Buy Cox and Kings; target of Rs 223: ICICI Direct

ICICI Direct's research report on Cox and Kings

Cox and Kings’ board has entered into an agreement to sell its education business to Midlothian Capital Partners for all cash enterprise value of Rs 4387 crore (i.e. £467 million). The focus on asset light strategy and reduction in debt burden remain the key main criteria behind this move as education is a capex heavy business. This division reported revenue and EBITDA of Rs 613 crore and Rs 242 crore, respectively for FY18. Post this deal, the overall debt burden will come down from Rs 3907 crore to Rs 1507 crore. Again, with the transfer of Rs 250 crore debt to its de-merged entity (i.e. forex division), the debt burden will come down to Rs 1257 crore, which is 1.6x adjusted FY20E EBITDA against 3.4x earlier. In our view, this is a significant step towards debt reduction and will help improve the return ratios, going forward, with focus on the business with high growth potential (i.e. leisure & hybrid hotel segment). As the transaction is subject to regulatory approval, we have not factored the same in our model.

Outlook

We expect the company’s domestic leisure revenues to grow at a CAGR of 11% in FY18-20E mainly led by improving domestic spend and higher growth in foreign tourist arrivals. The company plans to increase bed capacity at Meininger at a CAGR of 28% in FY18-22E will also drive the revenue growth of its international segment. With concerns over high debt now being addressed, we upgrade our rating to BUY with a revised target price of target price of Rs 223 (i.e. valuing at 6.5x FY20E adjusted EBITDA).