The Outperformers 2014

The calm after the storm

Though a costly buy impeded its progress, the travel major is now on safer ground

Published 6 years ago on Dec 26, 2014 Read

At a time when fledgling companies spring up and fade away faster than you can say ‘start-up’, perhaps the richest inheritance a business can receive is a long, robust and compelling history. In its 256 years of existence, that is the kind of legacy that the Great War-era travel phenomenon Cox & Kings has thrived on, shaping years of experience in the cut-throat travel industry into a key competitive advantage. With a 30% market share among organised players, Cox & Kings today is the largest travel provider in the country. The company operates chiefly in the leisure and education travel segment, with nearly half of its revenue — which, in FY14, added up to ₹2,307 crore — coming from its international business. However, it has not been all smooth sailing for the travel player in recent years, with continued investor scrutiny of the huge debt the company accumulated thanks to a series of buyouts. Flagging demand in India and abroad, then, only compounded matters.

Today, the company is slowly emerging from that shadow, aided by a focus on debt reduction, business restructuring and a gradual revival in demand. That the investors are taking debt restructuring seriously is clear from the 200% jump in the company’s stock price over the past year. Cox & Kings’ misadventure with debt started in 2011 when it acquired Holidaybreak (HBR), a leading Europe-based tour operator with a focus on niche categories such as education, adventure and camping. The company was valued at close to ₹3,300 crore at that time, and Cox & Kings borrowed $330 million to finance the deal. “2009 onwards, we felt the need to shift focus from the Indian market to the international arena so that we could mitigate risk and complement our domestic business. We consciously bought into businesses that were resilient and gave us an edge over competition,” says Peter Kerkar, CEO, Cox & Kings. As a result, gross debt shot up from ₹845 crore in FY11 to over ₹4,600 crore in FY12.  

Getting back on track

“During the restructuring, our focus was on maximising revenue but trimming costs at the same time. Our priority was to generate a larger amount of cash, so that we could reduce debt to manageable levels,” says Anil Khandelwal, CFO, Cox & Kings. At its peak, Cox & Kings’ debt was nearly four times its equity. As part of its restructuring strategy, the company sold its business camping division for ₹890 crore, reducing gross debt from ₹5,584 crore in FY14 to ₹4,860 crore today. The management is doing its best to further pare debt over the next two years, and is already taking steps in that direction: in the last week of November, the company raised ₹1,000 crore through a qualified institutional placement, with the offer being priced at ₹305 a share. “We want to touch a debt to equity ratio of less than 1 by the end of FY17,” says Khandelwal. The management is expecting resurgence in the core business to fuel cash flows and aid debt reduction. 

Talking favourites

For most Indians, the far-east tops the list for a debut overseas holiday 

Investors seem to have picked up on that confidence, too. “Though its international leisure segment and domestic business have remained stagnant over the last few quarters, the education side has picked up of late. HBR’s education segment also saw 75% occupancy in Q1FY15, compared with 69% in Q1FY14. Cost reduction has also given profitability a boost,” says analyst Sumant Kumar, who tracks the company at Elara Securities. Market observers have reason to feel optimistic about Cox & Kings’ fortunes — compared with the ₹137 crore negative operational cash flow in FY12, it had a positive cash flow of ₹577 crore in FY14. Khandelwal is hoping this figure persists next year. “When we took over HBR, its capacity utilisations dragged on at 50%; today, we are operating at 55-60%,” he says. Of course, it helps that the education travel segment has an operating margin of 40-42%, and will contribute a higher cash flow as utilisation levels improve.    

While the company’s education tours business — which accounts for 45% of its total revenue under HBR with brands such as PGL, NST and Meininger — is a largely international business, the leisure business, which contributes 54% to revenue, has a vibrant presence in India and abroad. Under the aegis of PGL, Cox & Kings conducts education-related tours for primary-level school children, hosting children 8-12 years of age at its 25 centres across Europe and Australia that have a combined capacity of 9,500 beds. The company facilitates educational activities and extra-curricular learning for the kids, with its NST brand offering the same service to kids in the 13-18 age group. Unlike PGL, which hosts participants at the company’s own centres, NST provides theme-based or package tours, offering teens end-to-end travel solutions.

Filling the gap

The education unit will fill the void created by the sale of the camping business

Combined, Cox & Kings’ education segment is set to grow at 14% annually over FY15-17, driven by the increasing preference of local education authority customers for PGL, thanks to its world-class infrastructure and high safety standards. It helps that the subsidiary is doing its best to increase capacity utilisation from the current 60% by renting out its centres to families, English speaking classes and the national citizenship programme during weekends and lean school holiday seasons. PGL also recently expanded capacity in Australia by opening a 200-acre centre with a 350-bed capacity and plans on spreading roots in India next. Meanwhile, another subsidiary, Meininger, signed four new properties that are expected to add 2,750 beds taking its overall bed count to 10,000. Currently, Meininger boasts of 16 youth hostel-type properties with a combined 7,340-bed capacity across locations in Europe and Australia. About 50% of its revenue comes from the school business — including PGL and NST — while the balance comes from corporate and leisure customers. Meininger has been running at a 92% capacity utilisation and is growing at a healthy 30% annually.

Getting formal

The company is expected to gain as travellers are beginning to prefer brand name tour operators 

Thanks to these developments, investors are hopeful that with strong revenue and profit growth in the education business and the recovery in the leisure segment, both at home and abroad, Cox & Kings should be able to post a good performance over the next two years. “We continue to be overweight on account of higher profitability in the education vertical due to a strong performance from PGL and Meininger, as well as targeted deleveraging of the consolidated balance sheet on the back of strong free cash flows,” says analyst Sahil Kedia, who tracks the company at Barclays Capital. If a recovery is in the offing anytime soon, Cox & Kings could stand to benefit from its India business first because of its strong footing in the domestic space. 

New horizons

The cost of spreading its international presence might have left Cox & Kings struggling in the clutches of debt but these very global subsidiaries have also given it cross-selling and bargaining power in the domestic space. The company currently boasts of 156 franchisees spread across 110 Indian cities, which contribute 50% to its retail business. More importantly, it derives nearly 40% of its revenue almost exclusively from tier 2 and 3 cities, a figure that barely hovered around 20-25% in FY08, indicating the company’s growing clout in the mass market. The company plans to add 10-15 franchisees each year to help it capture market share from the huge unorganised sector concentrated in small towns and cities. Using the franchisee model for expansion should keep the company’s business model asset-light, spread risk and enable the brand to connect to customers, who are always sensitive to the quality of service and relationships with local travel providers. “From 1-2% when we started our first store in 2009, our franchisees constitute 65% of our outbound revenue today. Having a franchise strategy means that we don’t have to worry about any legacy costs,” says Kerkar.

Though this could just as well apply to its competitors, Cox & Kings enjoys the benefits of a 30% share of the market size, international presence and good operating margins, which, at 20-22%, are stronger than Thomas Cook’s 12% or the 8-10% margins of smaller players. Besides, India’s increasing appetite for domestic and international travel should be enough to reassure investors about its growth prospects — according to KPMG, domestic tourism has grown at 16.5% annually between 2008 and 2012 and has begun showing signs of recovery. Cox & Kings is also trying to make a breakthrough in the religious travel business, a lucrative segment considering that conservative estimates peg the number of pilgrimages a year at 100 million, a burgeoning market being serviced only by the unorganised market. Travel outside India has seen good growth as well and Cox & Kings has taken advantage of this growth by providing end-to-end products that reduce hassles for travellers. Though this segment saw a slowdown in the recent past, the company is hopeful about a recovery in the coming months. “For 2016-17 and possibly even in future, we would be incredibly disappointed if we don’t hit [+25%] rate of growth year-on-year in the outbound leisure section,” Kerkar said during the Q2FY15 analyst conference call. 

With leisure travel not being restricted to India, Cox & Kings is looking at international markets such as Europe, Australia, US and Japan for its next stretch of growth. The management wants to expand its UK subsidiary Superbreak — which contributes 30% to international revenue — to other European markets and enhance its product portfolio. 

Increased presence in foreign markets will also help in creating publicity for its tours of incredible India, the next big growth opportunity for Cox & Kings given that foreign arrivals in India have grown from 3.46 million in 2004 to about 7 million in 2013. Whichever way tourists — local or international — travel in the future, Cox & Kings is poised for growth and raring to go.


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