25 MAY 2016 Quarterly Update COX & KINGS BUY MIDCAPS Target Price: Rs 286 Disappoints on debt repayment Cox & Kings’s (C&K) FY16 revenue at Rs 24 bn (up 6% YoY) and CMP : Rs 150 EBITDA at Rs 8.2 bn (up 1% YoY) were broadly in line with our Potential Upside : 91% expectations. PAT at Rs 539 mn (our est. Rs 2.8 bn) was affected due to goodwill write-off as a result of sale of subsidiary. However, what disappointed us was debt repayment guidance of Rs 3-5 bn not panning MARKET DATA out (due to higher capex/working capital). FY16 net debt came down to No. of Shares : 169mn Free Float : 51% Rs 22.5 bn primarily due to cash from sale of subsidiary. Market Cap : Rs25bn Management does not see deterioration in working capital but expects 52-week High / Low : Rs317 / Rs141 capex to be higher at Rs 3 bn in FY17 led by PGL expansion Avg. Daily vol. (6mth) : 497,006 shares (Rs 1.1bn); India capex at Rs 0.8 bn (largely on account of SAP Bloomberg Code : COXK IB Equity implementation); and Rs 0.7 bn towards Meininger expansion. Promoters Holding : 49% FII / DII : 34% / 3% Management guided cash of Rs 4 bn from sale of subsidiaries coupled with operating cash flow will be used to reduce debt. Q4 highlights: In a seasonally weak quarter (Q4 contributes ~10% of yearly EBITDA),C&K reported 4% decline in revenue to Rs 4.7 bn. Despite higher ad spends in domestic leisure and impact of terror attack, EBITDA (adj. for forex gain) increased 21% YoY to Rs 0.6 bn due to cost controls and lower maintenance expense in the Education segment. Q4 PAT was affected due to restructuring of the international leisure businesses. While C&K realized a gain of Rs 2.2 bn from sale of its subsidiaries, it also wrote off goodwill amounting to ~Rs 7.5 bn. This resulted in Q4 reporting a net loss of Rs 3.1 bn. Estimates and valuation:While we expect overall business growth to continue, higher depreciation and interest outgo reduce our FY17 and FY18 EPS estimate to Rs 16 and Rs 20 (Rs 24 and Rs 28 earlier). Maintain BUY with revised TP of Rs286(14x FY18E EPS) vs. 336 earlier.Key triggers for the stock (factored in) would be: (1) strong FCF generation; (2) meaningful debt reduction; and (3) no exceptional items by way of M&A. Financial summary (Consolidated) Key drivers Y/E March FY15 FY16 FY17E FY18E Revenue growth FY16 FY17E FY18E Sales (Rs mn) 25,691 23,519 22,223 24,757 India business 13% 16% 15% Adj PAT (Rs mn) 4,004 3,945 2,864 3,605 Meininger 2% 7% 20% Con. EPS* (Rs) - - 22.3 26.6 Education 4% 8% 8% EPS (Rs) 23.7 23.3 16.2 20.4 Int. Leisure 4% -45% 5% Change YOY (%) 55.0 (1.5) (30.4) 25.9 P/E (x) 6.3 6.4 9.2 7.3 Price performance RoE (%) 18.5 15.7 11.1 12.5 150 Sensex Cox And Kings RoCE (%) 11.2 10.3 10.3 11.7 100 EV/E (x) 4.8 5.5 5.2 4.4 DPS (Rs) 1.0 1.0 1.0 1.0 50 Source: *Consensus broker estimates, Company, Axis Capital 0 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 01 25 MAY 2016 Quarterly Update COX & KINGS MIDCAPS Segmental highlights India business (23% of FY16 revenue) Q4 witnessed tepid inbound tourist growth, resulting in 6% YoY growth in revenue to Rs 1.1 bn. Higher advertising and marketing expenditure due to intense competition resulted in EBITDA declining 8% YoY to Rs 350 mn. The division has seen robust demand during the summer months. With 30% market share in Indian travel and tourism, we believe C&K will be a key beneficiary of secular growth in the industry. We expect India business to sustain 15% revenue CAGR over FY16-18 with EBIDTA margin of ~50%. Exhibit 1: India business - financials Revenue EBITDA EBITDA margin (RHS) 8 70% (Rs bn) 7 60% 7.2 6 6.3 50% 5 5.4 40% 4 4.8 4.2 30% 3 3.6 3.1 2 20% 2.4 2.6 2.1 1 10% 0 0% FY14 FY15 FY16 FY17E FY18E Source: Company Axis Capital International business Education business (28% of FY16 revenue): Revenue increased 5% YoY to Rs 1 bn in Q4. Tight cost control and even spread of maintenance expenses over Q3 and Q4 led to curtailed losses during a lean season. In Q4, the division reported EBITDA breakeven (loss of Rs 320 mn in Q4FY15). PGL has already booked 86% of revenue targets for FY17 and 42% for FY18. For FY17, PGL will have ~9,300 beds available. Average revenue per bed night in FY16 for PGL (UK) increased to GBP 67 (GBP 66). Expansion of PGL Australia has seen encouraging results, where 533 beds would be available for FY17. PGL plans to add 1,500 beds over the next couple of years. PGL is expected to garner greater market share as local education authorities (PGL’s competitors) are facing budget cuts. We expect 8-10% revenue CAGR over FY16- 18and EBITDA margin of 41%. 02 25 MAY 2016 Quarterly Update COX & KINGS MIDCAPS Exhibit 2: Education business - financials Revenue EBITDA EBITDA margin (RHS) 10 70% (Rs bn) (%) 60% 8 7.8 50% 6 7.2 6.4 6.7 40% 5.4 4 30% 20% 3.0 3.3 2 2.6 2.9 2.3 10% 0 0% FY14 FY15 FY16 FY17E FY18E Source: Company Axis Capital Meininger – offering affordable stay for young travellers (15% of FY16 revenue):Paris and Brussels attack affected bed capacity utilization as well as rates across Europe. Meininger Brussels (727 beds), in particular, was severely affected in the aftermath of Brussels airport closure. Revenue for Q4 declined 11% YoY to Rs 730 mn, while EBITDA declined to Rs 70 mn (Rs 100 mn in Q4FY15). For FY16, Meininger had 7,025 beds (6,949 beds in FY15) with an occupancy level of ~77% (75% in FY15). Average revenue per bed night increased ~4% to EUR 28.4. It is seeing strong booking trends for the coming months, which should help in yield management. The division expects to add beds at key European destinations like Paris, Madrid, Edinburg, Florence, Oslo to expand its service offerings. We expect 12% revenue CAGR over FY16-18 with EBITDA margin at 34%. Exhibit 3: Meininger - financials Revenue EBITDA EBITDA margin (RHS) 5 70% (Rs bn) (%) 4.7 60% 4 3.9 50% 3.6 3.6 3 3.3 40% 2 30% 20% 1.7 1 1.2 1.3 1.4 10% 1.0 0 0% FY14 FY15 FY16 FY17E FY18E Source: Company Axis Capital Leisure business – offering customized international tours (29% of FY16 revenue):FY16 saw C&K rebalancing its international leisure portfolio wherein it disposed Explore Worldwide for GBP 25.8 mn (December’15). Further, in Q4, C&K concluded a 3 step deal: (1) Sale of 100% stake in Laterooms UK for GBP 20 mn (acquired in Oct’15); (2) C&K’s 66%-owned subsidiary Holidaybreak has sold 100% of its holding in Superbreak for net consideration of GBP 9.25 mn; and 03 25 MAY 2016 Quarterly Update COX & KINGS MIDCAPS (3) C&K has acquired 49% stake of Malvern for GBP 6.37 mn (remaining 51% being owned by a private equity investor). Malvern’s only investments are Laterooms and Superbreaks, which were sold by C&K. The company will receive net consideration of GBP 22.8 mn for its 51% stake in Laterooms and 17% stake in Superbreak. With this transaction, C&Khas recovered its investment in Laterooms (19 mn GBP), while retaining 49% stake in these entities. This rebalancing will improve the margin profile of C&K from FY17. In Q4, revenue from continuing operations increased 29% to Rs 1 bn, while EBITDA stood at Rs 55 mn (Rs 290 mn in Q4FY15) on the back of strong performance in Dubai (now accounts for 35% of the division’s EBITDA). C&K is a niche tour operator in Australia, Dubai, UK, USA and Japan. We expect the division to report 5% revenue CAGR over FY16-18 (inline with growth in world travel industry). However, we expect EBITDA margin to improve to 45% in FY17 and FY18, as low margin Laterooms is hived off. Exhibit 4: International leisure - financials Revenue EBITDA EBITDA margin (RHS) 8 70% (Rs bn) (%) 60% 6 6.5 6.7 50% 6.1 40% 4 30% 3.7 3.9 2 20% 2.2 2.4 1.9 1.7 1.7 10% 0 0% FY14 FY15 FY16 FY17E FY18E Source: Company Axis Capital 04 25 MAY 2016 Quarterly Update COX & KINGS MIDCAPS Exhibit 5: Results update Quarter ended 12 months ended (Rs. mn) Mar-16 Mar-15 % Chg Dec-15 % Chg FY17E FY16 % Chg Net Sales 4,710 4,896 (3.8) 5,119 (8.0) 22,223 23,519 (5.5) EBIDTA 740 1,702 (56.5) 1,159 (36.1) 8,690 8,669 0.2 Other income 118 125 (5.9) 91 29.1 300 301 (0.4) PBIDT 858 1,827 (53.1) 1,250 (31.4) 8,990 8,970 0.2 Depreciation 532 270 96.9 393 35.2 1,369 1,485 (7.9) Interest 636 589 8.1 625 1.8 2,536 2,537 (0.0) PBT (311) 969 (132.1) 231 (234.2) 5,086 4,948 2.8 Tax (161) 501 (132.2) 238 (167.9) 1,322 1,590 (16.8) Profit from associates 0 (9) (102.9) (2) (116.4) (900) 595 (251.1) Minority Interest (1,985) (188) - 11 - 0 (9) - Adjusted PAT 1,836 646 184.3 (563) (425.9) 2,864 3,945 (27.4) Extra ordinary income/ (exp.) (4,891) 0 - 1,631 (399.9) 0 0 - Reported PAT (3,055) 646 (573.1) 1,067 (386.3) 2,864 3,945 (27.4) No.