Recently, I’ve been reading Overbooked by Elizabeth Becker. I was surprised to learn that the worldwide tourism industry is $7 trillion, or >10% of global GDP. It is larger than the oil and gas industry. Curiosity is an innate human trait and mankind will forever want to see the places which he/she has not seen. Tourism has been exploding around the world over the past decade and is poised to grow as the world’s middle class expands, tourism opens up in more countries, and services improve. More significantly, millennials are extremely interested in and willing to spend substantial money on travel, particularly at a young age. The world has become increasingly global and the internet has made travel much more transparent and easy to facilitate. In India, travel is especially popular among young adults a few years out of college. College graduates are typically well paid and either live at home or with roommates, providing for large sums of disposable income. As is the case with most young adults, they spend money on restaurants, mobile phones, movies, and… travel.

The number of Indians traveling outside India today numbers around 15 million. This compares to nearly 100 million Chinese tourists. There is enormous potential in both outbound and domestic tourism in the country.

I was attracted to the sector after reading Prof. Bakshi’s thesis on Thomas Cook India last year. In mid 2012, Fairbridge Capital, a subsidiary of Prem Watsa’s Fairfax Financial, acquired a 75% stake in the tour operator. Watsa laid out his thesis and intentions clearly in his annual letter – Thomas Cook has incredible growth potential and would serve as Fairfax’s investment vehicle in India. For nearly a year, investors had the opportunity to buy into Thomas Cook India for a price comparable to what Fairbridge paid. I didn’t pay enough attention to the opportunity and missed an extremely attractive entry point (the share price has tripled in the last 12 months).

I’ve done a lot of work on Thomas Cook and can’t quite justify paying the price where it is currently trading. In addition, there are a few factors which give me pause. First, the company acquired Sterling Resorts, a timeshare business, which I have mixed feelings about. It’s a very capital intensive and competitive business and the brand has deteriorated in recent years due to poor facility maintenance and customer service. Second, the company’s wholesale forex business is likely to decline in the long term. As such, it’s a company I’m keeping an eye on, but not investing in at current levels.

My work on Thomas Cook naturally led me to Cox & Kings (CKX), the leading domestic and outbound tour operator in India. Cox & Kings and it’s various travel brands are the most widely recognized in India and are associated with high quality and best-in-class customer service. CKX is benefiting from two important macro factors at work in the Indian travel sector. First, organized travel players such as CKX and Thomas Cook are taking share from unorganized players (unorganized players are the small mom and pop travel shops which have very limited services, e.g. only transportation). It turns out that many people would rather book an organized tour than book all the individual components themselves, particularly when traveling outside the country. Booking a tour saves time, provides peace of mind, reduces on the ground hassle, and assures travelers that accommodations will meet certain standards.

Second, the large organized players are taking share from smaller organized players. Although the services are somewhat commodity in nature, scale matters in this industry. Large players such as Cox & Kings have much larger advertising budgets, increasing brand awareness and reach. Second, volume players are able to strike more favorable deals with tourism suppliers, creating favorable pricing. CKX is able to charge lower prices than competing operators, but actually maintains a price premium due to its strong reputation. Cox & Kings generates ~22% gross margin in its tourism operation vs. ~10% for Thomas Cook.

Today, you can buy into Cox & Kings for less than 10x operating income. The stock has tripled in the past year, but is still undervalued. The largest overhang on the stock is extremely high debt levels. Debt / cash flow is currently greater than 5x. The company is taking measures to reduce the debt burden, including selling off non-core assets and bringing outside equity investment. In addition, the company has a number of assets it could sell to cover its obligations. Moreover, earnings currently cover interest charges by greater than 2x.

I’ve been adding some Cox & Kings to the portfolio between Rs. 300 and Rs. 320 per share. I’ll share more detailed thoughts once I’ve finished my work and gone through the checklist. If everything checks out, this will likely become a concentrated position.


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