We initiate coverage on Cox & Kings (C&K) with a BUY based on a combination of robust fundamentals and attractive valuations. We expect >20% growth in C&K’s India business combined with stable margin. Acquisition of UK-based HBR brings defensive education travel business, which is in contrast to the more discretionary spending-oriented leisure businesses. Full fledged HBR consolidation from current year is likely to lead to ~5x jump in FY13 PAT and another ~26% yoy jump in FY14. Stock currently trades at the lower end of its historic PE & EV/EBDITA ranges and with the US$138mn equity infusion in HBR parent company, we believe debt concerns have been largely allayed. We project cumulative free cash flows of ~Rs7bn over FY13/14 and recommend BUY with 9-mth target price of Rs185. Key risks to our call include steep FX fluctuation which might impede India outbound travel and significant slowdown in HBR portfolio due to accelerated economic stress in UK/Europe.
India business to clock healthy 21% revenue cagr over FY12-14
C&K India business is dominated by outbound travel which accounts for ~67% of its revenues while domestic tourism and other services account for the rest. India segment revenues posted a robust 26% cagr over past 4 years and we expect the segment to clock a healthy 21% rise in sales over FY13/14.
HBR acquisition expands product offerings, offers synergies to exploit
C&K acquired UK-based HBR for EV of US$730mn and consolidated it wef September 2011 which impacted FY12 PAT as bulk of HBR profits accrue in the Apr-Sep period. HBR brings relatively defensive segments like Education, Camping to C&K fold which sits in contrast to the more discretionary spending oriented leisure businesses. We expect HBR to account for 58% of consolidated revenues and see potential synergies to cross sell HBR assets to outbound clientele from India and other geographies. Ex-India, ex-HBR business is projected to grow at ~10% as we factor in relatively soft spending environment across key markets especially Japan.
|Y/e 31 March (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||24.4||68.7||109.4||5.2|
|yoy growth (%)||(3.6)||(67.8)||399.0||25.9|
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