Cox and Kings - Express Idea

CMP Rs191, Target Rs220, Upside 15.2%

Holidaybreak acquisition-one-off PAT impact to reverse in FY13

Cox & Kings (C&K) acquired UK-based Holidaybreak (HBR), an education and activity travel group with market leading positions in UK and other major European markets in late Q2 FY12. Acquisition was made for an EV of US$730mn in a business that generated ~US$100mn EBIDTA in FY11 (Oct-Sep). HBR business has a strong seasonality with bulk of profits accruing in H2 (Apr-Sep). For instance, H1 FY11 saw headline pre-tax loss of US$28mn whereas FY11 posted headline PBT of US$53mn. Since C&K would consolidate the loss making Oct-Mar period, we expect FY12 PAT to be adversely impacted but situation would reverse with full year consolidation in FY13.

Holidaybreak: resilient model with leadership position

Holidaybreak offers educational and activity-based tours with FY11 group revenues of US$711mn and EBIDTA of ~14%. It has 4 segments-Education, Hotel breaks, Adventure and Camping with the first two accounting for over ~54% of revenues and 57% of EBIDTA in FY11. Within the education segment, PGL is the leader in outdoor residential trips for students with centres spread across Europe, largely on ownership basis. Acquisition would fortify C&K’s revenue mix with the addition of a sturdier education business to the high growth leisure travel business.    

India outbound growth to remain robust

Of the nearly 20% of the 13.6mn outbound travelers from India who bought a travel package in 2011, C&K accounts for ~50% share; it expects India outbound to grow at a robust 30% yoy. Over the FY09-12 period, C&K India revenues have probably witnessed a ~26% cagr and we build in a healthy ~22% compounded growth over FY11-14.

Margins to improve, valuation appears attractive: BUY

Q3 FY12 EBIDTA was impacted by HBR merger which has a seasonally lean period in Oct-Mar while higher interest expense took its toll on PAT. However, the impact would reverse from FY13 upon full year consolidation. C&K would drive synergies on both revenue (C&K outbound generates European hotel bookings worth US$51mn to whom Hotel break bookings can be marketed) and cost fronts through group buying. Expect consolidated margin, return ratios to improve as HBR is fully integrated; valuations at 8.4x EV/E appears attractive. Recommend BUY.

Valuation summary