If the economy picks up, as is widely anticipated, one can expect people to travel more both within and outside the country. Glad tidings for travel and tour operators. A good investment bet in this space is Cox & Kings, one of the big boys in the tour business, with operations in India and abroad, mainly Europe.

An inorganic growth path with seven acquisitions in as many years — the largest being the nearly ₹2,500-crore buyout of the UK-based education tour major Holidaybreak in 2011 — has helped Cox & Kings gain size and businesses that complement one another. The company’s consolidated sales grew from ₹838 crore in 2011-12 to ₹2,308 crore in 2013-14, while profit increased from ₹42 crore to ₹383 crore.

But this has come at the cost of significant debt — around ₹5,086 crore as of March 2014. Combined with a difficult economic climate, both in India and abroad, and a weak rupee there has been investor disquiet around the stock. The stock had slipped badly over two-three years until last December.

But healthy performance, especially in the last few quarters, has vindicated the company’s expansion strategy and seen the stock rebound strongly. It is up nearly 80 per cent since December and 36 per cent since our last buy call, in March.

Long-term investment The Cox & Kings stock still presents a good buying opportunity for a long-term investor. At its current price of ₹206, it trades at a little more than seven times the trailing 12 month earnings — at the lower end of historical valuation band (7-22 times).

The company is focussing on reducing its debt; it recently sold the camping division of subsidiary Holidaybreak for about ₹890 crore. As on March 2014, despite the significant outstandings, the company’s debt-equity ratio was 1.97 times, down from 2.23 times a year ago. This could further reduce to around 1.5 times by next year.

The interest service cover ratio at more than four times currently should also get better. A stronger rupee will also help by moderating the rupee cost of the company’s predominantly foreign debt.

Importantly, operational performance should continue improving. The India leisure business (accounting for nearly a fifth of Cox & Kings’ revenues and operating profits currently) should benefit from a pick-up in the economy over the next couple of years which will increase both internal and outbound travel.

The international leisure business (about 25 per cent of sales and profits) should benefit from stable economic conditions in Europe. In the education business (about 37 per cent of revenue and profits), forward bookings for the current year are healthy.

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