Cox & Research Retail Kings Ltd.

Initiating Coverage

Tours & Travel 30 December 2011

Tours & Travel

Cox & Kings Ltd.

BUY: Rs 155

Target: Rs 244

Cox & Kings Ltd. (C&K), a 250 years old brand, is one of the leading Tours and Travel Company providing an array of travel related services viz destination management, Domestic & International Holiday packages, Luxury travels, Businesses and MICE, Forex and Insurance etc. The company has a presence in more than 19 countries through its various direct and indirect subsidiaries. The company has recently acquired Holidaybreak PLC, an UK based education and activity travel group having dominant presence in European market for price consideration of $530 million. We expect huge business synergies with this acquisition. The outbound travel is the largest revenue vertical and a high growing segment for C&K. With rising affordability and emergence of cheap holiday destinations especially in South-East Asian region, we expect C&K to be major beneficiaries going forward. We initiate coverage on the stock with a 'BUY' rating.

Investment Rationale:
Holidaybreak Acquisition: Deriving Business Synergies:
Cox & Kings completed the acquisition process of a British specialist travel company Holidaybreak Plc for USD 530 million in an all cash transaction. The deal is looked upon as a game changer for C&K. Holidaybreak is an education, adventure, camping and activity travel group with dominant presence in UK and other major European markets. It has over 15 long established and widely recognized brands with leading niche positions in the travel sector. Interestingly, nearly 80% of the group's operating profit for fiscal year 2010 was driven by specialty travel verticals of education, adventure and camping. C&K's outbound UK and European travel businesses, will specially benefit from greater access to certain markets and customers as a result of the acquisition where Holidaybreak is a market leader. The acquisition will also help C&K to effectively counter the cyclical nature of travel business, as Holidaybreak's revenues typically peak in July-August and September, while C&K' business peaks from March to the end of June. It appears to be a symbiotic relationship between the two companies reducing C&K's dependence o n l eisu re travel si mult aneously capital izi ng on Holidaybreak's strength in the education segment. It can now look to draw students from captive base of customers in India, Japan, Australia, New Zealand and China to fill Holidaybreak's school tours and camps during off-seasons. Valued at about Rs 2,250 crore, the acquisition is funded through a mixture of debt and equity. It is expected to become accretive from day one because the company is already cash generative. It generates free cash after capex and its average profit before tax (PBT) is around 30 to 35 million pounds every year. C&K will retain the Holidaybreak's brand since it has a great brand recall and is a market leader in education and adventure tourism so it will like to take advantage of the brand equity of Holidaybreak.
FINANCIAL SUMMARY Year 2010A 2011A 2012E 2013E Sales (Cr) 399.7 495.6 591.6 728.6 EBITDA (Cr) 186.9 229.0 275.1 341.7 PBT (Cr) 186.5 193.2 219.9 283.6 PAT (Cr) 133.8 129.1 153.9 198.5 EPS (Rs) 10.6 9.5 11.3 14.5 DPS (Rs) 0.5 0.5 0.8 1.0 BV (Rs) 64.4 88.5 98.9 112.2

STOCK DATA BSE Code NSE Code Bloomberg Code 52 Week High / Low (Rs.) Face Value (Rs.) Diluted Number of Shares (Crore.) Market Cap. (Rs Crore.) Avg. Yearly Volume SHAREHOLDING PATTERN (%) Particulars Sept. FY11 Jun. FY11 58.7 21.5 9.0 7.7 3.2 100.0 Mar. FY11 58.7 22.7 8.6 6.6 3.4 100.0 Dec. FY10 58.7 25.8 6.1 6.0 3.5 100.0 533144 COX&KINGS COXK IN 277 / 154 5 13.65 2239 87367

Promoters 58.7 FII's 18.9 Other Ins titutions 8.2 Public & Others 11.1 Custodian 3.2 Total 100.0

RETURNS STATISTICS (%) 3M Cox & Kings Sensex (27.8) (6.9) 6M (15.5) (16.9) 12 M (40.6) (23.3)

FINANCIAL RATIOS Particulars 2010A 14.6 2.4 11.1 5.2 4.9 25.8 22.4 2011A 16.4 1.8 8.7 4.0 4.3 12.8 14.6 2012E 13.7 1.6 7.1 3.3 3.6 12.0 13.3 2013E 10.7 1.4 5.7 2.7 2.9 13.8 14.8 PE (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) Mcap/Sales (x) ROE (%) ROCE (%)

RELATIVE TO SENSEX
C o x & K ings Lt d S ensex

12 5 90 55 20 De c -10 Mar-11 Jun-11 Se p-1 1 De c -1 1

RAJESH GUPTA - Research Analyst Regd. Office: SBICAP Securities Limited, 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005 SBICAP Securities Lim ited December 30, 2011 1 For a list of our branches refer to our website: www.sbicapsec.com

Cox & Kings Ltd.

Tours & Travel

Prominent margin business

C&K's operational efficiency lies in its high EBITDA margins which are as high as 46% in congruence with high PAT margins which are over 25%. The company avails as good as 40-50% discounts from hotels, airlines and other travel partners on account of advance bookings. In terms of expenditure, company shells out its majority of the pennies on its human resource and advertisement expenses which comprises nearly 26 and 9 percent of total revenue respectively.
EBDITA MARGIN (%) & NET PROFIT MARGIN (%)
EBDITA Margins (%) 59 41 23 5 2010A 2 011A 2012E 2013E Net Profit Margin (%)

EXPENSE BREAKUP FOR FY11

Other Expenditure 21% Employee Exp. 48%

Rent 7% Travelling & Conveyance 8% Advertisement 16%

Source: SBICAP Securities Research

Source: Company

All Set to Grab Indian Tourism's Infinite Opportunities

After combating tough global conditions posed by economic crisis, T&T sector has made a strong comeback generating some very powerful GDP and employment numbers. Growth in tourism sector outpaced economic growth but the sector still remains unpenetrated. The industry in India is expected to grow at a CAGR of 10.2% over 20102020 from USD 42 bn in 2010 to USD 111 bn in 2020. The Indian Tourism Industry is extremely fragmented with majority being unorganized players. There are as many as 25000 independent travel agents, nearly 5000 unorganized tour operators and this number goes down to as low 20 when speaking about organized players in this sector. C&K with its varied product portfolio, market customized-specialized services, strong network presence in major tourist attractions worldwide and integrated business model possesses immense scope to grab a significant market share in the industry.
T&T MARKET SIZE USD (BILLION)
Australia UK USA India China 0 90 42 113 180 270 360 450 540 50 89 511

INDIAN TOURISM: PLAYER SEGMENTATION

Organised Players = 20 Unorganised Players = 5000 Independent Travel Agents = 25000

Source: WTTC 2010 (World Travel & Tourism Council)

Source: Company

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The pie of organized players is increasing courtesy:

n n n

Growing demand for customized, convenient and flexible traveling options Professional Competence and strategic industry tie-ups Diseconomies of scale for unorganized players in treating tailor made individual requests

Outbound Tourism: Leading the way ahead

C&K derives major chunk of revenues (62-65 percent) from outbound travel especially South East Asia. India is one of the rapidly growing outbound tourism markets with outbound traffic growing by 13 percent until 2010. C&K's outbound business is expected to grow at 30-35 percent CAGR till 2015 vis-a-vis 12 percent CAGR of the total Indian outbound tourism. In 2010, the most outbound tourists visited Singapore, Malaysia, the United Arab Emirates and Thailand. Following are the factors contributing to the expansion of outbound tourism in these countries:
n

Increase in the disposable income and rising aspirations of the Indian middle class families. Change in the consumer preferences towards foreign trips from domestic tours. Affordable air fares. Competitive tour packages offered by tour operators ~ C&K's outbound business is expected to grow at 30-35 percent CAGR till 2015

n n n

On an outbound journey, hotel accommodation in congruence with travel tickets formulates the largest component of expense of the entire journey. A cost-benefit analysis between South East Asian countries and the rest of the world tilts in favor of the former due to the price affordability of the accommodation and travel expenses in these countries which doesn't leave a big hole in the traveler's wallet hence entitling them to be an enjoyable yet a price affordable proposition. To capitalize on this opportunity, C&K has also commenced destination management services (DMS) in Singapore. We expect it to exhibit a double digit growth going forward. Apart from these destinations, Egypt, Indonesia and Italy are the emerging outbound destinations. USA and Singapore continued to be the top two destinations in terms of outgoing tourist expenditure in 2010, accounting for a combined share of nearly 20 percent of total outbound expenditure.

OUTBOUND SALES AS %OF TOTAL SALES

84% 60 % 54 % 63% 65% 67%

56% 56%

28%

0% 200 8A 200 9A 2010A 2 011A 2012A 2013A

Source: SBICAP Securities Research

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Round the Globe Presence

Cox & Kings operates in 20 countries across the globe through branch offices, subsidiaries, representative offices, franchised sales shops as well as through global network of sales agents. C&K, through a series of strategic acquisitions, has attained the status of a truly global firm with presence in nearly all tourist friendly territories.
ACQUISITIONS OVER THE YEARS

FY11 FY10

FY09

FY08

FY06

Source: SBICAP Securities Research / Company

Apart from this, it has also set up subsidiary in Taiwan for handling outbound operations mainly tapping the European market which would help in creating revenue synergies. Its newly opened subsidiary in Singapore is likely to increase its competitiveness and market share. It is also the fourth DMS provider apart from other three namely India, UK and UAE. The strategic tie-ups will not only contribute in increasing the revenues but will also help counter attack the slump in demand during off seasons.

PEAK HOLIDAY SEASONS India March-June Australia/Other July-Sept. USA/Europe Oct.-March

Peak
Source: SBICAP Securities Research Company

Valuations:
At current price of Rs155, the stock is trading is at 13.7x and 10.7x of its FY12E and FY13E consolidated earnings (Excluding Holidaybreak) respectively while on P/BV front it is available at 1.6x and 1.4x respectively. While comparing with its peers based on TTM September 2011 earnings, C&K is fairly valued across all different parameters with superior margin both at operating and net levels. We have use sum of the parts valuations (SOTP) to value the company which includes the valuation Indian operation, Overseas operation and Holidaybreak PLC. We have used DCF (Discounted Cash Flow) analysis for Holidaybreak whereas C&K's consolidated business (including overseas operations) is valued on PE multiple basis. The Fair value of Holidaybreak PLC using DCF stands at Rs90 per share whereas the value of C&K's consolidated business is pegged at Rs154 per share by discounting FY13E EPS of Rs14.5 by 10.6x (Average PE ratio of last 2 years less standard deviation) All the things put together, we have arrived at the fair value of Rs244 which entails an upside potential of 57 percent from current price level.

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C& K's Business Model :

Cox & Kings Ltd. is the largest and longest established travel company in India with an existence of over 250 years. It is a premium brand that offers on stop travel solutions and travel related products for individuals and group travel. C&K has its business stretched in 20 countries across 120 cities with considerable presence in India, UK, Australia, Japan, Dubai and USA.
C&K's CORPORATE STRUCTURE

(FIT, GIT, MICE)

Source: Company

Indian Operations
C&K's business operations comprises of four segments namely Leisure Travel, Business, Visa Processing and Foreign Exchange. C&K holds 255 points of presence covering 164 locations through a mix of branch sales offices, General Sales Agents (GSAs) and Preferred Sales Agents (PSAs). It also operates through 56 franchised sales shops spread across India to have larger access to their customers.

1. Leisure Travel It is the most important segment contributing approximately 90 percent of the consolidated revenues in the preceding three financial years. It offers pre-packaged tours through brochures or customized packages as per traveler's pre requisites. It can be classified as Inbound, Outbound, Domestic and Rail Tour. a) Outbound Travel refers to sales of tour packages to customers traveling to destinations outside their home country. USA and South East Asia are the most favored travel destination amongst Indians. In FY11, the outbound segment accounted for ~63% of revenues. Outbound travel can either be free independent traveler (FIT) or group individual traveler (GIT). C&K's brands - 'Flexihol' and 'Duniya Dekho' are premium names that cater to these sub-segments respectively.
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b)

Inbound Travel refers to non-residents traveling in the given country. It is typically a B2B where in the company provides destination management services to their own subsidiaries and other tour operators located abroad. This division also provides specialist services to foreign participants for international meetings, conferences, ad hoc incentives and exhibitions and also caters for domestic conferences and corporate incentives. Ground related services to international cruise companies touching Indian shore with a provision of shore excursions are other leading activities of this division. Over the past many years, USA and UK have remained the largest tour client countries for India. In FY11, the inbound segment accounted for ~18% of revenues. Domestic Travel refers to residents of the given country traveling only within this country. C&K sells domestic-travel-related products under the brand 'Bharat Dekho' to both FIT and GIT. C&K's NRI division caters to travelers primarily from the Middle East, Europe, US, Australia, Sri Lanka and Hong Kong. Andhra Pradesh receives the largest share of domestic travellers in India followed by UP and Tamil Nadu. In FY11, the domestic segment accounted for ~8% of revenues. C&K's market share in domestic travel is nearly 2%. Rail Tours is yet another area of operation where C&K has a 50:50 JV with Indian Railways Catering and Tourism Co-operation Ltd (IRCTC) named Royale Indian Rail Tours. The JV marked the launch of Maharaja Express - a luxury train travel experience. This provides various packages (Princely India, Royal India, Classical India and India Sojourn) which mainly covers the northern territories of the country. The train has a capacity of 86 passengers and 23 coaches and runs between September to April every year. It is scheduled to run 28 times a year in these 8 months. The JV clocked 25 crore revenues in FY11 in which C&K has 50% share. The train witnessed 80% occupancy during the period of September - November 2011 and is expected to breach this level going forward.

~ Over the past many years, USA and UK have remained the largest tour client countries for India. In FY11, the inbound segment accounted for ~18% of revenues.

c)

~ In FY11, the domestic segment accounted for ~8% of revenues. C&K's market share in domestic travels is nearly 2%.

d)

2. Business
C&K offers customized business travel solutions to its 200+ corporate clients in India. It also caters to all aspects of Conference organizing, Business Meetings, Event Management, Seminars, Exhibitions, Product Launches and Incentives which forms a part of MICE (Meeting Incentive Conference & Exhibition). Business travel constitutes 2 percent of its total revenue share generating 20-22% margins at gross level.

3. Visa Processing
C&K is a leading provider of visa processing services for inbound travelers from Germany, Greece, Hong Kong, the U.K. and Singapore in India. It facilitates visa processing in various categories such as Business Visa, Tourism Visa, Employment Visa, Student Visa etc. It operates these services as an outsourced business solution to diplomatic missions in countries like Germany, Greece, Hong Kong, the UK and Singapore. Through a series of subsidiaries operating in several countries (C&K Marhaba Dubai, Quoppro Global Services) and through numerous approvals from the diplomatic missions of India at Athens, Greece and at Hong Kong for outsourcing their visa processing activities, this segment looks promising for the company. The business requires bare minimal working capital generating a strong revenue stream of Rs 1200-1500 per applicant. It processed 5500 applications last fiscal.

~ Visa Processing requires bare minimal working capital generating a strong revenue stream of Rs 1200-1500 per applicant. It processed 5500 applications last fiscal.

4. Foreign Exchange
C&K is a licensed Authorized 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 amongst the leading retail forex dealers in India. The enhanced status (from FFMC to Authorized Dealer-Category II) helps it transact outward remittance requirements.

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Foreign Operations:
C&K has operations in 19 countries besides India which includes UK, USA, Japan, UAE, Australia etc. Through a series of strategic acquisitions and by setting up subsidiaries worldwide, it has attained phenomenal global visibility. As a part of its global expansion plan, it has recently commenced operations in Taiwan and a year back in Singapore. The company achieved stupendous growth, registering consolidated income of Rs533 crore in FY11 as against Rs 441 crore FY10 out of which 52% is attributed to non Indian operations. With the recent acquisition of Holidaybreak PLC, this contribution is expected to go much higher.
REVENUE BREAKUP (RS. IN CR) SUBSIDIARY WISE CONTRIBUTION - 2011

India 380 270 160 50 2011 236.79 259.95

Rest of the World

Dubai 4% East India 5%

Aust ralia 12%

223.27 175.88

India 50%

CNK Japan 8% ETN 3%

2010
Source: Company

UK Travel 18%
Source: Company

Overseas operations of Cox & Kings:

C&K Ltd UK OUTBOUND Premium long haul tour operator for retirees C&K Destination Management Services UK INBOUND DMS in Europe for group companies and tour operators C&K Japan Ltd OUTBOUND Wholesaling white label packages to other tour operators & DMS for Japanese travelers C&K Gmbh, Germany , C&K Hellas, Greece, C&K Global Services Pvt Ltd, India VISA-PROCESSING East India Travel Company Inc. USA OUTBOUND Customizing luxury packages for celebrity clientele Holidaybreak PLC EDUCATION - Outdoor trips for school children ADVENTURE - Worldwide tours, language travel, gap year trips CAMPING - Family holidays in European camp sites HOLIDAY BREAKS - Domestic short break trips C&K Tours LLC, UAE INBOUND - Serving tourists from C&K, India OUTBOUND - Tour operator for local population Quoprro Global Services Pte Ltd, Singapore, Quoprro Global Services Pvt. Ltd, Honkong VISA-PROCESSING

Tempo Holidays Pty Ltd Australia, Tempo Holidays NZ Ltd New Zealand OUTBOUND Establishing synergies with group companies operating in Middle East and Europe My Planet Australia Pty Ltd Australia, Bentours International Pty Ltd Australia OUTBOUND Leading tour and travel operator to Scandinavia

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SWOT analysis of various overseas operations:

Country - wise Operations UK:
n n

STRENGTH

WEAKNESS
n

OPPORTUNITY Targeting mid market segment more extensively. Diversification of product portfolio with HBR in yet untapped markets. Synergies with HBR will help double the group revenue.
n

THREAT Uncertain global environment and economic slowdown has reduced outbound travel. Instable Euro.

C&K (UK) Ltd. n C&K DMS n Holidaybreak Plc (HBR)

Wealthy retirees with n Limited target fixed holiday plans customer range. every year as targets. DMS when provided besides outbound services increases revenue earned per customer.

USA:
n

East India Travel Company Inc

Price insensitive, loyal celebrity customer base. Strong brand equity. Most profitable segment, yielding margins as high as ~40%

n n

Strong security and n Chartered flights privacy concerns of can strengthen the target customers. revenue base further.

Zero portfolio diversification.

JAPAN:
n

C&K Japan Ltd

Insulated from n The business is seasonal/cyclical suffering losses demands since its due to the recent main revenue driver is tsunami attack. its business segment.

Expected to be turned around by FY13. Plans to utilize staff for setting up operations in East Asia ensuring increased productivity.

Frequent incidence of earthquakes.

AUSTRALIA:
n

Tempo Holidays Pty Ltd. n My Planet Pty Ltd. n Bentours International Pty Ltd.

Amongst the most n Scheduling & n Customized well connected timing of the products for countries in terms of flights throughout premium market strategic & the week. segment. geographic location. n Capitalizing on Australia's scenic n Operating at its core beauty & competency; unique swashbuckling positioning. landscapes by n Huge customer base venturing into with majority of inbound travel. products targeting mass market.
n

Huge customization requirements of FITs increasing the development and operating costs.

Synergies with C&K, UK for DMS

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World Travel & Tourism Industry

"Atithi Devo Bhava" - Really!!!
Today, countries across the globe leave no stone unturned to ensure maximum number of tourist inflows every year, every season but not with the idea of pure hospitality, but for its own profit. The tourists along with their own baggage also bring bags full of much needed foreign exchange. T&T has always been a critical economic sector worldwide, with a huge potential in providing economic growth and exposure internationally . A growing T&T sector is a huge contributor of employment, elevates national income and can improve the balance of payment positions of any country. Thus the sector is an important driver of growth and prosperity especially in developing countries, simultanoeusly playing a key role in employement generation, infrastructure development and mainteneance.
WORLD INBOUND INT. TOURIST ARRIVAL IN 2010 (%)
54 50
1, 20 0 9 17

T&T MARKET SIZE (USD BILLION)

2010 2020

36 22 18 16 5 0 Europe Asia Pacific America Africa Middle East 7

90 0 60 0 30 0 0 China India USA UK Au stralia 113 501 511 148

42

11 1

89

50 80

Source: UNWTO

Source: WTTC, 2010

Despite the difficult global environment over the past decade - from terrorist attacks and health scares to natural disasters - international T&T demand has shown phenomenal growth. In 2011, the World Travel & Tourism Council (WTTC) expects it to contribute almost USD 6 trillion to the global economy or 9 percent of global gross domestic product (GDP). This is more than the automotive industry which accounts for 8.5 percent, and slightly less than the banking sector which accounts for 11 percent. The money visitors spend on travel, accommodation, activities and souvenirs i.e visitor exports in 2011, is expected to exceed USD 1.2 trillion around the world with 260 million estimated people across the globe. Furthermore, demand for T&T- both international and domestic - stimulates investment. In 2011, 4.5 percent of total capital investment i.e. approximately USD 650 billion, is expected to be driven by T&T. The rapid rise in global demand for T&T over the past few decades has been spurred by the rise in living standards, in turn fuelled by growing wealth, coupled with the increased affordability of air travel. According to the World Tourism Organization (UNWTO), international arrivals worldwide have more than doubled since 1990, rising from 435 million to 675 million in 2000, and to 940 million in 2010. The world T&T market is divided into two segments viz business and leisure. In 2011, worldwide leisure travel spending (both inbound and domestic) is expected to reach USD 3 trillion i.e. 77% of total expenditure, with business travel accounting for a relatively meek 23% or USD899.0 billion. Nevertheless, the impact of business travel -which includes travel to conventions, meetings and exhibitions, as well as corporatesponsored leisure travel (incentive trips) should not be underestimated.

WORLD T&T SPENDING BREAK-UP

Leisure Spending Business Spending 23%

77%

Source: WTTC 2011.

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Indian T&T market

Inbound: Over the past few years, India has witnessed maximum tourist inflows from US and UK and the trend is expected to continue till 2015. Over 2010-2015, inbound tourism is expected to grow at 6 percent CAGR, whereas tourism receipts are expected to increase at 3 percent CAGR. However, an increased inflow of tourists from South Africa, Malaysia, Brazil and many other countries are expected to generate further visitor's spending for India. Outbound: The recovering economy, improved consumer confidence and attractive deals have led to 13 percent growth in the number of departures from India in 2010 and is expected to increase at a CAGR of 12 percent by 2015. In 2010 the most outbound tourists visited Singapore, Malaysia, the UAE and Thailand. Apart from these destinations, Egypt, Indonesia and Italy are the emerging outbound destinations. US and Singapore continued to be the top two destinations in terms of outgoing tourist expenditure in 2010, accounting for a combined share of nearly 20% of total outbound expenditure.
INDIA TOURISM - INBOUND
Arrivals (in '000 trips) R ec iepts (Rs bn) 7768 717 6 89 3000 619 500 201 0 20 11E 2012E 2013E 20 14E 201 5E 631 666 647 620 560
8 300 1 000 2010 201 1E 20 12E 2013E 2014 E 201 5E 12497 138 42 15 414 1 7253 1939 2 22 900 452 47 5 15 600 219 02 24 0 50

INDIA TOURISM - OUTBOUND

Departures (in '000 trips) Expenditu re (Rs bn) 565 60 4 62 0 43 0

8000 572 2 5500 6012

6 356

67 55

722 1

740 680

5 00

530

Source: Euromonitor International, April 2011

Source: Euromonitor International, April 2011

Domestic: With increasing disposable incomes and the surging trend of short trips and weekend get aways, in 2010 the number of domestic tourist trips increased by 14% and is expected to increase by a CAGR of 14% in 2015.
In 2010, Andhra Pradesh received the largest share of domestic tourists, followed by Uttar Pradesh and Tamil Nadu. Karnataka was the fastest growing domestic destination in 2010 followed by Tamil Nadu and Bihar. In 2010, domestic tourist expenditure increased by 15% and is expected to continue at CAGR of 8% p.a.
INDIA TOURISM - DOMESTIC
Business 1150 946 829 mm trips 800 573 450 168 100 2 010 2011 E 2 012E 20 13E 2014E 201 5E 189 214 243 645 7 30 Leisu re 10 82

277

31 8

Source: Euromonitor International, April 2011

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Government Initiatives
1. FDI Policy With a view to stimulating domestic and international investments in this sector, the government has implemented the following initiatives:
a. 100% FDI under the automatic route is permitted in all construction development projects including construction of hotels and resorts, recreational facilities and city and regional level infrastructure. 100% FDI is permitted in all airport development projects subject to the condition that FDI for up gradation of existing airports requires FIPB approval beyond 74%. A five year tax holiday has been extended to Companies that set up hotels, resorts and convention centers at specified destinations, subject to compliance with the prescribed conditions.

b.

c.

2. Visa on Arrival
As a facilitative measure to attract more foreign tourists to India, Government launched a Scheme of "Visa on Arrival" (VoA) from January 2010 for citizens of five countries, viz. Finland, Japan, Luxembourg, New Zealand and Singapore, visiting India for tourism purposes. The Government has now extended this Scheme for the citizens of six more countries, namely Cambodia, Indonesia, Vietnam, Philippines, Laos and Myanmar from January 2011. The important highlights of VOA issued during the period of January to November 2010-11 as shown below:
COUNTRY WISE VISA ON ARRIVAL (VOA)
Jan - Nov 20 10
2079 1604 1123 1089 1241

VOA ON VARIOUS INDIAN AIRPORTS

Jan - Nov 2010 6416
1623 1654

Jan - Nov 2011

2289

Jan - Nov 2011

30 35 2402 1 258
53 66

171 3 1073 27 8 590

Fin land

Japan

Luxembou rg New Zealand

Sin gap ore

Delhi

Mu mbai

Chennai

Kolkata

Source: Ministry of Tourism

Source: Ministry of Tourism

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Outlook:
As per WTTC, T&T Industry in India is expected to grow at a CAGR of 10.2% over 2010-2020 i.e. from USD 42 bn to USD 111 bn in 2020. The total contribution of T&T segment to India's GDP including both direct and indrect is expected to reach Rs5 lakh crore from current Rs1.4 lakh crore. India's international tourist arrival is expected to reach 11.2 million from current 6 million growing at 6 percent CAGR between 2011 and 2021. Thus declaring it to be a highly promising and growing market. In India, T&T is expected to generate 30 million jobs by 2021 from current 24 million accounting for nearly 22.1% of total employment including employment by hotels, travel agents, airlines and other passenger transportation services. On the international front, the arrival in South Asia is expected to grow at 6 percent CAGR to 19 million in 2020 as compared to 11 million trourist in 2010. Europe will continue to be largest travel destination in the world. In Australia, the T&T's contribution is expected to reach 64.4 billion AUD in 2021 from 47.6 billion AUD in 2011. The inbound tourist arrival in Australia is expected to grow to 8.4 million by 2021 from 6.1 million in 2011 whereas Australia's outbound tourism is expected to reach 10.3 million by 2021 from current 7.8 million. In US market, T&T's direct contribition to GDP is expected to reach USD 570 billion by 2021 from current USD 404 billion. C&K is strategically present across all the travel destinations to take levarage on its expertise and growth in world T&T market.
T&T'S CONTRIBUTION TO INDIA'S GDP (RS BILLION)
Direct 14500 11000 7500 4000 500 2005 2 006 2007 2 008 20 09 2010 20 11 2021 Indirect Induced
48 36 1 9.7 24 12 0 2005 2006 2 007 2008 20 09 2010 2011 2021 2 2.1 24.4 23 .6 25.5 24 .6 24.3 24. 9 30.4 24 .4 17.0 13.3 12 .2 12.4 12. 7

T&T'S CONTRIBUTION TO EMPLOYMENT (MILLION)

Direct Indirect

17.6

Source: UNWTO

Source: UNWTO

INTERNATIONAL TOURIST ARRIVAL (IN MILLION)

2010 855 570
397 282 717

ASIA PACIFIC T&T MARKET

Visitors Export (USD Bn) Tourist Arrival (in Mn)

2020

750 500
36 69

375 250 125 0 2005 2006 2007 2008 2009 2010 2011 2021
Source: WTCC, 2011

527

285 47 77 0 Africa

190

19 5 11 19

250 0

America

East Asia & Pacific

Europe

M iddle South Asia East

Source: UNWTO

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Key Risks & Concerns:

Forex Risk
The company has significant risk exposure with regards to the forex market. Fluctuations in exchange rates have direct impact on business. Strengthening of the rupee may increase the number of outbound tourists from India as foreign tours will become relatively cheaper. However, at the same time it may affect inbound tourism as traveling to India would become relatively expensive and vice-versa. ~ The company has significant risk exposure wi th regards t o t he fo rex market. Fluctuations in exchange rates have direct impact on business.

Unorganized Market with high competition

T&T industry's highly fragmented and unorganized nature results into intense competition. There are 25000 independent players and nearly 5000 unorganized players against 20 organised players. In addition, C&K sometime faces margin split when DMS (Destination Management Services) is outsourced to third party.

Sensitive to changes in unforseen circumstances

In the past, occurrence of Swine Flue, SARS, Bird Flue and Mad Cow etc saw a drop in the number of tourist arrivals in the affected countries and has ability to affect the outbound tourism. Precautionary measures like the suspension of flights in such events also impacts the numbers of tourists coming into the country. Natural calamities like recent earthquake in Japan, Tsunami, Haiti Earthquake, Iceland Volcanic Eruptions and many more disastrous calamities have affected the travel and tourism industry badly. People have reduced their traveling to a few countries with the fear of natural calamities. T&T industry also got hampered due to global terrorist attacks and other acts of violence or war causing a drop in the number of arrivals into the country. The September 11, 2001 attack on US and the November 26, 2009 attack on Mumbai have had an adverse effect on the number of people traveling to these countries. ~ There are 25000 independent players and nearly 5000 unorganized players against 20 organised players.

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Financials & Valuations:

We expect the consolidated net sales and profit (Excluding Holidaybreak) to grow at 21 and 23 percent CAGR to Rs729 and Rs198 crore respectively between 2011 and 2013. C&K is banking on high growing outbound vertical which is expected to grow at 30-35 percent over next few years. We expect the share of outbound revenue from Indian operations to cross 65 percent from current 62 percent. The overseas subsidiaries like C&K Dubai, C&K DMS in UK and Australian subsidiaries to drive the overseas revenue growing at 30-45 percent CAGR over next 2-3 years whereas Japanese subsidiary will take another 1-2 years to show positive growth. UK Travel and East India USA is also expected to show positive growth between 7-15 percent over next 2 years. We expect the consolidated EBITDA to grow at 22 percent CAGR to Rs342 crore between 2011-FY13 whereas EBITDA margin is expected to remain at 46-47 percent level. The net margin is also expected to be at 26-27 percent level in spite of increase in debt. At current price of Rs155, the stock is trading is at 13.7x and 10.7x of its FY12E and FY13E consolidated earnings (Excluding Holidaybreak) respectively while on P/BV front it is available at 1.6x and 1.4x respectively. While comparing with its peers based on TTM September 2011 earnings, C&K is fairly valued across all different parameters with superior margins both at operating and net level. We have use sum of the parts valuations (SOTP) to value the company which includes the valuation Indian operation, Overseas operation and Holidaybreak PLC. We have used DCF (Discounted Cash Flow) analysis for Holidaybreak whereas C&K's consolidated business (including overseas operations) is valued on PE multiple basis. The Fair value of Holidaybreak PLC using DCF stands at Rs90 per share whereas the value of C&K's consolidated business is pegged at Rs154 per share by discounting FY13E EPS of Rs14.5 by 10.6x (Average PE ratio of last 2 years less standard deviation) All the things put together, we have arrived at the fair value of Rs244 which entails an upside potential of 57 percent from current price level.
RELATIVE VALUATIONS Particulars CMP (Rs) TTM Sales (Rs Crore) Mcap (Rs Crore) PE (x) EV/Sales (x) EV/EBITDA(x) Mcap/Sales (x) P/BV (x) OPM (%) NPM (%) Cox & Kings 155 560.8 2116.1 16.5 3.6 8.1 3.8 1.8 51.6 22.9 Thomas Cook (I) 33 353.2 708.8 13.5 2.1 8.9 2.0 2.1 32.2 14.9 Mahindra Holiday 297 537.6 2501.6 22.3 6.3 20.2 2.0 5.0 34.1 20.9 SOTP A) Cox & Kings EPS (Rs) PE Multiple (x) Fair Value (Rs) B) Holidaybreak PLC Discounted T. Value PV of FCFF Total Current Debt Current Cash Enterprise Values Equity FV (Rs) Value per Share (Rs) Total Value (Rs) Sources: SBICAP Securities Research 594.4 1,535.7 2,130.1 1,311.4 406.7 1,225.4 68.3 5.0 90 244 (Rs. in Crore) FY13E 14.5 10.6 154

Sources: SBICAP/Cline based on TTM September 2011 earnings.

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1 YEAR FORWARD PE MULTIPLE

Clo se Price 450 11x 15x 19x 23x

AVERAGE PE MULTIPLE
Daily PE 1+2SD 35. 0 Average PE 1-SD 1+SD 1-2SD

300

25. 0
150 0 Apr-10 Aug-10 Dec-10 Apr-11 Au g-1 1 Dec-11

15. 0 5. 0 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Source: SBICAP Securities Research 1 YEAR FORWARD P/BV MULTIPLE

Close Price 1.4x 1 .9x 2. 4x 2.9x

Source: SBICAP Securities Research AVERAGE P/BV MULTIPLE

Daily P/BV 1+2SD Average P/BV 1-SD 1+SD 1-2SD

395
4.10

280 165 50 Apr-10

2.90 1.70 0.50

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Source: SBICAP Securities Research NET SALES

Net Sales 760 Fig Rs Crore 570 380 EBDITA Adjusted Net Profit

Source: SBICAP Securities Research EBDITA & MARGINS

EBDITA Margins (%) Net Profit Margin (%)

59 41 23

190 2010A 2011A 2012E 2013E

5 2010A 2011A 2012E 2013E

Source: SBICAP Securities Research ROE & ROCE (%)

ROE (%) 30. 0 R OCE (%)

Source: SBICAP Securities Research NET SALES GROWTH (%) & CAPEX GROWTH (%)
Net Sales Growth (%) Cap ex Growth (%)

47.0 33.0 19.0 5.0

2010A 2011A 2012E 2013E

22. 0 14. 0 6. 0

2010A

2011A

2012E

2013E

Source: SBICAP Securities Research

Source: SBICAP Securities Research

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Financial Statements:
Income Statement
Par ticulars Net Sales Other Income Tot al Income Tot al Expendit ure Employee Cost As % of Sales Other Operating Cost As % of Sales EBDITA ( Excl OI) EBDITA ( Incl. OI) Interest PBDT Depreciation PBT Tax Net Profit Extr a-ordinary Item Adjusted PAT Equity EPS Cash EPS FV 2010A 399.7 41.6 441.3 212.7 99.4 24.9% 113.3 28.4% 186.9 228.5 27.0 201.6 15.1 186.5 51.7 134.8 1.0 133.8 62.9 10.6 11.8 5.0 2011A 495.6 37.1 532.7 266.6 129.5 26.1% 137.1 27.7% 229.0 266.1 54.4 211.7 18.6 193.2 62.5 130.6 1.5 129.1 68.3 9.5 10.8 5.0

Figures in Cr.
2012E 591.6 41.4 633.0 316.5 153.8 26.0% 162.7 27.5% 275.1 316.5 74.1 242.4 22.5 219.9 66.0 153.9 153.9 68.3 11.3 12.9 5.0 2013E 728.6 51.0 779.6 386.9 190.2 26.1% 196.7 27.0% 341.7 392.7 82.9 309.8 26.2 283.6 85.1 198.5 198.5 68.3 14.5 16.5 5.0

Balance Sheet
Par ticulars Equity Capital Reserve and Surplus Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Tot al Capital Emp. Gross Block Less: Accumulated Dep. Net Block Goodwil Capital Work In Progress Investments Deferred Tax Assets Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Total Curr ent Assets Creditors Other Current Liabilities Provision 2010A 62.9 747.2 810.1 294.6 209.7 504.3 4.8 1,319.2 133.7 61.5 72.2 217.5 20.4 258.4 3.4 8.3 302.1 374.7 271.5 956.5 98.0 79.0 34.4 2011A 68.3 1,139.6 1,207.9 544.3 300.0 844.3 9.1 2,061.3 184.1 81.9 102.1 217.5 64.1 211.2 1.2 8.6 414.2 961.3 382.5 1,766.6 96.1 172.1 35.0 303.1 1,463.5 1.7 2,061.3

Figures in Cr.
2012E 68.3 1,281.6 1,349.9 707.6 300.0 1,007.6 5.9 2,363.4 225.7 104.5 121.3 217.5 22.4 266.2 3.0 10.5 443.7 1,182.9 396.3 2,033.5 118.7 142.0 41.1 301.8 1,731.7 1.3 2,363.4 2013E 68.3 1,464.3 1,532.5 764.2 300.0 1,064.2 7.3 2,604.0 251.2 130.7 120.5 217.5 27.0 327.9 3.6 12.9 548.5 1,219.9 488.2 2,269.4 145.1 167.6 50.3 363.0 1,906.5 1.1 2,604.0

Total Curr ent Liabilit ies 211.3 Net Current Assets 745.2 Micellanious Exp. 2.1 Tot al Assets 1,319.2

Cash Flow Statement

Par ticulars PBT Depreciation Interest (Net) Direct Taxes Paid Change in WC CF from optg. activit ies (Inc) / Dec. Capex Free Cash Flow 2010A 186.5 15.1 27.0 (51.7) (92.6) 84.3 (26.5) 57.8 2011A 193.2 18.6 54.4 (62.5) (131.7) 71.9 (94.0) (22.1) 47.1 (46.9) 304.0 340.0 (54.4) (7.9) (20.1) 561.5 586.6 374.7 961.3

Figures in Cr.
2012E 219.9 22.5 74.1 (66.0) (46.6) 204.0 204.0 (55.0) (55.0) 163.3 (74.1) (11.9) (4.7) 72.7 221.7 961.3 1,182.9 2013E 283.6 26.2 82.9 (85.1) (137.8) 169.8 (30.0) 139.8 (61.7) (91.7) 56.6 (82.9) (15.9) 1.0 (41.2) 37.0 1,182.9 1,219.9

Important Ratios:
Par ticulars 2010A 2011A 46.2 42.7 32.4 26.1 0.7 (0.1) 260.1 129.7 11.6 9.5 88.5 5.8 7.6 12.8 14.6 4.6 17.3 4.5 4.3 9.3 2012E 46.5 41.0 30.0 26.0 0.7 (0.1) 270.0 135.0 12.0 11.3 98.9 6.9 7.0 12.0 13.3 4.0 14.5 3.8 3.5 7.5 2013E 46.9 42.5 30.0 27.2 0.7 (0.1) 271.0 135.0 12.0 14.5 112.2 8.9 8.0 13.8 14.8 4.4 11.3 3.1 2.9 6.1 (A) Measur es of Perfor mance (%) EBIITDA Margin (%) 46.8 Gross Profit Margin (%) 50.4 Total Tax Rate (%) 27.7 Net Profit Margin (%) 33.5 (B) Measur es of Financial St atus Debt / Equity (x) 0.6 Net Debt / Equity (x) 0.2 Debtors Period (days) 240.6 Creditors Period (days) 165.8 Inventory Period (days) 14.0 (C) Measur es of Invest ment EPS (Rs) 10.6 Book Value (Rs) 64.4 Earning Yield (%) 6.5 ROA (%) 14.1 Return on Net Worth (%) 25.8 Return on Cap. Emp. (%) 22.4 Interest Coverage (x) 7.9 (D) Measur es of Valuat ion P/E (x) 15.4 M. Cap to Sales (x) 5.2 EV/Sales (x) 5.5 EV/EBDITA (x) 11.7

(Inc) / Dec. in Investment (212.7) CF from invest. activities (239.2) Issue of Shares Change in Debt Interest Paid Dividend Other Adjustment (Net) CF from fin. activites Net Change in cash Opening Balance Closing Balance 529.4 150.2 (27.0) (7.3) (179.1) 466.2 311.3 63.4 374.7

Source: SBICAP Securities Research

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Name Alpesh Porwal Rajesh Gupta Megha Hemdev

Designation SVP & Head (Retail) Research Analyst Research Associate

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