Off On A New Trip

Thomas Cook has been the talk of the town since May this year. Harsha Raghavan, the then CEO and managing director of its parent and promoter entity Fairbridge Capital, has quit the investment company to start a private equity firm. Following his exit, Raghavan sold 472,000 shares worth Rs.126.15 million from June 29 to July 2, 2018. After the sale, Raghavan still holds 118,000 shares worth Rs.32.33 million.

However, he was not the only one who sold shares. Thomas Cook’s managing director, Madhavan Menon sold 88,000 shares worth Rs.25.08 million on June 14, 2018 and has been on a selling spree since past two years.

Fairbridge currently holds 67% in the company. It had last acquired 81.17 million shares off the market in 2015. Fairbridge has not sold any of its holding.

The Nifty service sector index has gained 9.51% since the beginning of the year and Thomas Cook’s share prices followed suit, gaining 5.46%.

Thomas Cook is a leading global travel and related financial services company that offers foreign exchange, corporate and leisure travel, insurance, visa and passport services and e-business. It also has a presence in human resource services through Quess Corp and in vacation ownership through Sterling Holiday. The company’s consolidated revenue grew by 30.98% to Rs.112.48 billion YoY in FY18, while its net profit grew from Rs.776 million to Rs.61 billion during the same period due to an exceptional one-time non-cash gain of Rs.58.25 billion arising out of the re-classification of Quess Corp from subsidiary to associate company. On a standalone basis the company clocked a profit before tax of Rs.5.38 billion, including a net gain of Rs.5.35 billion largely arising out of stake sale of 5.42% in Quess Corp. The Ebit of the travel business registered a growth of 33% for the year, on a comparable basis.

The management paints a bright picture for the company’s future, where the current outbound business contributes 80% and is growing at 20-25% YoY. To combat competition from online travel operators, Thomas Cook has started providing customisable holiday services online and borderless multi-currency prepaid cards. Revenue from domestic travel is expected to change over two to three years and grow by 1,000 bps to 30%. Sterling Holiday Resorts reported 65% occupancy during March 2018 as compared with 63% in FY17, 57% in FY16 and 20% in 2011. Its rooms have increased from 1,512 rooms in 2014 to 2,200 now, while Mahindra Holidays & Resorts, which is currently the market leader has 3,472 rooms.

HDFC Securities has retained a ‘buy’ rating on the stock and is expecting Sterling Holidays to expand to 4,500 rooms in the next five years while an Axis Direct report says that Quess will continue to drive inorganic growth by acquiring smaller companies and integrating these within its platform, translating into Ebitda of Rs.10 billion over the next three years. As per a Nirmal Bang report, better realisation from cost-cutting and higher absorption of fixed costs should drive Ebit margin (for travel, forex and vacation ownership business) improvement from 2.6% reported in Q4FY18 to 5.4% in FY21E, which will help pre-tax RoIC to grow from 21.9% to 29.0%.

On the flip side, other analysts point out that the risk concerning the stock include competition from online travel operators and unorganised low-cost travel agents, and a possible slow-down in the economy leading to lower consumer spending. 

Looks like Raghavan was just looking for the right opportunity to de-board as he starts on a new voyage.