Thomas Cook India Ltd: Worth a Trip

These days Thomas cook India Ltd (TCI) is very active in countering the bad press after the demise of global travelling giant Thomas cook PLC UK. I do not track this one regularly and have not done the in depth analysis but after the recent fall I have started making my notes and so here i am just sharing those notes. I am yet to do my detailed study of the future potential and risks to its current business. Hence reviews are most welcome.

Thomas cook PLC UK has no relation to Indian arm operating under the same name as the Indian business of Thomas cook was sold to Prem watsa owned Fairfax Financial Holdings in 2012 when the global parent needed money for paying back the loans they took for costly acquisitions that did not work well and so they were selling assets worldwide. So at present Indian arm just has the rights for using the brand name of “Thomas cook” till 2025 and is paying royalty of around Rs. 2 cr every year.

A lot of information is already available in the media about the demerger of Quess from Thomas cook India and a lot of analyst coverage reports are available also. At current market price of 134 it is available at market value of around 5000 cr and at demerger ratio of 2 shares of Quess for every 11 shares of Thomas cook the inbuilt valuation of Quess is some 3200 cr which means TCI is valued at some 1800 cr which looks way undervalued for a company with very strong Forex and travel business, 100% holding in sterling holidays, 51% holding in Digiphoto. TCI has invested around 1000 cr in Sterling Holidays and it owns some 16 resorts with large unused land bank (some 150 acre at the time of acquisition, valued at some 550 cr) so we can still value the same at minimum 1000 cr and this leaves some 800 cr for all the businesses of TCI. But they have cash in the books of around 1000 cr and when we take this into account then TCI’s core business of travel and forex is available almost free!! Or if market thinks that by the time the demerger will happen the share price of Quess will be even lower (Because in this valuation equation of TCI, Quess is the only variable)?

So TCI looks like a value buy at CMP but the only risk is the future growth potential of Travel and Forex business which are perceived to be facing existential threats from ecommerce businesses in the form of online ticket and hotel booking (Online travel agents (OTA) like Makemytrip, Yatra), online Forex startups. So in my view, study of TCI only warrants study of the business potential of TCI in the wake of emerging competition because if it can survive this competition then it is a stunning business to own and a great investment to make.

A) OTA’s are new distributors with low value addition and low entry barriers

I always believe that distribution should not consume the largest share of total cost of a product. This should be the most efficient component. But distribution is the area where the business battles are won and lost and no doubt in present times maximum disruption is happening in taking the product to customer and the biggest secret to success of a product is cost efficient distribution.

a)Traditional Distribution channels add value to a product: But distribution is one of the most important functions in the entire value chain of a product from production to final consumption. And when we talk about value chain then it implies that distribution function adds “value” to the product. How? Distributors adds value in the form of creating market for the product, bulk procurement and redistribution, financing, inventory management and logistics, after sales services, knowledge of the local markets etc. Distribution is inherent in the entire value chain because the function like financing, storing large quantities, market creations etc. are very important in order for a product to get demanded and sold. People think that the likes of Flipkart, Amazon will eliminate the distributors but they are wrong because then they will become the distributors itself because somebody has to perform these distribution and marketing functions so if Amazon holds the inventory, provide credit, ensure delivery then they are playing the role of distributors. If they are not doing then it is sure that either the producers themselves or someone else is doing this function. Retailers keep small quantities of many products from different producers so they need the services of distributors to procure these small quantities whenever they need.

Producers want and need to focus on the designing, innovation, production and branding functions and these require a lot of capital. So blocking further capital in the distribution channel will be very risky for them as they can only afford to take that much risk hence they need the services of distributors in placing and managing the product and supply chain. So distribution needs large investments and lack of proper distribution strategy can make or break a product in the tough market conditions. Apart from the need for big investments, one can gauge the value addition by distribution function on its own from the fact that if retailers or consumers try to arrange for self-procurements of goods from producers then this will render them very costly…in fact unaffordable. So Distributors has independent value addition in the form of lowering the cost of product and that’s why new disruptions like ecommerce will in most optimistic case will only replace (not eliminate) the distributors and may result in cost savings and better efficiency (although this still needs to be proved).

b)Distributors in travel adds very low value: But in airline ticket booking and hotel booking, the distribution in its conventional set up was meant for breaking the physical boundaries-the primary aim was to solve the inconvenience of buyers related to ticket booking because only travel agent was having the access to information about the ticket prices and airlines etc. So he had all the control and he charged hefty commissions from both the sides. Airlines could not afford to open offices in every city so travel agents had low value additive role to play at high cost. Hence travel agents could only increase the cost of product as their value addition was very low. Their only role is to do a transaction over phone or keyboard and there is nothing transformational in just executing a transaction. Because in traditional product distribution, distributors with their immense value addition result in the creation/enabling of a transaction which without them could not have been possible (Like without distributors a new product can’t be sold to customers as who will create the awareness of the product by market making) and so distributors are creating new transaction. But travel agents never create the demand for a product as willing customer is always there without any of their intervention and they just execute the transaction. And as I said earlier there is nothing transformational in just executing a transaction.

And that’s why internet broke the backbone of travel agent model and brought the democracy and customers can see what airlines are offering and at what price. Actually if one can see there is vast difference in the distribution model for arranging a ticket or booking a hotel as compared to bringing a physical good to the consumer and internet in the later can only solve/improve just one component (product information/availability)  in the entire distribution chain and can never replace the most important distribution functions of financing, storage, market creation, after sales services, bulk procurement etc. and these primary functions ensure the most cost efficiency. But in the ticket/hotel booking chain the main function of the distribution is the information about the product and price only nothing else (although if one can buy the inventory from airlines and hotels in order to resell it then he will be a distributor in traditional sense) so scope of specialization is very remote and that’s why internet hit traditional travel agents hard and as one can see these online portals are nothing but new form of travel agents (Online travel agents) who earn their livings now at very low price.

Further, if one can see the business model of Packaged Tour operators like TCI, they spend huge sum of money on advertising and promotion (TCI spent some 150 cr in 2018-19)  to spread awareness about the vacation opportunities across the globe....so in my view these tour operators are the ones who are in a sense playing the role of distributors for Hotel and Travel industry as with their packages they are creating the demand for Hotel rooms.

c) Low entry barriers in OTA: So the startups which brought this revolution had just placed themselves to be the new form of travel agents which can focus on high volume low margin business due to the reach facilitated by internet but the likes of Makemytrip, Yatra, Oyo are nothing but new age travel agents and as they are burning big money on discounts so we think that they have brought big revolution but this may not be that big of revolution in the end (when equity flow will dry). But as there is no differentiation in the product or services offered so customer acquisition costs are high. Even the airlines themselves are selling tickets online.

Low entry barriers meant that the startups touted as revolutionary in online ticketing like Makemytrip are still making hefty losses even after around two decades of operations (its contemporary Naukri.com is profitable for last 15-20 years).  Makemytrip merged with Goibibo and Redbus and they were expecting profitable times but the entry from the likes of Paytm in air ticket, Oyo and Booking.com in hotel bookings has ruined their plans. These startups are backed by global giants are burning cash like anything for acquiring customers. And everybody has their own strengths like Booking.com is a global giant so for India inbound business (by foreign travellers) it is having the largest share for inbound travel.

Further, I feel as occupancy ratio of hotels are increasing in India…it is faster than the growth in the room supply so hotels may not be needing the services of these online portals that much and that will create the pressure on their margins which are already in single digits. So in the end this low margin low entry barrier game is going to be won only on the basis of sheer volumes. These online startups are riding on the value addition made by them to the unbranded small hotel chains because they have no means to spend big on branding and customer acquisition. So the likes of Makemytrip earns some 90-95% revenue from unbranded chains because the big chains like Oberoi, Tata has their own distribution models just like Dominos Pizza who have their own home delivery setup and they do not the services of aggregators like zomato and swiggy. Why? Because of their volume of business which is high enough to support the cost of having its own dedicated supply chain.

d) New Innovations in travel distribution: So as the models of the likes of Makemytrip is centered on adding value to unbranded small city chains. But present time is an era of distribution innovation-now new innovative startups like Fabhotels and Treebo have emerged. These startups take the inventory from small hotels on lease and provide standardized services to its customers just like an established branded chain and this may hit the likes of Makemytrip as hotels can’t afford so much distributors. The likes of Fabhotels charges some 20% commission from hotels and they manage these properties on their own. And I feel they are bigger disruptions than Makemytrip because the disruption factor for Fabhotels is quality of services not delivery form (online).

Makemytrip has suddenly formed the friendship with Oyo when the later has changed its businessmodel from an aggregator to supplier of hotel rooms. But Oyo is a supplier (taken on lease) of 1 star/budget hotels unlike Fabhotels and Treebo which are running 3 star hotel properties. So they are giving tough competition to the likes of Makemytrip and Oyo and recently Makemytrip has delisted both Fabhotels and Treebo from its platform and only allowed Oyo to continue their listings. I wonder how the customers looking at the listings of Makemytrip portals will find the best possible deals when Makemytrip has delisted Fabhotels and Treebo without any specific reason and this looks like anti-competitive step.

e)Quality and loyalty will be the differentiator: Even the global giant Booking.com is proving tough competitor to Makemytrip having some 52000 indian properties as compared to some 58000 of Makemytrip. Booking.com was a new entry in Indian hotel arena but I think they were the smartest as they focused on creating the differentiator in the form of quality services then cheap offers. The likes of Makemytrip and Oyo focused too much on offering discounts so they ended at supporting third class hotel properties to their customers which hit the loyalty very hard and this was where Booking.com nailed the deal. It built relationships with top quality hotels who are vary of their brand image and did not want to allow aggregators to destroy their long term value by offering their rooms at high discounts. So they preferred the likes of Booking.com for top quality properties. And I think the strategy of Booking.com is going to earn them the loyalty of its customers and this will be decisive in the final battle because pricing can’t be a decisive factor to earn customer loyalty and I am surprised that why most of the online aggregators have failed to recognize this. In the end, on judgment day the customers will choose the one with quality services because on that judgment day nobody could afford discounts (equity money long gone).

B) So specialization and personalized experience is the key for Thomas cook

a)Travel and vacation industry is in transformation and during these tough times one needs to have enough supplies (cash) to last longer on its own and that's where Thomas Cook UK did a blunder-Debt. They were hit by unnecessary high debt taken for useless pricey acquisitions. Travel firms do not have any tangible assets to support valuations. They only have brand value and that’s why their only asset in the balance sheet is the Goodwill which results in bloody blows to valuations during tough times when they are always found swimming naked in the pool. And these ghost balance sheets explain why some businesses like Hotels and Hospitals has strong barbed wires fences in the form of pricey and quality real estate which defends their valuations even in the toughest times.

As of June-19 TCI has some 1300-1400 cr cash in books and this they will use for more acquisitions. They have valuable real estate in the form of offices etc. of Thomas cook. Even Sterling holidays ltd has large unused land (150 acre, valued around 550 cr) and out of 33 resorts Sterling owns some 16 resorts. So TCI does not have a ghost balance sheet and it has real assets in the books to support and create high valuations.

So there are some industries where acquisitions in good times is always useless and Travel/vacations is one such segment...they are nothing....they do not have any sort of entry barrier...they do not provide complex services like these days many people are planning their vacations on their own (DIY) and this is hitting travel agency business hard..

I always try to invest in a stock with entry barriers. Like I am investing in Concor for long and recently advised everybody to invest higher amount in this one. The main reason is the high entry barriers-To arrange thousands of acre land for ICD’s, then buying or leasing thousands of containers, building and leasing railway networks and acquiring and building relationships with diverse clients is not an easy task and require huge capital. That’s why apart from Concor we only have Gateway Distriparks and Arshiya in railway container freight business in India. Entry barriers is the biggest decisive factor and i feel travel agents' day of earning big money just by dialing a phone/internet to a hotel/airlines are gone...they need to provide value added services...easy money is gone now. It is not about taking a person from point A to point B but now it is about “How” you’ll take them from point A to point B and what experiences you can create during this journey.

b)Vacations are about experience not management: With the advent of the likes of Airbnb, online ticket booking, Hotel deal aggregators any individual can plan their vacation itinerary and other details. But in this freedom to plan your vacation, there are high chances to find a useless homestay at Airbnb or a shabby hotel or trapped in an unknown route to a popular destination and this can turn a happy vacation into a nightmare quite fast and no traveler would want to take this risk if they can avoid this for a fee. And that’s why travel agency business is not about being a middleman anymore but it is more about personalized service to let an individual traveller to focus on the fun/relaxation part of the vacation not on the logistics and administrative tasks as these will eat out the precious time available for enjoying/relishing the vacations or running here and there to arrange the minute details in order. So there is a sound business case for Travel firms in the form of providing and ensuring comfortable vacations for the travellers. Being responsible for the vacation is extremely stressful and tedious job and this can possibly eliminate the idea of relaxation on a vacation. Planning your own vacations is like deciding, checking, guiding and supervise the preparation of a dinner you ordered in a restaurant.

Like if someone wants to cover multiple places in India from Mumbai, Rajasthan, Himalaya etc. so there will be places not connected by air and he has to plan for taxi booking etc. along with other all sorts of things which will definitely ruin the fun part of the trip.

Packaged tours take the services of local guides who have the knowledge of best places, best foods, local culture and due to this they can offer a traveller a wholesome experience rather than just a physical visit. I also feel that as the volumes will grow in the industry Hotel/airlines and packaged tour firms will be able to lower the costs and this may result in the elimination of any cost advantage in DIY booking and travel arrangements. Further, the tough times will require more customer centric quality services and experiences which will eliminate small and inefficient players from the industry and the much better players like TCI will survive this tough phase on the strength of their balance sheet and networks.

c)From Travel agent to Travel advisor: And this value addition is creating a new industry term-Travel advisor (not agent). And in order to remind people of their value addition, American Society of Travel Agents changed its name to the American Society of Travel Advisors (ASTA) in 2018. The advisor’s value comes from their knowledge and experience, rather than being simply transactional. The value addition can be in the form of concierge services like they handle dinner reservations while on travel, handling travel documents like Visa and passports etc. Travel advisors has vast networks in the form of long standing relationships with airlines and hotels and due to this they can offer cheap and best rates to their customers. They can provide customized tours purely on the basis of their networks which is not possible for an individual DIY planner like winery destination tours where people travel world’s best winery destinations and this is something that they can’t plan on their own. These travel advisors do not charge commission from you but they charge consultancy fees and this fee returns much higher value. TCI is earning some 30-40% from customized tours for its travel business.

d)How TCI is doing things different and better: So for players like Thomas Cook digital/online is just a medium to offer their value added services and is not a big differentiator/disrupter against the value additions that they can offer. Thomas cook India does have high entry barrier business in the form of money exchange etc which has great synergy with travel business. Thomas cook India has avoided useless acquisitions (that too funded by debt) in past and in fact they have done some great investments like Quess (unrelated), sterling holidays, Digiphoto etc. Prem watsa has demonstrated the willingness/philosophy (like Warren Buffet) of doing acquisitions in unrelated business segment like Quess (which is in human resource business) and they have created immense valuation. For Quess, in 2013 he picked up stake in Quess for some 250 cr (70%) and within 4 years he earned some 40-50 times returns.

So Prem Watsa so far has used cash flows from Thomas cook to do acquisitions not focusing only on size and synergy for the current business but purely on creating and maximizing shareholder value by using the cash for the most productive use. And just like Warrant buffet, Watsa also has this policy of providing free hand to the management of acquired companies. TCI had dedicated and capable management since long like its current head Madhavan menon is with TCI since 2000 and Watsa never interfered in the day to day business. Also he has left sterling holidays to operate independently. TCI acquired the travel business of Kuoni in India and renamed it as SOTC but SOTC is working independently and it is competing with TCI for travel business (although sharing common functions like HR, IT, Legal of the group). This I think is due to the fact that TCI wants to create a new travel vacation brand in India when they will lose the rights of using Thomas cook brand in 2025.

Like Digiphoto is not about our routine street photographer with a camera. Digiphoto managed to create value for itself even when everybody is having a camera. How? They added immense value to a photo…they use drones, Under water cameras, Ultra zoom cameras and other high tech equipment to capture the special moments for a traveler and one can’t click these pictures with their phones. Sometimes camera is placed one KM away from the venue. Like in amusement parks like Wonderla, Imagica in India they have their cameras installed on rides and with these they can click you on ride. They have tied up with Desaru Adventure Waterpark in Malaysia, Farah Experiences in Abu Dhabi and Atlantis Sanya in China. DEI owns rights to 14 intellectual properties. They clocked 450 cr revenue last year and around 25 cr net profit. That’s why value addition is a continuous process and one needs to reinvent regularly.

Thomas cook India has offered some of the best solutions for foreign travellers in the form of forex cards like in 2012 they launched a prepaid multicurrency forex card in collaboration with MasterCard and then in 2015 they launched a U.S. dollar-denominated preloaded one currency card which can be used without paying any currency conversion charge. After acquisition by watsa, Thomas cook increased the focus on online presence and now gets some 30% business via ecommerce routes which was at some 7% in 2016.

e)Debt killed Thomas cook Plc UK: Thomas cook Plc UK is dead because of high debt taken for pricey acquisitions which yielded no profits, they were having airplanes, they bought the hotel inventory in advance from hotels to sell the same later to travellers so as we can see with stressed balance sheet they could only go as far and that’s why they meet the dead end. Further, there is no denying to the fact the terrorist attacks on popular destinations where TC Plc was the specialist, travellers discarding beach experience, Brexit etc. has also hit their business hard but still the reason is that TC Plc could not survive these tough times due to weak balance sheet. The demand for their travel business can be assessed from the sheer number of package holidays sold by them last year-11 million!! Its competitor Tui has survived the same tough environment only due to its strong balance sheet.

As I have shared earlier about the low entry barriers in tour and travel business, so businesses with low entry barriers can’t afford to take high debt because of low margin business and due to low entry barriers when any deep pocketed rival starts the price war then high debt can prove to be a death knell because this will put further pressure on low margins and debt service would become impossible. That’s why I always feel that low margin businesses should stay away from debt at least for costly acquisitions.

But the likes of Thomas cook India and Thomas cook china have survived because of their diversified revenue streams when TC Plc was only having traditional asset heavy tour operator model. TCI has survived the onslaught from OTA because of nil debt and very strong balance sheet and in fact they also invested big in online channel and done acquisitions in this area. TCI offers a large portfolios of services like foreign exchange, corporate travel, meetings and incentives, leisure travel, insurance, visa and passport services and this has ensured asset light balance sheet and stable margins.

f)Tough to create strong brand in Packaged Holidays: In 2018 Makemytrip was the worst performer among all the online travel portals with de-growth of 18% in its revenues and is trading at most expensive valuations and in spite of being in the business for more than 20 years it has not had a single quarter of positive EBITDA since 2012. It has done better in 2019 but that is more due to decrease in marketing spend by some 60%. The likes of Makemytrip are still playing the role of middleman between ticket/hotel bookings but off late they are also trying to provide packaged tour business because even they know that they can’t survive on low margin ticket bookings and packaged tour business is the natural progression of their ticket/hotel booking business. And most important thing is that there is a strong demand for packaged tour in fact quality packaged tour. People try on their own not because of costs involved in packaged tour but their doubts on any value addition. If packaged tour operators like TCI can provide top notch quality then there is no reason why people won’t opt for their services.

But building a successful brand in packaged tour requires altogether different approach and service quality. It requires building huge network of relationships with hotels, cruise liners, restaurants, transporters etc. and this is very different from being a middleman and it requires expertise and building a dedicated and professional team for this because the only differentiator here is the customer service and experience and this will result in the creation of customer loyalty and strong brand image.

And this strong brand image was the reason when Swiss tourism major Kuoni was selling its India business, the likes of Makemytrip was very aggressive for the same. Makemytrip knew very well that they need a strong brand in packaged tour and Kuoni was just that. Makemytrip was well aware that their current strengths can’t ensure the success in packaged tour business as the same require highly sophisticated service levels. Others like Club7 and many other private equity players were also in the foray but Thomas cook emerged as the ultimate winner. So Thomas cook is going to use Kuoni and SITA brands in future after their deal with Thomas cook ends in 2025. But in the wake of current crisis they may choose to shed the name Thomas cook but I still feel after this initial crisis sanity will prevail and with proper publicity TCI can even think of acquiring the Thomas cook brand forever.

g)Acquisition of Kuoni’s global DMS business: After Kuoni india business buyout, TCI has acquired the destination management specialists (DMS) of Kuoni spanning across 17 countries. This acquisition was done by TCI to focus on the capturing the outbound Indian travel. With the acquisition of DMS business of Kuoni, TCI has become a true multinational company and TCI added leading DMS entities like Asian Trails (APAC), Desert Adventures (MENA), ATM-Australian Tours Management (Australia), Allied T Pro (North America), Private Safaris (Eastern Africa) and Private Safaris (Southern Africa) under its network.

DMS is an entity which can handle the travel, meeting, sight-seeing or entertainment needs of a group of tourists or an individual at a specific place. They are local experts and can arrange anything from airport pick up, local transportation, Hotel and convention booking, site selection, local sight-seeing, tour guides etc. Like TCI may be sending a group of tourists to Singapore, Hong kong and Macau and instead of planning and arranging for facilities at these places it may outsource entire tour to local DMS in these cities. So as we can see, with the acquisition of worldwide DMS business now TCI can micro manage the vacation tours of its customers to these locations and all this ensures much better and seamless experience for a traveller.

Because of the size of operations of TCI in travel and forex, each and every acquisition is getting fit in the whole scheme of the entity and big synergy is created due to diversified and interconnected revenue streams of TCI like the additional revenue of some 1200 cr from Kuoni DMS will also bring the business for forex and other foreign travel services. So every acquisition is worth more in the hands of TCI than any other rival. For India bound tourism, TCI is providing DMS services under 3 brands-SITA, TCI, and Distant Frontiers and it earned revenue of Rs. 632 cr from this in FY 2018-19.

h)Online vs Brick and Mortar presence: The management of TCI could easily foresee that the ticketing business is going to become a commodity soon and this will not be having much business sense. So they focused instead on building the products which could provide the experience to customers and so they invested in planning specialized packaged tours. Buying a ticket online is very different from buying a tour package online as one would need to consult and discuss a lot about the package with the provider and this necessitated the need of having brick and mortar offices. TCI has never closed its physical offices and that proved a game changer because even the likes of Makemytrip, Firstcry, yatra opened brick and mortar stores all over India because there are few products where customers want to feel, discuss and know before pressing the buy button on a portal. Bargaining is also involved as Indian customers always want so it is very difficult to sell a packaged tour online in India. The opening of offices by OTA players for growing their Packaged tour business clearly shows the visionary insights of TCI about the travel industry and this also meant that these OTA players do not have any edge over TCI when it comes to offer packaged tours and in fact here TCI has much wider networks, history, brand, management expertise which will ensure further periods of high growth of its travel business.

These days customers use online channel when they are booking small low value domestic package but when they are booking costly and large international package then they prefer to have a physical touch point like visiting offices and talking over phone. Also TCI gets majority of revenues from outbound travel where local OTA’s like Makemytrip have very low impact and their capability to build network with international hotel chains is also limited.

i)TCI managed growth and survival in tough and competitive scenario: The advent of OTA channels could not hit the business of TCI is evident from the fact that the travel business of TCI has grown bigger and bigger in last 8-10 years. Even in 2018-19 its travel business grew by some 20% to 6000 cr with EBIT at 182 cr vs 135 cr. Its domestic leisure travel business grew by some 70% from 106 cr to 176 cr. Its MICE (Meetings, Incentives, Conventions and Exhibitions) has grown very fast and touched revenue of 1114 cr vs 810 cr last year. MICE segment is non-discretionary in nature as this is business oriented. This is an area where there is huge scope of growth as apart from Indian companies growing their international reach so many global firms are also opening businesses in india. Even in June-19 quarter, MICE business has shown the growth of 15%. Thomas cook has negative working capital business model where customers pay them in advance but they pay to the supplier later.

Further, Thomas cook India does not see the OTA’s as their competitors because TCI main thrust is on comprehensive tour business and in fact TCI is the largest supplier of business to the likes of OYO and Makemytrip.

Thomas cook is continuously creating new innovative packages like woman only tours, packages for senior citizens etc. and they are spending big on advertising because they have the money. As we can see the specified packages like senior citizens require much deeper specialization in providing special diets, medical facilities etc. on tour and this requires specialization and investments. This is the value addition which customers need and specific packages like these can’t be executed in individual capacity.

j)Consolidation in the tough business environment is the key: The business environment is very tough for tour and travel guys and the demise of Cox & Kings and Thomas cook Plc has created the doubts in the mind of every supplier of the industry and they are getting very cautious in extending credit to the industry especially small players. So we’ll see that banks will not advance credit to small unorganized players and this will hit the unorganized sector very hard and consolidation will follow where only the strong players like TCI will survive. So the present time is just about the survival and only those who can withstand the hard blows will survive. Low entry barriers are illusionary as everybody thinks that they have the ace factor to succeed but in reality low entry barrier businesses are one of the toughest to run profitably because more often too much money will chase the low volume of business which hits the margin hard. But this creates the problems only for small players and after a long battle these small players put down their guns.

Further with the fall of Cox & kings and now Thomas cook Plc there is a golden opportunity for TCI to capture this business. Just like the share price of Tui group the competitor of Thomas Cook Plc UK which has surged some 15-20% after the demise of Thomas cook UK because analysts are confident about Tui to fill the vacuum created by Thomas cook UK. Similarly, TCI may acquire some businesses of cox & kings or may even looking at buyout the same as it can use the brand name but this all depends upon the final decision taken by management on the future viability of brand name of Thomas cook. But I feel that they should stick to Thomas Cook and even consider buying out the Thomas cook brand at least for India. Also, I am sure that the likes of Makemytrip may do anything to acquire a brand like Cox & kings as they badly need something in this segment.

The main reason behind the fall off Thomas cook Plc and Cox & Kings (I even have doubts at the management taking so much debt) is the high debt acquired for pricey acquisitions so this shows that this is one of the toughest businesses to be in because value proposition to customer is highly sophisticated and during difficult times travel and vacation is the first discretionary spend cut by the people. They can go on watching movies weekly as they do not require much money but tour and travel is a significant expense and this is something which is highly avoidable. So one has to be very wise in acquiring businesses in this sector at hefty valuations especially with debt because due to low entry barriers any deep pocketed startup can make their life miserable just like what Paytm has done to Makemytrip. The winner in this sector will be decided on the base of volumes only and there is no scope for large number of players competing with high overheads and customer acquisition costs.

k)High growth potential of outbound tourists from India: At present some 5 million Indians do foreign leisure trips and this number is going to touch 15 million within next 5 years or so. For a perspective, numbers of outbound tourists from China are some 150 million. Indian tourists are among the world’s highest-spenders and they usually spend much higher than that of the Chinese and Japanese. The average stay of Indian traveller is around 12-15 days. To capture this great business opportunity global airlines have lined up at Indian airports. This also means that more of such tourists will take the services of premium packaged holiday player like TCI. Indians generally prefer to stay in premium hotels. They value comfort of packaged holiday more than self endeavors in micro managing everything.

C)Why Prem Watsa wants to demerge the holdings of Quess corp

 One thing which I want to add on TCI demerging the holding in Quess corp to the shareholders of TCI-earlier Prem watsa utilized the sale proceeds from Quess holdings to clear the debt and acquisitions for TCI so with this demerger can we assume that Prem Watsa has done with the acquisitions spree of TCI and now wants TCI to grow these businesses first? Or if Watsa wants to utilize the demerger for raising Fairfax stake in Quess as he sees great potential in it?

If we go by the recent happenings where Fairfax has bought more shares of Quess (some 2.56 lac) from open market to raise their stake in Quess one thing is sure-that Watsa values Quess very high. The founder of Quess Ajit Issac is a very dangerous man and has done some great acquisitions in the recent past. Like recently Quess has raised money from Amazon (51 cr) to to grow the business of wholly owned subsidiary Qdigi Services Ltd. Qdigi is into the after sales services for mobile phones and consumer electronic goods through pan india service centers.

Qdigi earlier was owned by HCL Infosystems Ltd (one of the reasons I wanted to invest in HCL Infosys but after initial small entry could not make more investment) and later on Quess acquired it from HCL. This after sales services business is going to see great growth in the future if one can see the growing trend of buying much costlier mobile phones and other electronics goods where repair presents cost effective option (along with data) rather than buying a new one.

Amazon picked .51% stake at Rs.676 per share when market price was Rs. 480-at 40% premium to the current market valuation.

So Prem watsa is not going to sell Quess corp and I think neither shall we and to me this also means that TCI may not venture into any new high valued acquisition and instead the focus will be on consolidating the recent buyouts. Its recent results were good as far as topline is concerned but bottom lines growth was missing but I feel this is due to the consolidation phase of recent acquisitions and as they mature we’ll the impact on bottom line also.

Further, the growth of travel and tourism also mean that Sterling Holidays will have strong earnings growth in the future and this may prove to be the dark horse for TCI. Under TCI Sterling has improved markedly in every metrics whether it is occupancy ratio, revenue per room, Certifications, debt reduction, customer satisfaction, control of expenditure.

TCI’s forex business is seeing high growth and has very high margins. TCI has constantly created innovative product in forex like Forex card which has made handling cash on foreign travel very comfortable. Its charges for remitting foreign exchange outside India are much lower than banks and money is transferred much faster as compared to many days by banks. TCI acquired forex business from Tata capital in 2017.

Conclusion

I wanted to cover the strength of its Forex business and Sterling Holiday business in details. I also wanted to cover the comparative analysis of customer acquisition cost of OTA (in the form of heavy discounts and marketing) and the likes of Thomas cook (in the form of office rent, marketing etc.). But I am leaving it here due to length and will cover these aspects in the next post. At present I am working on GIC Re Ltd which I have started buying at 170 but as I was busy so could not post the study at the blog and in the meantime it has already touched 225 but it is still a stunning investment and if you ask me now to choose to between TCI and GIC then I’ll choose GIC without any second thought.

So I think there are valid reasons to believe that TCI is going to witness continued growth in its travel and forex businesses in the future and it is more than competent to fight the competition and living out the drought period comfortably. Moreover the valuation of some 800 cr assigned to the core business of travel and forex of TCI is very low and thus provides margin of safety. But as the sector is facing headwinds, severe competition, low entry barriers, damage to Thomas cook brand image so it is a Tier 2 stock and money should be allocated accordingly.

 (Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).