Buy Thomas Cook; target of Rs 250: Sharekhan

Sharekhan's report on Thomas Cook (India)

"The acquisition of a 75% stake in Quess Corporation (Quess Corp) in early 2013 at Rs256 crore reflects Mr Watsa’s acumen as an astute investor. Quess Corp has exponentially grown its consolidated revenues to Rs1,401 crore in FY2014 from merely Rs49 crore in FY2009 and emerged as a leader in multiple segments like human resources (HR), office management and technology solutions. Given its exponential growth, strong cash flows and healthy return ratios, we expect huge value accretion for the TCIL shareholders and believe that the value could be unlocked through a fund raising exercise in future."

"Sterling has improved its operating performance significantly after being acquired by TCIL (in early 2014). Its revenues grew by 32% and operating loss declined by almost 40% in the first six months of FY2015. With a well redefined turn-around strategy, the management has guided that the company would turn profitable this year and significantly improve its margins in the coming years. We have factored a revenue CAGR of 30% and an OPM of 28% for Sterling by FY2017."

"TCIL is a quality play on the huge growth opportunity in the Indian leisure industry along with an exposure to the fast growing HR and office management business. With an expectation of a 30%-plus growth over the next three to four years and free cash flows exceeding Rs1,000 crore cumulatively in the next three years, TCIL would get re-rated. This leaves scope for a 40% upside in the next 9-12 months from the current levels. We recommend a Buy rating on TCIL with a price target of Rs250 (enterprise value [EV]/EBITDA of 15x on FY2017 consolidated estimated earnings factoring fully diluted equity capital of Rs 36.45 crore)", says Sharekhan research report.

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