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.
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.
