Thomas Cook India: Is the noise hiding an undervalued gem?

What exactly is happening with Thomas Cook India?

Thomas Cook India holds about 50% stake in Quess Corp. In order to simplify the corporate structure, the management decided to demerge the company’s holding in Quess Corp.

Essentially, shareholders of Thomas Cook will receive shares of Quess after about 2 weeks. The ratio, which was announced about a year ago, stands such that for every 100 shares of Thomas Cook, shareholders will receive 18.89 shares of Quess Corp.

Since Quess trades at ~Rs.500/share, it accounts for ~Rs.100 of the price of Thomas Cook India’s shares (current price is Rs. 150). Thus, one can expect the price of Thomas Cook to correct by ~Rs.100 ex-date (today), or down by ~66% from closing price on December 4th. Thus the effective price of Thomas Cook after listing should be Rs. 50.

What is Thomas Cook India’s standalone business?

The company has two major revenue streams, namely, travel packages and prepaid forex cards. Both these businesses are essentially cash cows. Travel packages including fees for booking a person’s tour/itinerary and kickbacks/commissions from airlines and hotels.

In the forex business, the borderless pre-paid cards generates float. Float is the amount of money that the company has collected on the cards, but that has not yet been utilised by the customer. The company earns a small interest on the float, and a small spread on the currency conversion.

What is opportunity in travel industry?

Centre for Asia Pacific Aviation India (CAPA India) estimates that only around 4-5 million unique individuals in India travel overseas for leisure in any given year, a miniscule 0.4% of India’s population.

The room for growth is immense as India’s young millennial population spending on overseas travel increases. Foreign tourist arrivals (FTAs) in 2018 stood at 10.56 million compared to 10.04 million in 2017, and approximately 6.5 million in 2012, showing the spectacular growth in inbound tourism.

What are the triggers for Thomas Cook India?

Management claims to have 50% market share in the organized tours market (5% of the total) prior to Cox and Kings shutting down. As discretionary income of Indians increases, people are likely to spend more on overseas travel. An organized player like Thomas Cook, with a recognizable brand name should get a meaningful chunk of this business.

What are risks for the business?

1. Competition from digital platforms like MakeMyTrip: Digital platforms have been growing their airline bookings at a blistering pace, thereby growing the market share in the overall airline bookings space

2. Short-term/Transitory: The Cox and Kings saga has damaged the reputation of tour providers. Company will probably have to increase discounts to attract customers. Also the company’s parent, Thomas Cook PLC, filed for bankruptcy in the UK. These events have caused a near term hindrance to the company’s business.

Where does Thomas Cook stand in all of this?

Looking at the standalone numbers, the company has generated more operating cash flow than EBITDA. The cash flow from operations/EBITDA ratio is 2x on average over the past 5 years, shows the strong cash generation ability of the company.

Based on closing price on December 4th, after demerger with Quess Thomas Cook should be available at a market cap of ~Rs.1850 cr. The company has net cash + deposits of about Rs. 700 crores. If we take this into account, we get an adjusted market cap of Rs. 1100 crores.

The company is expected to generate Rs.200 crores of free cash flow for calendar year 2019 (one of the most challenging years in its recent history with Jet crisis + Thomas Cook PLC + Cox and Kings).

Thus, the company is available for less than 6x FCF, a rather reasonable valuation for a leader in a burgeoning industry.

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