,509 5,117 Capital WIP 103 204 641 1,641 2,141 Total fixed assets 1,928 3,101 3,837 47,928 47,452 EBITDA Margin (%) 42 47 46 21 47 Investments 457 2,584 2,112 2,112 2,112 Depreciation 96 151 186 964 1,476 Goodwill 1,110 2,175 2,175 27,230 27,230 Current Assets 5,613 9,565 17,666 21,899 26,295 Other Income 67 426 359 346 360 Inventories 35 83 86 194 751 Interest (Net) 201 270 544 1,363 1,153 Debtors 2,322 3,021 4,142 4,842 6,007 PBT 983 1,870 1,931 (472) 2,848 Cash & bank 634 3,747 9,613 12,408 13,080 Loans & advances 2,622 2,715 3,825 4,455 6,457 PBT Margin (%) 34 47 39 (7) 26 Other Current Assets 0 0 0 0 0 Tax 349 517 625 (146) 854 Current Liab. & Prov. 2,199 2,113 3,031 14,733 23,839 Creditors 688 980 961 12,978 20,123 Minority Interest 6 10 15 20 20 Other liabilities 1,147 790 1,721 1,743 2,703 Adjusted Pat after 628 1,344 1,291 (346) 1,973 Provisions 364 344 350 13 1,013 Minority Interest Net Working capital 0 0 0 0 0 Extraordinary /excep. 0 0 0 0 0 Miscellaneous Exp 0 21 17 17 17 Reported PAT 628 1,344 1,291 (346) 1,973 Total Assets 5,815 13,144 20,522 57,144 51,958 Key Ratio Cash Flow Y/E (`mn) FY09 FY10 FY11P FY12E FY13E Y/E March, (`mn) FY09 FY10 FY11P FY12E FY13E Per Share Ratios PBT 983 1,870 1,931 (472) 2,848 Fully diluted E P S 11.2 10.7 9.5 (2.5) 14.5 Add: Depreciation 96 151 186 964 1,476 Book Value 5.8 3.7 2.3 2.2 1.9 Add: Interest expense 201 270 544 1,363 1,153 Dividend per share 0.1 0.5 0.5 1.0 1.0 Less: Other Income (67) (426) (359) (346) (360) per share FCFO (2.3) 0.4 0.3 17.5 14.1 Other Adjustments (1) (155) (135) 0 0 Valuation Ratio P/E 21.1 22.5 21.9 (73.0) 12.8 Change in working capital (1,495) (926) (1,317) 10,264 5,382 P/BV 5.8 3.7 2.3 2.2 1.9 Taxes paid 349 517 625 (146) 854 EV/EBITDA 13.3 16.9 11.8 38.6 9.9 CF from operations (631) 267 224 11,920 9,645 EV/Sales 5.6 7.9 5.4 8.2 4.6 Change in fixed assets (1,368) (1,324) (922) (45,055) (1,000) Price/ FCFO per share 11.2 10.7 9.5 (2.5) 14.5 Changes in Intangible Asset 0 0 0 0 0 Growth Ratios Change in investments 8 (2,127) 471 0 0 Sales Growth 57.5 39.1 24.4 42.3 55.1 Other income 67 426 359 346 360 EBITDA Growth 66.2 53.7 23.4 (34.4) 239.1 Net Profit Growth 49.4 114.1 (4.0) (126.8) (670.6) CF from investing acti. (1,294) (3,025) (91) (44,709) (640) EPS Growth 49.4 (5.0) (11.5) NM NM Change in debt 2,245 1,502 3,400 37,000 (7,000) Common size Ratios Change in Equity capital 0 4,712 2,901 0 0 Gross Margin 0.0 0.0 0.0 0.0 0.0 Changes in Pref. capital 0 0 0 0 0 EBITDA Margin 42.3 46.7 46.3 21.3 46.7 Dividend & dividend tax (7) (73) (79) (159) (159) PAT Margin 21.9 33.7 26.0 (4.9) 18.0 Interest paid (201) (270) (544) (1,363) (1,153) Employee Cost 27.6 24.9 26.1 36.7 24.8 Other Adjustments (33) 30 66 (0) (0) S&G Expenses 88.4 91.1 91.5 82.5 88.0 Return ratios CF from financing acti. 2,004 5,901 5,744 35,478 (8,312) RoAE 32.0 25.9 12.8 (2.9) 15.7 Change in cash 73 3,113 5,866 2,669 672 RoACE 17.4 16.3 9.9 1.6 5.1 Opening cash 561 634 3,747 9,613 12,408 Turnover ratios (days) Closing cash 634 3,747 9,613 12,408 13,080 Debtors ( Days) 261.3 244.3 263.2 231.9 180.6 Creditors ( Days) 91.3 76.3 71.3 359.8 551.0 Du-Pont Analysis Inventory (Days) 4.8 5.4 6.2 7.2 15.7 (%) FY09A FY10A FY11E FY12E FY13E Net working capital 258.6 296.5 320.6 (5.7) (264.1) Net Profit Margin 21.9 33.7 26.0 (4.9) 18.0 Solvency Ratios Asset Turnover 0.5 0.3 0.2 0.1 0.2 Total Debt/Equity 1.6 0.6 0.7 3.9 2.8 Leverage 2.6 1.6 1.7 4.9 3.8 Interest coverage 3.8 5.7 3.1 0.5 2.4 ROE 32.0 25.9 12.8 (2.9) 15.7 Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 35 Equity | India | Travel & Tourism Thomas Cook India Ltd. Initiating Parent company concerns overdone… December 12, 2011 Coverage BUY CMP (`) Target (`) Investment Rationale 38.75 46.5 Dominance in the forex business in India Potential Upside Absolute Rating Thomas Cook India Ltd (TCIL) is derives 60% of its revenues from the forex business (in CY10) 20% BUY and is a market leader in forex-related services. TCIL also has the largest distribution network in India among forex players, comprising 172 locations in 72 cities mainly driven by the acquisition Market Info (as on 9th December 2011) of LKP Forex in CY06. Leisure travelers, those traveling for migration, employment and medical BSE Sensex 16,213 treatment, banks, non-bank retailers, and money-changers are its important customers. Nifty S&P 4,866 We expect this segment to witness a 10% CAGR in CY10-13E and remain the major growth driver for the company with a 55% share of consolidated revenues in CY13E. Stock Detail BSE Group B Focus on outbound segment to drive travel business growth BSE Code 500413 TCIL is amongst the top five outbound-travel operators in India and has a strong presence in NSE Code THOMASCOOK Europe and USA, both of which constitute over 25% of India’s outbound travel. We thus expect it Bloomberg Code TC IN to benefit from the growing T&T industry in India and find its outbound segment poised to Market Cap (`bn) 8.21 witness a 25.9% CAGR in CY10-13E. Moreover, a 12.9% CAGR in inbound travel and 8.2% CAGR in Free Float (%) 25% corporate travel in the same period should help the travel segment to grow by 17.3% in CY10- 52wk Hi/Lo 64 / 36 13E. Consequently, its share of travel-related business is expected to increase from 40% in CY10 Avg. Daily Volume (NSE) 429932 to 45% in CY13E. Face Value / Div. per share (`) 1.00 / 0.37 Synergy potential from the parent company . Shares Outstanding (mn) 211.9 TCIL is part of the UK based Thomas Cook Plc which creates a huge potential for synergies to Shareholding Pattern (in %) improve margins by increasing the cost competitiveness. a) Consolidated product sourcing, b) Promoters FIIs DII Others Cross-selling of products leading to an improved product mix, c) Leveraging of its global 77.13 1.78 1.51 19.58 platform to reduce advertising and marketing spend, and d) Handling tours originating from its parent company which in turn strengthens its inbound business are some of the benefits of a Financial Snapshot (`mn) strong parent company. To this end, TCIL’s management appointed an executive to the Board Y/E Mar FY10 FY11 FY12E FY13E from its parent company, in November 2008, whose sole responsibility is to integrate the Indian Net Sales 3,180 3,601 3,973 4,533 business with the global one and derive synergy benefits in the process by using existing EBITDA 763 830 959 1,157 resources. PAT 447 531 539 646 EPS 2.2 2.5 2.5 3.0 Concerns over parent company debt overdone ROE (%) 14.7 14.7 13.3 14.2 Thomas Cook Group Plc (TCG) is currently facing a cash crunch and has an outstanding debt of ROCE (%) 11.6 12.1 11.2 12.2 €1.6 bn. The cash crunch, slowdown in economy has impacted sales by 25% and has resulted in P/E 27.7 14.8 14.5 12.1 the company taking serious measures like grounding part of its fleet. TCIL has performed much EV/EBITDA 17.7 9.0 7.8 6.3 better than TCG given the fact that India is the fastest growing outbound travel market in the World. TCIL has managed to deliver strong profits despite TCG lowering its guidance thrice in Share Price Performance 130 the last 18 months. Moreover, TCIL’s debt-equity ratio stood at 0.59x in CY10 and hence we 120 believe the parent company concerns are overdone. 110 Valuation 100 90 TCIL is currently trading at 15.2x CY12E EPS and 12.7x CY13E EPS, a 33% and 44% discount 80 respectively to its historical one-year forward P/E band of 22.7x. The stock has witnessed a 20% 70 drop over the last two months on concerns of the high debt position (€1.6 bn) of its parent 60 company, TCG. Given TCIL’s outperformance over TCG and its current debt-equity ratio of 0.59x we believe the parent company concerns are overdone. Jul-11 Jan-11 Feb-11 Apr-11 Jun-11 Aug-11 Sep-11 Nov-11 Dec-10 Mar-11 May-11 Dec-11 Oct-11 Thomas Cook (India) BSE SENSEX We initiate the coverage with a BUY rating and target price of `46.5 (15.2x CY13E EPS). We see great value for the company even at its lowest one-year forward P/E since 2003 of 15.2x. Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Thomas C (%) (20.1) (20.9) (25.0) (27.4) SENSEX (%) (6.6) (3.9) (11.8) (15.7) Source: Company data, GEPL Capital Research Analyst +91-22- 6614 2690 email@example.com GEPL Capital Research 36 Sunil Sewhani Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Investment Rationale Dominance in the forex business in India TCIL is one of India’s largest foreign-exchange dealers and one of largest exporters in the world for bank notes and handles close to 60% of India’s foreign currency bank notes. It offers currency exchange, money transfer, remittance, travelers’ cheques, pay orders, wire transfers and pre-paid cards services and caters to the forex needs of various customer segments such as leisure travelers, those traveling for migration, employment and medical treatment, banks, non-bank retailers, and money-changers. Acquisition and tie-up have strengthened distribution network TCIL plans to further expand its reach through new outlets, franchisees and tie-ups. It strengthens its presence in forex business in CY06 with the merger of LKP Forex Ltd, the second largest player. The merger gave TCIL access to a network of 85 branches across 55 cities and a country-wide network of over 250 franchisees. TCIL also has a presence in Sri Lanka and Mauritius, through wholly owned subsidiaries, to cater to the forex needs of tourists. The company has also tied up with a) Apollo and Fortis hospitals to have counters inside the hospitals’ premises and b) the Indian postal department to open forex and travel related service counters. Moreover, it has been awarded contracts to set up and operate counters at the Delhi (seven years) and Cochin (five years) international airports. To continue dominating in the forex-related services The forex market is the biggest revenue contributor for TCIL (60% of consolidated revenues in CY10). TCIL is the market leader in this high volume, low-margin business and has blended commission margin of ~1.3%. We expect the forex business to witness a 10.3% CAGR in CY10-13E to `2.55 bn driven by the strong growth in outbound travel, FTA, and global inward remittances to India. Consequently, we expect the revenue share of the forex business to reduce to ~56% in CY13E from ~60% in CY10 and expect the blended commission margin to stabilise at 1.2%. Forex Revenues 3,000 14 2,551 2,500 12 2,288 2,138 10 2,000 1,900 1,725 8 % Rs mn 1,500 6 1,000 4 500 2 - 0 CY09 CY10 CY11E CY12E CY13E Forex Revenues YoY growth Source: Company data, GEPL Capital Research Plans to have a separate money-transfer vertical Global remittances into India have grown at 17.6% CAGR in the last five years. TCIL plans to have a separate money-transfer vertical. The vertical accounts for 5% of the overall profitability in its foreign exchange business. TCIL is also a principal agent in India for ‘MoneyGram’ and and has entered into a strategic tie-up with Xpress Money, a service offering of the UAE Exchange & Financial Services Ltd. TCIL is an agent for Xpress Money and offers services through its 180 locations, over 72 cities in India. This service provides opportunity to Indian families to receive money through Xpress Money from any UAE. GEPL Capital Research| Initiating Coverage 37 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Focus on outbound segment to drive travel business growth We expect commission revenues from the travel-related business to grow at 15.7% CAGR over CY10-13E, from `1.28bn in CY10 to `1.98 bn in CY13E mainly led by strong growth in the outbound segment. Consequently, TCIL’s share of travel-related business is expected to increase from 40% in CY10 to ~44% in CY13E while the outbound business contribution is expected to rise to ~23% in CY13E from ~17.5% in CY10. Outbound segment gaining momentum Despite the global recession and the H1N1 pandemic, the Indian outbound tourism sector has witnessed a 10.6% CAGR in outbound travel over the last decade and reached 12.1 mn in CY10. With the rising income levels, higher disposable income, propensity to spend and higher aspiration of Indian consumers as well as expansion of Indian corporations, the growth rate is expected to be maintained. The WTTC estimates a 14.1% CAGR in outbound visits during CY11E- 21E, to reach 45.1 mn. The outbound segment has been one of the major growth drivers within the travel segment and we expect this trend to continue even in the future. TCIL is among the top five Indian outbound- travel players with a strong presence in Europe and the US. These routes, typically long-haul, offer better margins. In fact, Europe (UK, France and Italy) and the US are among the top-ten destinations for outbound tourism in India and together account for 15.3% of total outbound visits. The leisure travel and tourism spend in the US and UK is expected to grow at 3.7% CAGR and 3.8% over CY11E-21E to US$956 bn and US$128 bn respectively. Hence TCIL is poised to be one of the biggest beneficiaries of the growth in outbound travel. The outbound segment for TCIL has grown by over 40% for the second consecutive year, surpassing the other segments. This segment is expected to grow by another +25% over the next couple of years Top 10 Outbound destinations by Indians in CY09 Singapore 7% UAE 6% UK 6% Malaysia 5% USA Others 5% 55% Thailand 5% Eqypt China 4% Italy France 3% 2% 2% Source: Company data, GEPL Capital Research Synergies from TCI acquisition to drive a historically weak inbound segment The inbound travel segment contributes ~8% to the revenues of TCIL and has historically been a weaker segment when compared to the forex or outbound division. TCIL acquired Travel Corporation India Ltd (TCI) in an all-cash deal of `1.8 bn to strengthen its position in the inbound segment and got six branches worldwide, which serve as TCIL’s selling and distribution offices. TCIL (with TCI), offers Free Independent Traveler (FITs) and Group Individual Traveler (GITs), depending upon travelers’ requirements, as most of these are sourced by overseas GEPL Capital Research| Initiating Coverage 38 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 principals, tour operators and travel agents. With the launch of several innovative products (Deccan Odyssey, Indian Maharaja), it has been able to gain market share in this segment. The company has also entered into business arrangements with foreign tour operators to serve their customers on arrival in India and hence act as Destination Management Centre (DMC). However, the growth in this segment has been slow across the industry post the CY09 economic turmoil and has hence impacted TCIL too. This has been coupled with a slower growth in the European region with the current debt crisis and risk of defaults holding back leisure travel spend by individuals. Consequently, inbound-tourist arrivals (to India) are expected register 7.8% CAGR over CY11E-21E to 11.9mn visits as per the WTTC. As over 50% of the total Foreign Tourist Arrivals (FTAs) in India are from Europe and the US, TCIL is expected to be one of the major beneficiaries due to its strong presence in these regions. The segment grew by 10% in CY10 and in the first 9 months of CY11. With the commission margins expected to stabilize at 12.5% we expect a 10% CAGR in commission revenues over CY10-13E, from `250 mn in CY10 to `333 mn in CY13E. Top 10 Countries by FTA’s in India in CY09 USA 16% Others 38% UK 14% Bangladesh 7% Malaysia Canada 3%Australia Japan France Sri Lanka Germany 4% 3% 3% 4% 4% 4% Source: Company data, GEPL Capital Research Sustained revenue stream in corporate segment The Corporate travel segment formed ~15% of TCIL’s consolidated revenues in CY10 whereby TCIL manages the travel budgets of several large, national and multinational companies. TCIL is one of the most preferred travel groups for most Indian corporate houses (the Reliance Industries group, the ADAG group, Hindustan Unilever and the Tatas), catering to over 300 clients with the top 30 clients contributing to 50% of sales in this segment. The corporate segment has witnessed a growth of 10-12% over the last 18 months, in line with the inflation rate. This segment further helps to generate MICE revenues. The company has also started passing on the direct commission benefits received from airlines to its corporate travelers and charge them with a fixed management fee for the same. As the airline commission rates have been on a decline (+7% at peak in CY07 to 5.5% in CY10 and currently at 3.5%), TCIL is not impacted due to the fixed fees charged. We expect 8.2% CAGR in commission revenues over CY10-13E, from `480mn in CY10 to `608mn in CY13E. The reasons for growth being relatively slow are: a) a conscious management decision to reduce exposure to this segment due to the higher working-capital requirement in the corporate space and b) the assumption of a 100bps decline in commission margin, from 6% in CY10 to 5% in CY13, due to an increase in competition. GEPL Capital Research| Initiating Coverage 39 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Synergy potential from parent company TCIL is part of the Thomas Cook Group Plc (TCG) company which was formed in June CY07 by the merger of Thomas Cook AG and MyTravel Group Plc. TCG mainly has operations in four regions: a) the UK and Ireland; b) continental Europe (Germany, Austria, Belgium, France, the Netherlands, Poland, Hungary, Slovenia and Slovakia); c) Northern Europe (Sweden, Norway, Denmark and Finland); and d) North America (Canada and the US). It also has a German airline operating under the Condor brand. TCG’s consolidated revenues in CY10 Airlines North America Germany 4% 8% UK incl. India Northern and M iddle East Europe 36% 11% West & East Europe 19% Central Europe 22% Source: Thomas Cook Plc. UK, GEPL Capital Research We believe TCIL has potential for synergies from the parent company, in terms of: A) Strengthening of inbound business TCIL is able to increase its inbound business by handling tours originating from the parent company. This is possible due to the strong presence of TCG in US and Europe which together form ~25% of India’s’ inbound traffic. B) An improved product mix TCIL is also able to leverage its global platform and improve its product offering resulting in a better mix enabling a better variety of products in a more cost effective manner resulting in better margins on individual packages. C) Consolidated product sourcing The large scale of operations offer better bargaining powers with vendors and enable to negotiate a better rate as well as enable year round demand due to presence in USA and India where the lean and peak season offset each other. D) Lower advertising and marketing costs With the better distribution and economies of scale it is possible to reduce the per unit spent on advertising and distribution, resulting in lower advertising and distribution costs as a percentage of sales as the size and scale of operations increase. In fact, in order to realise synergies, TCIL’s management appointed an executive to the Board from its parent company, in November CY08, whose sole responsibility is to integrate the Indian business with the global Thomas Cook business and derive synergy benefits in the process, by using existing resources. GEPL Capital Research| Initiating Coverage 40 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Concerns over parent company debt overdone TCG’s shares tanked by 75% on 22nd November, 2011 after the company said it was seeking new agreements with its main creditors. Investors fear the company would be unable to repay its debt as the announcement came within a month of TCG negotiating new funding arrangements to carry it through the slow winter months. The unrest in Tunisia and Middle East - normally the top winter destination for TCG has led to group sales dropping by 25%. The company is currently facing a severe cash crunch with its net debt soaring to €1.6 bn currently from €1.1 bn in CY10 and €930 mn in CY09. The slowdown in the economy, lean winter session and the Middle East crisis have accumulated to result in a cash crunch situation for the company. TCG’s Net debt 1,800 1,637 350 1,600 300 1,400 1,063 250 1,200 940 1,000 200 772 % € mn 800 150 600 100 400 182.5 50 200 0 0 CY07 CY08 CY09 CY10 CY11E Net debt YoY growth Source: Thomas Cook Plc. UK, GEPL Capital Research However, TCG has reduced its fleet of 41 aircraft to 35, and it hopes to raise £200 mn ($312 mn) by selling assets including its stake in Britain’s part-privatized air traffic control service. In any given case, TCIL has performed much better than TCG given the fact that India is the fastest growing outbound travel market in the World. TCIL has managed to deliver strong profits despite TCG lowering its guidance thrice in the last 18 months. Moreover, TCIL’s debt-equity ratio stood at 0.59x in CY10 and hence we believe the parent company concerns are overdone GEPL Capital Research| Initiating Coverage 41 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 New growth initiatives The growth in India’s T&T industry over the last decade, the potential for growth over the next few years, the strong domain expertise in the travel business and its strong distribution network are some of the factors that have led to TCIL’s growth in the last couples of years. To capture the future growth and expand its footprint, TCIL has undertaken two new major growth initiatives- the visa-processing and passport business and the insurance business. Visa-processing and passport- a ticket for future growth Thomas Cook Visa and Passport Services (TCVPS), was set up in CY08 by TCIL to cater to clients needs of visa and passport services. TCVPS has set up an end-to-end, online tracker to track the various stages of the documentation process, facilitated by bar-coded documents and can be used by internal and external customers. Some foreign missions are also moving towards e-visas and these can be processed only by approved visa agents, thereby boosting TCIL’s opportunities in this vertical. The business has established itself internally over the last three years and currently seeks to provide third-party services to the travel industry. By leveraging on its technology in an otherwise unorganized market, TCVPS intends to become the largest organised player in the segment. Insurance business – securing future growth The company is also focusing on the insurance business as a growth vertical in the future. It plans to capitalise the strong synergy potential available from its strong distribution network and a strong travel business (leisure, corporate and student) for the distribution of travel insurance. TCIL has tied-up with TATA-AIG General Insurance to offer various travel-related insurance products, including customised products such as wallet and credit card loss coverage, to customers. To leverage the brand and the network, TCIL has tied-up with Bajaj Allianz Life Insurance Company to distribute various life-insurance products. GEPL Capital Research| Initiating Coverage 42 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Financials Revenues to grow at 12.6% CAGR in CY10-13E We anticipate a 12.6% CAGR in CY10-13E in TCIL’s consolidated revenues to `4.5 bn driven by a 15.7% CAGR in the travel business and 10.3% CAGR in the forex business in the same period. Due to the higher CAGR of the travel business (8.2% CAGR in corporate, 10.0% CAGR in inbound and 23.7% CAGR in outbound), the contribution to consolidated revenues is expected to rise from 40% in CY10 to ~44% in CY13E. Revenue mix in CY10 Revenue mix in CY13E Outbound Outbound 17% 23% Inbound 8% Inbound Foreign Foreign 7% Exchange Corporate Exchange 57% 15% 60% Corporate 13% Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research However, we do expect a 60bps decline in the blended margins for the travel business over CY10-13E to 7.9%, led by a lower corporate margin and outbound margin. In the forex business, we expect the blended commission margin to stablise near 1.2%. Segmental revenues Segmental margins in CY13E 5,000 4,500 14.0 12.5 4,000 12.0 10.3 3,500 1,982 10.0 3,000 1,685 1,464 Rs mn 1,280 8.0 2,500 % 920 6.0 5.0 2,000 1,500 4.0 2,288 2,551 1,000 1,900 2,138 1.2 1,725 2.0 500 0 0.0 CY09 CY10 CY11E CY12E CY13E Foreign Corporate Inbound Outbound Exchange Financial Services Travel Related Services Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 43 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Outbound segment to drive growth in travel business The outbound segment has been one of the major growth drivers within the travel segment and we expect this trend to continue even in the future. The outbound segment grew by 52% in CY10 driven by a 41% growth in turnover in CY10 which by passed the other segments (Inbound 10%, Forex 10% and Corporate 45%) in the same year. While the corporate segment grew strongly in CY10, it has witnessed a 10% growth so far while the outbound segment has in the last 9 months registered another 40% growth. Segmental travel related revenues Segmental CAGR in CY10-13E 2,500 23.7 25.0 2,000 20.0 1,500 1,041 Rs mn 833 15.0 683 % 10.0 10.3 1,000 550 8.2 10.0 362 333 275 303 250 500 228 5.0 480 506 550 608 331 0 0.0 CY09 CY10 CY11E CY12E CY13E Corporate Inbound Foreign Outbound Exchange Corporate Inbound Outbound Source: Company data, GEPL Capital Research Source: Company data, GEPL Capital Research Consequently we expect the outbound segment to register a 23.7% CAGR in CY10E-13E to `1.04 bn. We expect the corporate segment to register 8.2% CAGR over CY10-13E, to `608mn, despite a 15% improvement in turnover, mainly due to a 100bps decline in margins over CY10-13E to 5%. In the inbound-travel segment, we expect 10.0% CAGR in commission revenues over CY10-13E, to `333 mn, with steady margins. EBITDA margin to improve 150bps by CY13E We expect a 150bps improvement in EBIDTA margin over CY10-13E to 25.5% led by scale benefits and increased operational efficiencies with better distribution of overhead costs. Consequently, we expect 14.9% CAGR in EBIDTA over CY10-13E, to `1.16 bn in CY13E. EBITDA and EBITDA margins 1,400 26 25.5 26 1,200 25 1,000 25 24.1 24.1 24.0 Rs mn 800 24 % 23.1 24 600 23 400 23 200 22 0 22 CY09 CY10 CY11E CY12E CY13E EBITDA EBITDA margin Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 44 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Net profits to record 11.1% CAGR in CY10-13E The higher rate of interest of 11% despite partial debt repayment (`450 mn over next two years) and a lower other income should partially negative the impact of higher margins. We expect the Profit after tax (PAT) to witness a 11.1% CAGR in CY11E-13E, from `471 mn in CY10 to `646 mn in CY13. Consolidated net profit after tax 700 646 100 600 531 539 80 471 500 60 400 40 Rs mn % 250 300 20 200 0 100 -20 0 -40 CY09 CY10 CY11E CY12E CY13E PAT YoY growth Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 45 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Key Risks Company Related Risks Parent company Concerns Thomas Cook Plc (TCG) is currently facing a cash crunch and has an outstanding debt of €1.6 bn. The cash crunch, slowdown in economy has impacted sales by 25% and has resulted in the company taking serious measures like grounding part of its fleet. TCIL has performed much better than TCG given the fact that India is the fastest growing outbound travel market in the World. TCIL has managed to deliver strong profits despite TCG lowering its guidance thrice in the last 18 months. Moreover, TCIL’s debt-equity ratio stood at 0.59x in CY10 and hence we believe the parent company concerns are overdone Delisting rumors Investors have been worried with rumors of delisting of TCIL. One possible reason for this could be that TCIL is the only listed subsidiary of TCG making it a possible delisting candidate. However, we do not think the possibility of delisting exists in the future. Even though the TCG management holds 77% stake in TCIL, the law requires them to increase stake to 95% before delisting. Furthermore, given the high debt of TCG (€1.6 bn) and the current cash flow crunch that the company is facing with the slowdown in European tourism, we believe the possibility of increasing a stake in TCIL is unlikely. Consequently, we believe that the management would reduce its stake to 75% in the next one year as per the stipulated norms of the SEBI and would not delist. Higher penetration of credit card usage amongst Indians Since TCIL derives 60% of its business from the forex division, 35% of which is retail, the higher penetration of credit cards and decline in use of travelers’ cheques can hamper the revenues. With the increasing penetration of credit cards and the rise in facilities and limits offered to customers, people could shift from using traveler’s cheques to credit cards on foreign trips. However, we do not expect TCIL to lose out on its retail clients due to the unfavourable currency conversion rates that credit card companies offer as well as the mark-up charged by banks for using credit cards. Lower commission rates from airlines With the rising fuel price burden and mounting losses, airlines have reduced their commission rates to travel agents and tour operators from 7-7.5% to 5.5% last year which has currently dropped to 3%. Moreover, there are talks of bringing down the commission rates to 0% and selling tickets through their respective websites. We do not think this is possible as consumers prefer to use a Global Distribution System (GDS) system to compare prices while purchasing tickets and prefer to make informed decisions. Also, TCIL now passes on its commission discounts to corporate clients and other customers and charges a fixed management fees and charges for the airline ticket sales. Hence, even if the commission rates drop further, it would not impact the volumes or the revenues of TCIL GEPL Capital Research| Initiating Coverage 46 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Industry related Risks Fluctuating exchange rates Any fluctuation in the foreign exchange rates can impact business as most regulations of most countries require tour operators to fix and quote prices on brochures throughout the offer period. This can pose a risk if the currency fluctuates and if operator’s over/under-book tours. Moreover, though the strengthening rupee can lead to an increase in the outbound tourists from India, inbound tourism would be hit as India would become relatively expensive. Brand awareness and enhancing Continued investments are needed to maintain a high brand recall and retain traveler, supplier and advertiser’s mind share as the industry is highly fragmented. A bad experience in the past can have a domino effect on the brand image of the company and impact future earnings. Negotiation of favourable rates with travel suppliers It is important for the company and other industry players to maintain and improve margins by enhancing relations with suppliers and GDS partners and try and achieve maximum scale benefits. Employee retention and satisfaction Being in a highly service-oriented industry, people are the most important resources for the industry and hence any faster than expected attrition rate of de-motivation by employees can impact the business. Competition The industry is intensely competitive, with the unorganised sector forming over 70% of the tourism market. Moreover, the fragmented nature of the business can lead to revenue losses. Competition also includes internet distributors and low-cost airlines, which may lead to a fall in demand for traditional package tours. Unforeseen conditions and the industry’s cyclical nature The industry is cyclical; hence, any changes in economic or political stability may adversely affect the industry. Events such as natural calamities (the Japanese earthquake), terrorist attacks (Mumbai 2008), economic downturns, political disturbances (Egypt, Bahrain, Libya) may lead to reduced demand for such products and services. Tourism is the first to be hit if an economy slows down. GEPL Capital Research| Initiating Coverage 47 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Valuations TCIL is currently trading at 15.2x CY12E EPS and 12.7x CY13E EPS, a 33% and 44% discount respectively to its historical one-year forward P/E band of 22.7x. This is on account of a 20% drop on the stocks over the last two months on concerns of the debt positions of its parent company TCG. TCG has revised its earning guidance thrice in the last three months and has a net debt of €1.6 bn. Hence TCG which is listed on the LSE also witnessed a 75% intraday drop. We however believe, TCIL has performed much better than TCG aided by the fact that India is the fastest growing outbound travel market in the World. Moreover, TCIL’s debt-equity ratio stood at 0.59x in CY10 and hence we believe the parent company concerns are overdone. We initiate the coverage with a BUY rating and target price of `46.5 (15.2x CY13E EPS). We see great value for the company even at its lowest one-year forward P/E since CY03 of 15.2x. In view of its well diversified business model with strong growth prospects in the forex and travel business and the parent company concerns overdone, we expect the stock to perform well over the course of the next year. 1 year forward P/E 140 120 100 80 60 40 20 0 Jul-06 Nov-01 Jun-02 Jan-03 Aug-03 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-04 May-05 Dec-05 Mar-11 Oct-04 Price 10.0x 20.0x 30.0x 40.0x Oct-11 Source: Bloomberg, GEPL Capital Research 1 year forward EV/EBITDA 120 100 80 60 40 20 0 Jul-06 Nov-01 Jun-02 Jan-03 Aug-03 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-04 May-05 Dec-05 Mar-11 Oct-04 Oct-11 Price 8.0x 12.0x 16.0x 20.0x Source: Bloomberg, GEPL Capital Research GEPL Capital Research| Initiating Coverage 48 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Company background TCIL is one of the largest integrated T&T operators in the country with operations spread across 72 cities in 190 locations in India through its own branches and has additional presence through its general sales agents (GSAs), 184 preferred sales agents (PSAs) and 72 franchised offices. TCIL has a presence in six other countries (USA, Spain, UK, Japan, Nepal and Germany), apart from its subsidiaries in Mauritius and branches in Sri Lanka. TCIL is part of the Thomas Cook Group Plc (TCG), - a leisure travel group with sales of ~£9 bn, 19 mn customers, 30,000 employees, a fleet of 97 aircraft, a network of over 3,000 owned or franchised travel stores and a number of hotels and resort properties. TCIL : Change in Promoters CY07 CY08 CY09 • Dubai Financials (LLC) acquired entire stake of • Thomas Cook Group Plc Thomas Cook UK, the was created with the holding company of TCIL. merger of MyTravel • Thomas Cook group Group Plc and Thomas acquired 100% of Thomas Cook AG. Cook International • TCIL acquired LKP Forex Markets (TCIM), TCIL’s and TCI. holding company, from • Thomas Cook Group Plc Dubai Financials (LLC). is listed on the London • TCIL sold entire stake in Stock Exchange. Hindustan Cargo Ltd (HCL). Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 49 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 TCIL earns revenues from two segments: 1) Foreign exchange and financial services (60% of revenues) 2) Travel and related services (40% of revenues) Company structure Thomas Cook India Ltd (TCIL) Forex Business Travel Business (60%) (40%) Wholesale Retail Leisure Corporate (65-70%) (30-35%) (62.5%) (37.5%) Inbound Travel Outbound (30%) Travel (70%) Source: Company data, GEPL Capital Research 1) Foreign exchange and financial services (forex) TCIL has been granted an authorised Dealers License (Category II) to deal in foreign exchange by the Reserve Bank of India (RBI). TCIL provides travel-related forex and payment solutions where in it offers travelers’ cheques, credit cards, pre-paid international cards, inbound and outbound remittances, money transfers and financial services related to travel insurance. It is one of India’s largest foreign-exchange dealers and one of largest exporters in the world for bank notes. It handles 60% of India’s foreign currency bank notes and derived 60% of its consolidated revenues from this segment in CY10. The forex division of the company can further be classified into two categories depending on its nature of business: A. Wholesale business: This segment forms 65-70% of total forex revenues (39-42% of total revenues). TCIL provides currency buying and selling services to institutions (FFMCs, RMCs, etc) and collects, packages and ships forex to its three international locations. The segment is a steady source of revenue with IT companies contributing 40% to its volumes with revenues generated by the spread between the buy and sell rates. B. Retail business: This segment accounts for 30-35% of total forex (18-21% of total revenues) revenues. The company provides forex services to travelers visiting India and/or to outbound travelers. With the merger of LKP Forex CY06, the company has managed to increase its retail market share to 55% (35% pre-merger) due to its enhanced branch network. GEPL Capital Research| Initiating Coverage 50 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Authorised dealer category Category Entities Activities Authorised Dealer - Category I Commercial Banks All current and capital account transactions according to State Co-op Banks RBI directions issued from time-to-time. Urban Co-op Banks Authorised Dealer - Category II Upgraded FFMCs Specified non-trade related current account transactions Co-op Banks and all the activities permitted to FFMC and any other Regional Rural Banks (RRBs) activity as decided by the Reserve Bank Others Authorised Dealer - Category III Select Financial and other institutions Transactions incidental to the foreign exchange activities undertaken by these institutions Full Fledged Money Changers (FFMC) Department of Posts Purchase of foreign exchange and sale for private and Urban Co-op Banks business visits abroad. Other FFMCs Source: Company data, GEPL Capital Research 2) Travel-related services Thomas Cook Group Plc is a leading international leisure travel group, created by the merger of MyTravel Group Plc and Thomas Cook AG in June CY07. Being part of a strong parent company, TCIL too has been increasing its presence in the travel related segment (40% of revenues in CY10). TCIL also offers travel-related services under two broad categories: a) leisure travel and b) corporate travel. 1. Leisure travel: Under this segment TCIL offers inbound and outbound holidays through customised individual tours, group escorted holidays and MICE (meeting, incentive, conference and exhibition) arrangements. The leisure travel segment accounted for 25% of the total revenues in CY10. The leisure travel business can be further classified into A) Outbound leisure travel: This segment accounted for 70% of leisure revenues (17% of total revenues) in CY10, hence dominating the leisure travel segment. In this segment, TCIL focuses on long-haul routes like Europe and US, who are typically high-ticket transactions and offer, better margins. B) Inbound leisure travel: This segment accounted for 30% of the leisure revenues (8% of total revenues) in CY10. Under the inbound leisure travel segment TCIL caters to tourists coming to India typically sourced by overseas principals, tour operators or travel agents routed through its offices in the European Union and the USA. Currently, its inbound customers are primarily from the US and Europe. The company also acquired Travel Corporation India (TCI) in CY06 which offered individual and group tours. 2. Corporate travel: The Company also operates under the corporate segment where it manages the travel budgets of ~1400 corporate. It provides passport and visa services, air and hotel reservations, insurance, forex, conference arrangements, and land arrangements specialising in tailor-made travel policies for each corporate entity. The Corporate travel segment accounted for 15% of the total revenues in CY10. GEPL Capital Research| Initiating Coverage 51 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 Income Statement Balance Sheet Y/E march (`mn) FY09(A) FY10(A) FY11(A) FY12(E) FY13(E) Y/E March (`mn) FY09 FY10 FY11P FY12E FY13E Equity capital 211 212 212 212 212 Total net revenues 2,652 3,180 3,601 3,973 4,533 Reserves & Surplus 2,803 3,190 3,620 4,060 4,607 COGS - - - - - Preference Capital 6 6 0 0 0 Gross Profit 2,652 3,180 3,601 3,973 4,533 Net worth 3,020 3,407 3,832 4,272 4,819 Employee Cost 1,073 1,290 1,471 1,655 1,862 Minority interest 0 0 0 0 0 Deffed tax liability (29) (76) (76) (76) (76) Advertising Expenses 113 206 220 238 272 Total debt 1,700 2,016 2,066 1,866 1,616 Other Expenditure 829 921 1,080 1,121 1,243 Total Liabilities & Equity 4,720 5,423 5,898 6,138 6,434 EBITDA 637 763 830 959 1,157 Net block 714 955 964 1,000 1,020 EBITDA Margin (%) 24 24 23 24 26 Capital WIP 24 66 66 66 66 Total fixed assets 2,192 2,475 2,484 2,520 2,540 Depreciation 116 135 141 164 180 Investments 356 155 155 155 155 Other Income 94 295 330 215 165 Goodwill 1,454 1,454 1,454 1,454 1,454 Interest (Net) 210 211 227 205 178 Current Assets 4,658 5,266 6,254 6,611 7,274 Inventories 0 0 0 0 0 PBT 405 712 792 805 964 Debtors 2,071 2,225 2,417 2,776 3,229 PBT Margin (%) 15 22 22 20 21 Cash & bank 1,501 1,601 2,406 2,202 2,182 Tax 155 265 262 266 318 Loans & advances 1,086 1,440 1,431 1,633 1,863 Minority Interest - - - - - Other Current Assets 1,086 1,440 1,431 1,633 1,863 Current Liab. & Prov. 2,456 2,397 2,919 3,071 3,458 Adjusted Pat after 250 447 531 539 646 Creditors 1,972 1,821 2,163 2,271 2,544 Minority Interest Other liabilities 334 458 395 435 497 Extraordinary Provisions 150 117 361 365 417 - - - - - /exceptional Net Working capital 0 0 0 0 0 Miscellaneous Exp 0 0 0 0 0 Reported PAT 250 447 531 539 646 Total Assets 4,720 5,423 5,898 6,138 6,434 Key Ratio Cash Flow Y/E (`mn) FY09 FY10 FY11P FY12E FY13E Y/E March, (`mn) FY09 FY10 FY11P FY12E FY13E Per Share Ratios PBT 405 736 792 805 964 Fully diluted E P S 1.2 2.2 2.5 2.5 3.0 Add: Depreciation 116 135 141 164 180 Book Value 2.3 3.8 2.0 1.8 1.6 Add: Interest expense 210 211 227 205 178 Dividend per share 0.4 0.4 0.4 0.4 0.4 Less: Other Income (94) (295) (330) (215) (165) per share FCFF (1.8) (0.2) 4.3 1.3 2.6 Other Adjustments (1047) (6) 0 0 0 Valuation Ratio P/E 27.8 27.7 14.8 14.5 12.1 Change in working capital 181 (568) 339 (409) (297) P/BV 2.3 3.8 2.0 1.8 1.6 Taxes paid 155 265 262 266 318 EV/EBITDA 11.2 17.7 9.0 7.8 6.3 CF from operations (384) (52) 908 285 542 EV/Sales 2.7 4.2 2.1 1.9 1.6 Change in fixed assets (152) (418) (150) (200) (200) Price/ FCFE per share (18.1) (251.6) 8.6 27.5 14.5 Changes in Intangible Asset 0 0 0 0 0 Growth Ratios Change in investments (354) 201 0 0 0 Sales Growth (14.5) 19.9 13.3 10.3 14.1 Other income 94 295 330 215 165 EBITDA Growth (31.9) 19.7 8.9 15.5 20.6 Net Profit Growth (33.0) 88.4 12.7 1.5 19.8 CF from investing acti. (411) 78 180 15 (35) EPS Growth (49.0) 88.1 12.7 1.5 19.8 Change in debt (904) 315 50 (200) (250) Common size Ratios Change in Equity capital 1670 15 0 0 0 Gross Margin 0.0 0.0 0.0 0.0 0.0 Changes in Pref. capital 0 0 0 0 0 EBITDA Margin 24.0 24.0 23.1 24.1 25.5 Dividend & dividend tax (93) (93) (99) (99) (99) PAT Margin 9.4 14.8 14.7 13.6 14.2 Interest paid (210) (211) (227) (205) (178) Employee Cost 40.4 40.6 40.8 41.6 41.1 Other Adjustments 15 47 (0) (0) (0) Ad spend 95.7 93.5 93.9 94.0 94.0 Return ratios CF from financing acti. 478 73 (276) (504) (527) RoAE 9.5 14.7 14.7 13.3 14.2 Change in cash (317) 100 812 (205) (20) RoACE 7.9 11.6 12.1 11.2 12.2 Opening cash 1819 1501 1601 2406 2202 Turnover ratios (days) Closing cash 1501 1601 2406 2202 2182 Debtors ( Days) 247.5 246.6 235.3 238.5 241.8 Creditors ( Days) 301.0 286.4 262.5 268.5 260.3 Du-Pont Analysis Inventory (Days) 0.0 0.0 0.0 0.0 0.0 (%) FY09A FY10A FY11E FY12E FY13E Net working capital 108.9 113.0 111.4 104.1 119.6 Net Profit Margin 9.4 14.1 14.7 13.6 14.2 Solvency Ratios Asset Turnover 0.6 0.6 0.6 0.6 0.7 Total Debt/Equity 0.6 0.6 0.5 0.4 0.3 Leverage 1.6 1.6 1.5 1.4 1.3 Interest coverage 1.8 2.8 3.0 3.3 4.3 ROE 9.5 14.7 14.7 13.3 14.2 Source: Company data, GEPL Capital Research GEPL Capital Research| Initiating Coverage 52 Equity | India | Travel & Tourism Thomas Cook India Ltd. December 12, 2011 NOTES Recommendation Rationale Recommendation Expected Absolute Return (%) over 12 months BUY >20% ACCUMULATE <20% and >10% NEUTRAL <-10% and <10% REDUCE >-10% and <-20% SELL >-20% Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation. GEPL CAPITAL Pvt Ltd (formerly known as Gupta Equities Pvt. Ltd.) Head Office: D-21/22 Dhanraj mahal, CSM Marg, Colaba, Mumbai 400001 Reg. Office : 922-C, P.J. Towers, Dalal Street, Fort, Mumbai 400001 Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Name : Sunil Sewhani Sector : Travel & Tourism Disclaimer: This report has been prepared by GEPL Capital Private Limited ("GEPL Capital "). GEPL Capital is regulated by the Securities and Exchange Board of India. This report does not constitute a prospectus, offering circular or offering memorandum and is not an offer or invitation to buy or sell any securities, nor shall part, or all, of this presentation form the basis of, or be relied on in connection with, any contract or investment decision in relation to any securities. 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"Tourism Industry_Initiating_Coverage_Cox _ Kings Thomas Cook"