Investor's Eye: Stock Idea - Cox & Kings; Sector Update - Automobiles

 

Investor's Eye [September 02, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA    Cox & Kings Recommendation: Buy Price target: Rs395 Current market price: Rs298   King of good times   Key points  An integrated player in global travel & tourism market: Cox & Kings Ltd (CKL) is an integrated player with a strong presence in both the global leisure travel segment (with a 30% market share in the outbound tourism segment) and the education tourism segment in Europe (it's the market leader in the UK). Its domestic leisure and international education businesses are growing at 15% each and have OPM of about 50% and 40% respectively. It recently forayed into the Australian education tourism segment by acquiring a centre with a capacity of 350 beds in Melbourne and plans to introduce the same model in India in another two to three years. In the leisure tourism space it aims to improve its penetration in India and the other key geographies.  To reduce debt by Rs1,500 crore by FY2016 which would significantly lower interest cost: The key overhang for CKL is net debt of Rs4,000 crore on the consolidated books. However, the company plans to reduce the debt by about Rs1,500 crore over the next two years by raising about Rs900 crore by hiving off the non-focused camping business and improving the cash flows. The exercise will both reduce the stress on the balance sheet and substantially lower the interest cost which will fuel the bottom line growth. Revenues and earnings to grow in double digits: Adjusting for the camping business, CKL is well poised to clock a double-digit revenue growth over the next two to three years, driven by an improvement in the international leisure business, and a steady growth of 15% each in the domestic leisure segment and the education tourism segment. The consolidated OPM is expected to sustain at ~40% in the near term. But an improvement in the revenue mix because of an increased contribution from the high-margin businesses, such as domestic leisure and education businesses, would boost the OPM in the long run. With a steady operating performance and reduction in the interest cost CKL is well poised to achieve a PAT growth of over 20% over the next three years.  Recommend Buy with price target of Rs395: An exit from the low-margin camping business and focus on strengthening the balance sheet bode well for CKL from the long-term perspective. The company aims to become one of the largest leisure travel players globally and is also keen to expand its education tourism business in the other geographies. This would result in a stable double-digit earnings growth and generate better cash flows in the near to medium term. This makes CKL one of the better players in the tourism space. Hence, we recommend a Buy on the stock with a price target of Rs 395 (valuing the stock at 9x FY2016E EV/EBIDTA).  Key risk: CKL's leisure tourism business is susceptible to economic vagaries and currency risk (any significant appreciation in the rupee against the key international currencies from the current level would result in forex losses in FY2015).  SECTOR REPORT   Automobiles       Automobile sales in August 2014: some Zest in Motown ahead of festive season     In August 2014 the domestic automobile companies shifted to a higher gear buoyed by an improvement in consumer sentiment and with an eye on the upcoming festive season. With the festive season falling about a month earlier this year as compared with the last year, dealers have started stocking inventory early. Hence, the growth rates have to be adjusted for the impact of the same. August saw a flurry of launches and the trend is expected to continue over the next couple of months with auto manufacturers raising the noise levels. The notable launches during the month were Tata Motors (TAMO)' new compact sedan, ie Zest, Honda Mobilio, Fiat Punto Evo, TVS Scooty Zest and Bajaj Discover 150. The top car makers, ie Maruti Suzuki India Ltd (MSIL), Hyundai Motor India Ltd (HMIL) and Honda Cars India Ltd (HCIL) as well as the top two-wheeler manufacturers, ie Hero MotoCorp (Hero), Honda Motorcycle and Scooter India Pvt Ltd (HMSI) and TVS Motor Company (TVS), reported a 20%-plus growth in dispatches for the month, demonstrating the positive sentiment in the industry.  The key takeaways from the month's performance are given below. The two-wheeler companies reported an impressive performance for August 2014. TVS' performance was notable with all-time high monthly dispatches aided by new launches, Jupiter, Star City+ and Scooty Zest over the past three quarters. Hero too reported a 21% growth in volumes and has lined up several new launches over the festive season. Bajaj Auto Ltd (BAL) remains a laggard as it aims for a course correction with the launch of Discover 150. However, three-wheelers and exports continue to deliver a robust performance for the company.  In the passenger vehicle (PV) category, market leader MSIL reported a robust 27% growth in volumes for the month. While the mini segment (Alto, WagonR) reported a healthy growth of 8.3%, the growth driver for the company was the compact segment (Celerio, Swift, Dzire), which grew by 53%. Even the van (Omni, Eeco) and utility vehicle (UV; Ertiga) segments reported a growth of 20% each. The PV volumes of Mahindra & Mahindra (M&M) and TAMO remained weak during the month, given their outdated product portfolio. TAMO witnessed a 20% month-on-month jump in dispatches on the back of the launch of Zest, which received positive feedback and garnered 10,000 bookings. The medium and heavy commercial vehicle (MHCV) segment showed early signs of recovery as both TAMO and Ashok Leyland Ltd (ALL) with a combined market share of 85% reported a double-digit growth during the month. The commentary from vehicle manufacturers and financers is positive for the segment, indicating better days ahead. However, there is still some pain left in the light commercial vehicle (LCV) segment as it continues to report a decline. There is a lag effect between the MHCV and LCV segments and we expect the LCV segment to report a positive growth from Q4FY2015.  The monsoon deficiency in parts of the country especially in western and central parts of the country has come down with good rains in July and August leading to some pick-up in demand for tractors in these regions. However, the rainfall deficiency in the north-western parts of the country remains high affecting the demand for tractors. M&M reported flat volumes for the month while Escorts, which has a strong presence in the northern markets, reported a double-digit decline. Early signs are that the upcoming festive season should be highly profitable for the auto companies after which a steady and sustainable uptrend is expected.  Picks: We continue to prefer TVS, MSIL, M&M and ALL among the auto stocks under our active coverage.     Click here to read report: Investor's Eye      Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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