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Thomas Cook: Analyst meet notes

Dec 10, 2002

Thomas Cook India (TCIL), the 60% subsidiary of Thomas Cook AG, had an analyst meet recently. Following are the excerpts from the same. TCIL offers various services such as foreign exchange, business travel, charter airlines, hotels, leisure travel and travel related insurance. Despite the adverse conditions, TCIL was able to put up an impressive performance for the year ended Oct' 2002. It must be noted here that the company has changed its year ending to October, in order to align the company's financial year with that of its parent company Thomas Cook AG.

Financial analysis
The company posted an overall 10% YoY growth in 4QFY03 revenues. The contribution from the travel division of the company peaked in 4QFY03 to 77%, as compared to the FY03 contribution at 72%. This quarterly spurt can be attributed to the nearing of the peak season. Just to put things in perspective, on a consolidated basis, the rise in 4QFY03 income has been contributed by an above 18% increase in revenues from the financial services segment. TCIL's core travel and related services logged a sluggish 6% YoY growth during the quarter.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net sales 197 217 9.8% 842 981 16.5%
Other Income 20 14 -33.1% 65 27 -58.1%
Expenditure 123 167 36.4% 611 623 2.1%
Operating Profit (EBDIT) 75 49 -33.9% 232 358 54.6%
Operating Profit Margin (%)37.9%22.8%27.5%36.5%
Interest 2 3 39.3% 19 27 46.2%
Depreciation 12 12 -1.9% 57 53 -6.6%
Profit before Tax 81 48 -40.4% 221 304 37.8%
Extraordinary items (32) (0) - (41) (2) -
Tax 28 20 -29.5% 77 108 40.0%
Profit after Tax/(Loss) 21 28 36.0% 103 194 88.8%
Net profit margin (%)10.4%12.9%12.2%19.7%
No. of Shares (m) 14.6 14.6 14.6 14.6
Diluted Earnings per share* 5.6 7.7 7.0 13.3
P/E Ratio (x) 17.0
(* annualised)

While analyzing the company's 3QFY03 performance we had indicated that the domestic outbound season ends towards May and inbound travel season commences towards the end of September, resulting in a vacuum in the interim. As a result, the 4QFY03 for TCIL was likely to be a sluggish one. If we compare the first half of TCIL's FY03 with the second half, the performance pattern becomes even clearer. In 1HFY03, the company logged in a heartwarming 23% topline growth. The second half (2HFY03) reported a staid 10% topline growth.

Operating margins in 4QFY03 (excluding diminution in value of investment and amortisation of start up cost) fell sharply on account of various reasons. For one, advertising expenses increased during the period to 6% of sales as compared to a negligible 1% in the corresponding quarter previous year. For the full year ended FY03, margins have increased largely due to lower adspend brought about by a mixture of factors such as the September 11 blues last year and consequently, the slack season. The ramp up in 4QFY03 ad expenses is a sign that TCIL is positive on the upcoming holiday season and has been investing to take advantage of it.

The rise in interest expenses could be due to short-term working capital requirements. Extraordinary items here pertain to amortisation of start up cost and diminution of value of investment to the tune of Rs 2.4 m and 0.4 m respectively for FY03 (Rs 13.2 m and Rs 27.7 m respectively in FY02). Net profit, after this adjustment, has increased at a stellar rate of 88% to Rs 194 m in FY03. This is a commendable performance despite a challenging environment.

The way forward...
TCIL is the No.1 charter handler in India with a market share of approximately 25%. It is No. 2 in the outbound travel with a share of approximately 1/3rd of the market. As far as future growth prospects are concerned, the management expects overall revenues to grow at an average 15% per annum. Going one step further, while the financial services division is expected to grow by 10%, revenues from the travel & related segment will increase by about 25% per annum.

The key growth drivers for the travel division would be focusing on leisure travel by increasing contribution from rail and road tours. This strategy will considerably bring down the cost of tour packages being offered by the company and consequently, an edge over the competition that is predominantly premium-end.

With the company becoming the ground-handling agent for foreign airlines coming into Goa and Kerala, TCIL has emerged the top charter handler in India. The company is also trying to get permission from the Ministry of Civil Aviation to operate outbound charter services (TCIL expects some positive development on this front in the next 12-18 months). Here is where synergies with Thomas Cook AG come into play. The parent company owns and operates a fleet of 85 aircrafts and the opportunities are immense. To put things in perspective, outbound travelers, in absolute terms, have increased to 4.5 m in FY02 as compared to around 1.8 m three years back. TCIL is also enhancing its reach through new channels - web, call-centers and agents.

On the operating front, the company has been successful in bringing down the cost per transaction from the original Rs 550 to the current Rs 225. The objective is to bring it down to Rs 90 per transaction over the period of two years.

Also, Thomas Cook (India) Ltd. is looking at the possibility of acquiring medium-sized 3-4 star hotels in places like Goa. The reasons are obvious. The company does reservations for 1,670 rooms per day for 7 months (largely the peak season) in a year in various hotels. It intends to take advantage of this huge potential. However, a cause of concern for investors is that the return on capital employed (ROCE) has fallen consistently over the last few years. If the company acquires properties, then it would adversely affect the ROCE of the company, owing to the cyclical nature of the hospitality industry. This could be a drain on the financials of the company. However, the company seems confident of delivering results on account of expertise that TCIL could gain from the parent.

The stock currently trades at Rs 229 implying a P/E multiple of 17x FY03 earnings. The long-term growth prospects are promising when one considers the company's market leadership and prospects of increased flow of foreign direct investments (FDI) into the country that could result in higher inbound traffic flow in the future. Also, FY04 is likely to be better sans the September 11 blues it suffered in FY03. Statistics from China National Tourism Administration (CNTA) indicate that China generated revenues of over US$ 60 bn from the travel and tourism industry. Given this backdrop, the Indian potential is enormous. However, lack of initiative from the government to promote India as a tourism destination traditionally, continues to hamper growth prospects in the medium-term.

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