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Nath Balakrishnan

Capitalising on the surge in tourist arrivals.

PIGGYBACKING on improved tourist arrivals over the past four months, travel services major Thomas Cook reported a strong showing for the quarter ending October 2003.

Tourist arrivals, that gained momentum from September on, are likely to remain strong over the first quarter of the next calendar year. This should augur well for Thomas Cook over its next two quarters, which represents the best phase for its earnings.

However, the sharp run up in the stock's price over the past couple of months appears to have captured, at least partially, the upside potential in earnings.

Since October 1, the stock posted gains of almost 90 per cent. Further price appreciation is unlikely to be as rapid as it has been over the past two months; it may also not be of the same magnitude.

Under the circumstances, it may be best for shareholders to retain their holdings; investors looking to add the stock to their portfolio can do so at declines of about 10 per cent from its current levels,

Financial highlights

For the quarter-ended October 2003, revenues rose 25 per cent to Rs 27.1 crore. Cost-control initiatives are reflected in the reduced expenditure — down to 66 per cent of revenues compared to 77 per cent on a year-on-year basis.

On operating margins front, the financial services division continues to be in good health, clocking about 58 per cent. The profit margins of the travel services division at 45 per cent continues to be strong. This is a healthy sign considering that this division contributes upwards of 70 per cent of Thomas Cook's revenues and about 60 per cent of operating profits.

Net profit has more than doubled to Rs 6.6 crore, capturing the sea-change in the business environment.

For the year ended October 2003, sales growth was more sedate at seven per cent; operating margins dipped by about 200 percentage points to 37 per cent; and net profit rose a modest 12 per cent to Rs 21.6 crore.

Business performance

The impressive performance in the last quarter has offset the rather unusually lacklustre showing in the first half of the fiscal. The outbreak of SARS (severe acute respiratory syndrome) in South-East Asia, and the war in West Asia knocked the wind out of Thomas Cook's earnings in the first half of the year. For the third quarter, margins continued to be under pressure as the company was forced to engage in price competition with other players in the domestic space, as the inbound tourist season came to a close.

If the latest tourist statistics are anything to go by, Thomas Cook should have a thick coat of black in its bottomline over the next couple of quarters. But one also needs to keep in mind that the earnings stream is susceptible to extraneous events that can a direct bearing on tourist flow. For example, when the SARS epidemic hit South-East Asia, potential travellers (from the West) to the Indian sub-continent either dropped or deferred their plans, as they perceived a health risk.

The risk associated with SARS continues to linger, though. Just a few days ago, a case of SARS resurfaced in Taiwan; in a knee-jerk reaction, stocks of airline and hospitality majors in the South-East Asian market fell. Thomas Cook, too, is no exception to such a happening. Should the threat of SARS assume a larger proportion, history could well repeat itself by taking the sheen off Thomas Cook's earnings.

However, such occurrences are but aberrations and should this lead to a decline in the stock's price, exposures can be contemplated then.

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