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Concerns overdone

Source : BUSINESS_STANDARD
Last Updated: Wed, Aug 29, 2012 19:25 hrs

After a knee-jerk reaction that barely lasted a day, the stock of Cox and Kings Ltd has dipped six per cent since August 22 when it announced plans of a stake sale in its wholly owned UK-based subsidiary, Prometheon Holdings UK Ltd, for $137.75 million (about Rs 765 crore) in a move to reduce its debt. The high debt, which has been an overhang on the stock, has seen it correct by 21 per cent in the last six months.

However, analysts suggest the concerns may be overdone at this stage and the stake sale could boost financial performance. The risk-to-reward looks favourable at six times FY14 estimated earnings. Given the average target price of Rs 217 based on recent analysts’ reports, there is an upside potential of about 70 per cent from the current levels of Rs 127.25.

Positive trigger
In September 2011, Prometheon Holdings had raised an equivalent of Rs 1,400 crore dollar denominated debt for acquiring 100 per cent stake (the biggest overseas acquisition by an Indian travel company) in the UK-based Holidaybreak.

With Citi Venture Capital International’s investment in the company for about 15-20 per cent stake, it will help Promethoen partly reduce its $330 million debt. Says Sumant Kumar, an analyst at Elara Capital: “This would be earnings accretive to Cox and Kings’ consolidated business.” He estimates the net debt-to-equity to reduce from 2.8 times in FY12 to 2.2 times in FY13.

COMFORTING OUTLOOK
In Rs  crore FY12 FY13E FY14E
Net sales 845.0 1,726.3 1,958.5
Y-o-Y change (%) 70.0 104.3 13.5
Operating profit 290.5 623.7 763.6
Y-o-Y change (%) 26.0 114.7 22.4
Net profit 31.4 211.5 315.2
Y-o-Y change (%) -75.7 573.6 49.0
EPS (Rs ) 2.3 15.5 23.1
P/E (x) 58.3 8.7 5.8
E: Estimates; Consolidated financials        Source: Company, Analysts' reports

Adds Rashesh Shah, analyst at ICICI Direct: “This would help improve profitability and return ratios. We see scope of expansion in margins due to long-term synergy with Cox and Kings and Holidaybreak.” The company plans to bring down its debt by Rs 500-600 crore every year, thanks to steady cash flows, especially on account of Holidaybreak, reports suggest.

Well balanced portfolio
The company’s India business, which forms about 20 per cent of consolidated sales, grew 24 per cent in FY12 and maintained the same rate in the June quarter with a sales growth of 22.5 per cent despite the macro-economic pressures, thanks to the country’s strong demographic profile and growing aspirations.

Going ahead, the focus on new channels like call centre bookings, new product launches like Instant Holidays (for short-haul destinations) and increased franchise business from Tier II and III cities will help.

While European revenues are under pressure due to the challenging environment that impacted operations of Holidaybreak’s adventure and camping business, the latter’s strong presence in education travel (40 per cent of revenues) is turning out to be a good support and is acting like a compensating factor for Cox and Kings. Holidaybreak is a profitable company with steady cash flows. Further, its business has low capital intensity, which provides comfort over debt repayment that is spread out over a period of eight years following an 18-month repayment moratorium.

Cox and Kings fully consolidated Holidaybreak’s numbers in the June quarter, which led to a stupendous boost in financial performance. Consolidated sales and net profit surged 239 per cent and 286 per cent, respectively.

The company’s targeted revenues of Rs 1,000 crore in FY13 looks achievable and margins have potential to improve over time, analysts say.




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