The stock of tour operator Cox & Kings is up 43 per cent since our buy call last June. This was driven by a good show across business segments which propped up the company’s profit from operations 19 per cent in 2014-15.

Besides, Cox & Kings addressed the over-leverage concern weighing on the stock. Capital infusion through qualified institutional placement and sale of its camping business helped the company pare debt significantly from about ₹5,600 crore as on March 2014 to ₹3,800 crore. The debt-to-equity ratio is now just about one time, down from more than two times a year ago.

Despite the rally last year, investors with a long-term perspective can buy the Cox & Kings stock. The company, with operations in India and abroad, mainly Europe, is firing on all cylinders. Its businesses — leisure travel (both domestic and international), education tours, and Meininger (hotel offering) — have grown profits steadily at a healthy pace; operating margins are a healthy 35-50 per cent. The verticals are expected to continue doing well.

Revenue visibility Summer bookings for the leisure India business have been robust and a pick-up in the Europe economy should mean higher revenue in the leisure international segment. The big contributor to the education tour segment, a unit called PSL, is already booked 86 per cent for 2015-16 and 37 per cent for 2016-17. Also, nearly 39 per cent of Meininger’s internal revenue target for 2015-16 has already been met. These factors provide strong revenue visibility. Besides, lower interest cost due to reduced debt levels should also add to the bottom-line.

Investing for expansion Cox & Kings, now comfortable with its leverage levels and financing costs, intends to slow down debt repayment. Instead, it plans to invest aggressively in the business — especially in education tours where it sees much scope to expand both in Europe and other geographies, including India, and also in Meininger in which it is targeting many new locations in Europe.

The company has also indicated that with cash flows expected to improve, it will step up dividend payout. Currently, the dividend yield is quite low at less than 0.5 per cent.

At ₹294, the stock trades at nearly 50 times its consolidated trailing 12-month earnings, much higher than the upper end (22 times) of its historical valuation band. But this is misleading because net profit in 2014-15 was dragged down by an accounting entry — the amortisation of the large amount of goodwill pertaining to the camping business which was sold last year.

On an enterprise value-to-operating profit (EV/EBITDA) basis, the stock trades at about eight times, much lower than the average 12 times it has traded at in the past five years.

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