Thomas Cook India - Fundamental Call - Consortium

Thomas Cook India (TCI)'s Q4CY12 was solid - PAT grew 70% to Rs86mn backed by revenue growth of 8% and EBITDA margin of 23% as against the Q4CY11 margin of 14%. The margin improvement was a function of calibration in advertising expenses (which benefitted the quarter, may not benefit the year) and restructuring of the corporate ticketing business (which has more sustainable benefits). The company also announced plans to acquire 74% stake in IKYA Human Capital Solutions (IKYA). The benefits of the acquisition notwithstanding, we believe the core travel business in itself is strong enough to justify investing in the stock. The business is not slowing down - bookings for outbound CY13 season have been up 30% YoY (which is a proxy for revenue growth). Its forex business will be benefitted by launch of multi-currency card, even as TCI increases focus on improving profitability in the corporate ticketing and growing the domestic businesses. We thus expect revenue CAGR of 14% over CY12-14 - revenue of Rs5.6bn in CY14, with EBITDA margin of 28.9%. We value the stock at CY14 P/E multiple of 18x arriving at a fair value of Rs72. Maintain BUY.

Strong Q4CY12: TCI reported a strong Q4CY12 - consolidated operating income grew 8% YoY but PAT grew 70% to Rs86mn as EBITDA margin expanded 900bps YoY and 210bps QoQ to 23.2%. The margin expansion was induced by lower advertising spend (down 320bps YoY) as well as personnel cost (down 300bps YoY) and other expenses (down 280bps YoY).

Core business going strong... TCI's core business (~72% of revenue) continues to do well: 1) outbound travel business posted ~35% growth in CY12, and in spite of economic problems as well as downward trend in realisation, bookings for the summer season in CY13 increased 30% YoY in value terms, 2) Forex business, in spite of rupee volatility, posted a flat growth in CY12, which will improve significantly as benefits of multicurrency card launched in November will flow in CY13 and 3) MICE business, impacted by ban on foreign conferences for doctors, registered 20% sales growth. We thus expect a revenue growth of 14% through CY13-14, which is conservative if the economy improves as CY09-12 saw a CAGR of 16%.

...add to this the margin improvement due to restructuring of low-margin corporate ticketing and domestic inbound businesses (example discontinuation of "Maharaja" saves ~Rs25-40mn for TCI, benefitting in CY13).

Along with outsourcing, we expect these initiatives to improve EBITDA margin to 28.9% in CY14 vs. 26% in CY12. Core business strong; IKYA gives a long term potential upside: Our valuation of 18x P/E on CY14 gives a target price of Rs72/share. We are not including IKYA's earnings as the takeover plan is still at a nascent stage but note that 1) IKYA acquisition - ~Rs2.6bn for 74% stake is relatively inexpensive as compared to global peers. It values IKYA at FY13E EV/EBITDA of 8.5x and P/E of 17x, despite better growth prospects (In India this is still a nascent business) and 2) In worst case, if we assume nil value for IKYA, and TCI raising ~Rs1-1.5bn through equity dilution to fund the takeover, leading to ~13% dilution at the current market price, it impacts our TP by at most ~12%. However this is the worst case - IKYA has a 9MFY13 PAT of ~Rs155mn and only working capital debt.

Source : Equity Bulls

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