{"id":1154,"date":"2019-10-02T15:35:00","date_gmt":"2019-10-02T15:35:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1154"},"modified":"2019-10-02T15:35:00","modified_gmt":"2019-10-02T15:35:00","slug":"thomas-cook-india-ltd-worth-a-trip","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1154","title":{"rendered":"Thomas Cook India Ltd: Worth a Trip"},"content":{"rendered":"
\n<\/p>\n
\n<\/div>\n
\nThese days Thomas cook India Ltd
\n(TCI) is very active in countering the bad press after the demise of global
\ntravelling giant Thomas cook PLC UK. I do not track this one regularly and have
\nnot done the in depth analysis but after the recent fall I have started making
\nmy notes and so here i am just sharing those notes. I am yet to do my detailed
\nstudy of the future potential and risks to its current business. Hence reviews
\nare most welcome.<\/span><\/div>\n
\n<\/div>\n
\nThomas cook PLC UK has no relation
\nto Indian arm operating under the same name as the Indian business of Thomas
\ncook was sold to Prem watsa owned Fairfax Financial Holdings in 2012 when the
\nglobal parent needed money for paying back the loans they took for costly
\nacquisitions that did not work well and so they were selling assets worldwide.
\nSo at present Indian arm just has the rights for using the brand name of
\n\u201cThomas cook\u201d till 2025 and is paying royalty of around Rs. 2 cr every year.<\/span><\/div>\n
\n<\/div>\n
\nA lot of information is already
\navailable in the media about the demerger of Quess from Thomas cook India and a
\nlot of analyst coverage reports are available also. At current market price of
\n134 it is available at market value of around 5000 cr and at demerger ratio of
\n2 shares of Quess for every 11 shares of Thomas cook the inbuilt valuation of
\nQuess is some 3200 cr which means TCI is valued at some 1800 cr which looks way
\nundervalued for a company with very strong Forex and travel business, 100%
\nholding in sterling holidays, 51% holding in Digiphoto. TCI has invested around
\n1000 cr in Sterling Holidays and it owns some 16 resorts with large unused land
\nbank (some 150 acre at the time of acquisition, valued at some 550 cr) so we
\ncan still value the same at minimum 1000 cr and this leaves some 800 cr for all
\nthe businesses of TCI. But they have cash in the books of
\naround 1000 cr and when we take this into account then TCI\u2019s core business of
\ntravel 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)?<\/span><\/span><\/div>\n
\n<\/div>\n
\nSo TCI looks like a value buy at CMP
\nbut the only risk is the future growth potential of Travel and Forex business
\nwhich are perceived to be facing existential threats from ecommerce businesses
\nin the form of online ticket and hotel booking (Online travel agents (OTA) like
\nMakemytrip, Yatra), online Forex startups. So in my view, study of TCI only
\nwarrants study of the business potential of TCI in the wake of emerging
\ncompetition because if it can survive this competition then it is a stunning
\nbusiness to own and a great investment to make.<\/span><\/div>\n
\n<\/div>\n
\nA) OTA\u2019s
\nare new distributors with low value addition and low entry barriers<\/span><\/u><\/b><\/div>\n
\n<\/div>\n
\nI always believe that distribution should not consume the largest
\nshare of total cost of a product. This should be the most efficient component.
\nBut distribution is the area where the business battles are won and lost and no
\ndoubt in present times maximum disruption is happening in taking the product to
\ncustomer and the biggest secret to success of a product is cost efficient
\ndistribution. <\/span><\/div>\n
\n
<\/span><\/div>\n
\na)Traditional Distribution channels add value
\nto a product:<\/span><\/u><\/b> <\/span>But distribution is one of the most important functions in
\nthe entire value chain of a product from production to final consumption. And
\nwhen we talk about value chain then it implies that distribution function adds
\n\u201cvalue\u201d to the product. How? Distributors adds value in the form of creating
\nmarket for the product, bulk procurement and redistribution, financing,
\ninventory management and logistics, after sales services, knowledge of the local
\nmarkets etc. Distribution is inherent in the entire value chain because the
\nfunction like financing, storing large quantities, market creations etc. are very
\nimportant in order for a product to get demanded and sold. People think that
\nthe likes of Flipkart, Amazon will eliminate the distributors but they are
\nwrong because then they will become the distributors itself because somebody
\nhas to perform these distribution and marketing functions so if Amazon holds
\nthe inventory, provide credit, ensure delivery then they are playing the role
\nof distributors. If they are not doing then it is sure that either the
\nproducers themselves or someone else is doing this function. Retailers keep
\nsmall quantities of many products from different producers so they need the services
\nof distributors to procure these small quantities whenever they need.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nProducers want and need to focus on the designing,
\ninnovation, production and branding functions and these require a lot of
\ncapital. So blocking further capital in the distribution channel will be very
\nrisky for them as they can only afford to take that much risk hence they need
\nthe services of distributors in placing and managing the product and supply
\nchain. So distribution needs large investments and lack of proper distribution
\nstrategy can make or break a product in the tough market conditions. Apart from
\nthe need for big investments, one can gauge the value addition by distribution
\nfunction on its own from the fact that if retailers or consumers try to arrange
\nfor self-procurements of goods from producers then this will render them very
\ncostly\u2026in fact unaffordable. So Distributors has
\nindependent value addition in the form of lowering the cost of product and
\nthat\u2019s why new disruptions like ecommerce will in most optimistic case will
\nonly replace (not eliminate) the distributors and may result in cost savings
\nand better efficiency (although this still needs to be proved).<\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\nb)Distributors in travel adds very low value: <\/span><\/u><\/b>But in airline ticket booking and hotel booking, the
\ndistribution in its conventional set up was meant for breaking the physical
\nboundaries-the primary aim was to solve the inconvenience of buyers related to
\nticket booking because only travel agent was having the access to information
\nabout the ticket prices and airlines etc. So he had all the control and he charged
\nhefty commissions from both the sides. Airlines could not afford to open
\noffices in every city so travel agents had low value additive role to play at
\nhigh cost. Hence travel agents could only increase the
\ncost of product as their value addition was very low. Their only role is to do
\na transaction over phone or keyboard and there is nothing transformational in
\njust executing a transaction. Because in traditional product distribution,
\ndistributors with their immense value addition result in the creation\/enabling
\nof a transaction which without them could not have been possible (Like without
\ndistributors a new product can\u2019t be sold to customers as who will create the
\nawareness of the product by market making) and so distributors are creating new
\ntransaction. But travel agents never create the demand for a product as willing
\ncustomer is always there without any of their intervention and they just
\nexecute the transaction. And as I said earlier there is nothing
\ntransformational in just executing a transaction.<\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\nAnd that\u2019s why internet broke the backbone of
\ntravel agent model and brought the democracy and customers can see what
\nairlines are offering and at what price. Actually if one can see there is vast
\ndifference in the distribution model for arranging a ticket or booking a hotel
\nas compared to bringing a physical good to the consumer and internet in the
\nlater can only solve\/improve just one component (product
\ninformation\/availability) <\/span>in the entire
\ndistribution chain and can never replace the most important distribution
\nfunctions of financing, storage, market creation, after sales services, bulk
\nprocurement etc. and these primary functions ensure the most cost efficiency.
\nBut in the ticket\/hotel booking chain the main function of the distribution is
\nthe 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
\nspecialization is very remote and that\u2019s why internet hit traditional travel
\nagents hard and as one can see these online portals are nothing but new form of
\ntravel agents (Online travel agents) who earn their livings now at very low
\nprice.<\/span>
\n
<\/span>
\nFurther, 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.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nc) Low entry barriers in OTA:<\/span><\/u><\/b> <\/span>So
\nthe startups which brought this revolution had just placed themselves to be the
\nnew form of travel agents which can focus on high volume low margin business
\ndue to the reach facilitated by internet but the likes of Makemytrip, Yatra,
\nOyo are nothing but new age travel agents and as they are burning big money on
\ndiscounts so we think that they have brought big revolution but this may not be
\nthat big of revolution in the end (when equity flow will dry). But as there is
\nno differentiation in the product or services offered so customer acquisition
\ncosts are high. Even the airlines themselves are selling tickets online. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nLow entry barriers meant that the startups touted as
\nrevolutionary in online ticketing like Makemytrip are still making hefty losses
\neven after around two decades of operations (its contemporary Naukri.com is
\nprofitable for last 15-20 years). <\/span>Makemytrip merged with Goibibo and Redbus and
\nthey were expecting profitable times but the entry from the likes of Paytm in
\nair ticket, Oyo and Booking.com in hotel bookings has ruined their plans. These
\nstartups are backed by global giants are burning cash like anything for
\nacquiring customers. And everybody has their own strengths like Booking.com is
\na global giant so for India inbound business (by foreign travellers) it is
\nhaving the largest share for inbound travel.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFurther, I feel as occupancy ratio of hotels are increasing
\nin India\u2026it is faster than the growth in the room supply so hotels may not be
\nneeding the services of these online portals that much and that will create the
\npressure on their margins which are already in single digits. So in the end
\nthis low margin low entry barrier game is going to be won only on the basis of
\nsheer volumes. These online startups are riding on the value addition made by
\nthem to the unbranded small hotel chains because they have no means to spend
\nbig on branding and customer acquisition. So the likes of Makemytrip earns some
\n90-95% revenue from unbranded chains because the big chains like Oberoi, Tata
\nhas their own distribution models just like Dominos Pizza who have their own
\nhome delivery setup and they do not the services of aggregators like zomato and
\nswiggy. Why? Because of their volume of business which is high enough to
\nsupport the cost of having its own dedicated supply chain. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nd) New Innovations in travel distribution: <\/span><\/u><\/b>So as the models of the likes of Makemytrip is centered on
\nadding value to unbranded small city chains. But present time is an era of
\ndistribution innovation-now new innovative startups like Fabhotels and Treebo
\nhave emerged. These startups take the inventory from small hotels on lease and
\nprovide standardized services to its customers just like an established branded
\nchain and this may hit the likes of Makemytrip as hotels can\u2019t afford so much
\ndistributors. The likes of Fabhotels charges some 20% commission from hotels
\nand they manage these properties on their own. And I feel they are bigger
\ndisruptions than Makemytrip because the disruption factor for Fabhotels is
\nquality of services not delivery form (online).<\/span><\/div>\n
\n
<\/span><\/div>\n
\nMakemytrip has suddenly formed the friendship with Oyo when
\nthe later has changed its businessmodel from an aggregator to supplier of hotel
\nrooms. But Oyo is a supplier (taken on lease) of 1 star\/budget hotels unlike
\nFabhotels and Treebo which are running 3 star hotel properties. So they are
\ngiving tough competition to the likes of Makemytrip and Oyo and recently
\nMakemytrip has delisted both Fabhotels and Treebo from its platform and only
\nallowed Oyo to continue their listings. I wonder how the customers looking at
\nthe listings of Makemytrip portals will find the best possible deals when
\nMakemytrip has delisted Fabhotels and Treebo without any specific reason and
\nthis looks like anti-competitive step. <\/span><\/div>\n
\n
<\/span><\/div>\n
\ne)Quality and loyalty will be the
\ndifferentiator:<\/span><\/u><\/b> <\/span>Even the global giant Booking.com is proving tough
\ncompetitor to Makemytrip having some 52000 indian properties as compared to
\nsome 58000 of Makemytrip. Booking.com was a new entry in Indian hotel arena but
\nI think they were the smartest as they focused on creating the differentiator
\nin the form of quality services then cheap offers. The likes of Makemytrip and
\nOyo focused too much on offering discounts so they ended at supporting third
\nclass hotel properties to their customers which hit the loyalty very hard and
\nthis was where Booking.com nailed the deal. It built relationships with top
\nquality hotels who are vary of their brand image and did not want to allow
\naggregators to destroy their long term value by offering their rooms at high
\ndiscounts. So they preferred the likes of Booking.com for top quality properties.
\nAnd I think the strategy of Booking.com is going to earn them the loyalty of
\nits customers and this will be decisive in the final battle because pricing
\ncan\u2019t be a decisive factor to earn customer loyalty and I am surprised that why
\nmost of the online aggregators have failed to recognize this. In the end, on
\njudgment day the customers will choose the one with quality services because on
\nthat judgment day nobody could afford discounts (equity money long gone).<\/span><\/div>\n
\n
<\/span><\/div>\n
\nB) So specialization and personalized experience is
\nthe key for Thomas cook<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\na)Travel
\nand vacation industry is in transformation<\/span><\/u><\/b> <\/span>and
\nduring these tough times one needs to have enough supplies (cash) to last
\nlonger on its own and that’s where Thomas Cook UK did a blunder-Debt. They were
\nhit by unnecessary high debt taken for useless pricey acquisitions. Travel firms do not have any tangible assets to support
\nvaluations. They only have brand value and that\u2019s why their only asset in the
\nbalance sheet is the Goodwill which results in bloody blows to valuations
\nduring tough times when they are always found swimming naked in the pool. And
\nthese ghost balance sheets explain why some businesses like Hotels and
\nHospitals has strong barbed wires fences in the form of pricey and quality real
\nestate which defends their valuations even in the toughest times.<\/span><\/span><\/div>\n
\n<\/div>\n
\nAs of June-19 TCI has some 1300-1400
\ncr cash in books and this they will use for more acquisitions. They have
\nvaluable real estate in the form of offices etc. of Thomas cook. Even Sterling
\nholidays ltd has large unused land (150 acre, valued around 550 cr) and out of
\n33 resorts Sterling owns some 16 resorts. So TCI does
\nnot have a ghost balance sheet and it has real assets in the books to support
\nand create high valuations<\/span>.<\/span><\/div>\n
\n<\/div>\n
\nSo there are some industries where
\nacquisitions in good times is always useless and Travel\/vacations is one such
\nsegment…they are nothing….they do not have any sort of entry barrier…they
\ndo not provide complex services like these days many people are planning their
\nvacations on their own (DIY) and this is hitting travel agency business hard..<\/span><\/div>\n
\n<\/div>\n
\nI always try to invest in a stock
\nwith entry barriers. Like I am investing in Concor for long and recently advised
\neverybody to invest higher amount in this one. The main reason is the high entry
\nbarriers-To arrange thousands of acre land for ICD\u2019s, then buying or leasing thousands
\nof containers, building and leasing railway networks and acquiring and building
\nrelationships with diverse clients is not an easy task and require huge
\ncapital. That\u2019s why apart from Concor we only have Gateway Distriparks and
\nArshiya in railway container freight business in India. Entry barriers is the
\nbiggest decisive factor and i feel travel agents’ day of earning big money just
\nby dialing a phone\/internet to a hotel\/airlines are gone…they need to provide
\nvalue added services…easy money is gone now. It is not about taking a person
\nfrom point A to point B but now it is about \u201cHow\u201d you\u2019ll take them from point A
\nto point B and what experiences you can create during this journey. <\/span><\/div>\n
\n<\/div>\n
\nb)Vacations
\nare about experience not management:<\/span><\/u><\/b> <\/span>With the advent of the likes of
\nAirbnb, online ticket booking, Hotel deal aggregators any individual can plan
\ntheir vacation itinerary and other details. But in this freedom to plan your
\nvacation, there are high chances to find a useless homestay at Airbnb or a
\nshabby hotel or trapped in an unknown route to a popular destination and this
\ncan turn a happy vacation into a nightmare quite fast and no traveler would
\nwant to take this risk if they can avoid this for a fee. And that\u2019s why travel agency business is not about being a
\nmiddleman anymore but it is more about personalized service to let an
\nindividual traveller to focus on the fun\/relaxation part of the vacation not on
\nthe logistics and administrative tasks as these will eat out the precious time
\navailable for enjoying\/relishing the vacations or running here and there to
\narrange the minute details in order. So there is a sound business case for
\nTravel firms in the form of providing and ensuring comfortable vacations for
\nthe travellers. Being responsible for the vacation is extremely stressful and
\ntedious job and this can possibly eliminate the idea of relaxation on a
\nvacation. Planning your own vacations is like deciding, checking, guiding and
\nsupervise the preparation of a dinner you ordered in a restaurant. <\/span><\/span><\/div>\n
\n<\/div>\n
\nLike if someone wants to
\ncover multiple places in India from Mumbai, Rajasthan, Himalaya etc. so there
\nwill be places not connected by air and he has to plan for taxi booking etc.
\nalong with other all sorts of things which will definitely ruin the fun part of
\nthe trip.<\/span><\/div>\n
\n<\/div>\n
\nPackaged tours take the services of
\nlocal guides who have the knowledge of best places, best foods, local culture
\nand due to this they can offer a traveller a wholesome experience rather than
\njust a physical visit. I also feel that as the volumes will grow in the
\nindustry Hotel\/airlines and packaged tour firms will be able to lower the costs
\nand this may result in the elimination of any cost advantage in DIY booking and
\ntravel arrangements. Further, the tough times will require more customer
\ncentric quality services and experiences which will eliminate small and
\ninefficient players from the industry and the much better players like TCI will
\nsurvive this tough phase on the strength of their balance sheet and networks.<\/span><\/div>\n
\n<\/div>\n
\nc)From
\nTravel agent to Travel advisor:<\/span><\/u><\/b> <\/span>And this value addition is creating
\na new industry term-Travel advisor (not agent). And in order to remind people
\nof their value addition, American Society of Travel Agents changed its name to
\nthe American Society of Travel Advisors (ASTA) in 2018. The advisor\u2019s value
\ncomes from their knowledge and experience, rather than being simply transactional.
\nThe value addition can be in the form of concierge services like they handle
\ndinner reservations while on travel, handling travel documents like Visa and
\npassports etc. Travel advisors has vast networks in the form of long standing
\nrelationships with airlines and hotels and due to this they can offer cheap and
\nbest rates to their customers. They can provide customized tours purely on the
\nbasis of their networks which is not possible for an individual DIY planner
\nlike winery destination tours where people travel world\u2019s best winery
\ndestinations and this is something that they can\u2019t plan on their own. These
\ntravel advisors do not charge commission from you but they charge consultancy
\nfees and this fee returns much higher value. TCI is
\nearning some 30-40% from customized tours for its travel business.<\/span><\/span><\/div>\n
\n<\/div>\n
\nd)How
\nTCI is doing things different and better:<\/span><\/u><\/b>
\nSo for players like Thomas Cook digital\/online is just a medium to offer their
\nvalue added services and is not a big differentiator\/disrupter against the
\nvalue additions that they can offer. Thomas cook India does have high entry
\nbarrier business in the form of money exchange etc which has great synergy with
\ntravel business. Thomas cook India has avoided useless acquisitions (that too
\nfunded by debt) in past and in fact they have done some great investments like
\nQuess (unrelated), sterling holidays, Digiphoto etc. Prem watsa has
\ndemonstrated the willingness\/philosophy (like Warren Buffet) of doing
\nacquisitions in unrelated business segment like Quess (which is in human
\nresource business) and they have created immense valuation. For Quess, in 2013
\nhe picked up stake in Quess for some 250 cr (70%) and within 4 years he earned
\nsome 40-50 times returns. <\/span><\/div>\n
\n<\/div>\n
\nSo Prem Watsa so far has used cash
\nflows from Thomas cook to do acquisitions not focusing only on size and synergy
\nfor the current business but purely on creating and maximizing shareholder
\nvalue by using the cash for the most productive use. And just like Warrant
\nbuffet, Watsa also has this policy of providing free hand to the management of
\nacquired companies. TCI had dedicated and capable management since long like
\nits current head Madhavan menon is with TCI since 2000 and Watsa never
\ninterfered in the day to day business. Also he has left sterling holidays to
\noperate independently. TCI acquired the travel business of Kuoni in India and
\nrenamed it as SOTC but SOTC is working independently and it is competing with
\nTCI for travel business (although sharing common functions like HR, IT, Legal
\nof the group). This I think is due to the fact that TCI wants to create a new
\ntravel vacation brand in India when they will lose the rights of using Thomas
\ncook brand in 2025.<\/span><\/div>\n
\n<\/div>\n
\nLike Digiphoto is not about our
\nroutine street photographer with a camera. Digiphoto managed to create value
\nfor itself even when everybody is having a camera. How? They added immense
\nvalue to a photo\u2026they use drones, Under water cameras, Ultra zoom cameras and
\nother high tech equipment to capture the special moments for a traveler and one
\ncan\u2019t click these pictures with their phones. Sometimes camera is placed one KM
\naway from the venue. Like in amusement parks like Wonderla, Imagica in India
\nthey have their cameras installed on rides and with these they can click you on
\nride. They have tied up with Desaru Adventure Waterpark in Malaysia, Farah
\nExperiences in Abu Dhabi and Atlantis Sanya in China. DEI owns rights to 14
\nintellectual properties. They clocked 450 cr revenue last year and around 25 cr
\nnet profit. That\u2019s why value addition is a continuous process and one needs to
\nreinvent regularly.<\/span><\/div>\n
\n<\/div>\n
\nThomas cook India has offered some
\nof the best solutions for foreign travellers in the form of forex cards like in
\n2012 they launched a prepaid multicurrency forex card in collaboration with
\nMasterCard and then in 2015 they launched a U.S. dollar-denominated preloaded one
\ncurrency card which can be used without paying any currency conversion charge.
\nAfter acquisition by watsa, Thomas cook increased the focus on online presence
\nand now gets some 30% business via ecommerce routes which was at some 7% in
\n2016.<\/span><\/div>\n
\n<\/div>\n
\ne)Debt killed Thomas cook Plc UK<\/span><\/u><\/b>: Thomas cook Plc UK is dead because of high debt taken for
\npricey acquisitions which yielded no profits, they were having airplanes, they
\nbought the hotel inventory in advance from hotels to sell the same later to
\ntravellers so as we can see with stressed balance sheet they could only go as
\nfar and that\u2019s why they meet the dead end. Further, there is no denying to the
\nfact the terrorist attacks on popular destinations where TC Plc was the
\nspecialist, travellers discarding beach experience, Brexit etc. has also hit
\ntheir business hard but still the reason is that TC Plc could not survive these
\ntough times due to weak balance sheet. The demand
\nfor their travel business can be assessed from the sheer number of package
\nholidays sold by them last year-11 million!! Its competitor Tui has survived
\nthe same tough environment only due to its strong balance sheet.<\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\nAs I have shared earlier about the low entry barriers in
\ntour and travel business, so businesses with low entry barriers can\u2019t afford to
\ntake high debt because of low margin business and due to low entry barriers
\nwhen any deep pocketed rival starts the price war then high debt can prove to
\nbe a death knell because this will put further pressure on low margins and debt
\nservice would become impossible. That\u2019s why I always feel that low margin
\nbusinesses should stay away from debt at least for costly acquisitions.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut the likes of Thomas cook India and Thomas
\ncook china have survived because of their diversified revenue streams <\/span>when TC Plc was only having traditional asset heavy tour
\noperator model. TCI has survived the onslaught from
\nOTA because of nil debt and very strong balance sheet and in fact they also
\ninvested big in online channel and done acquisitions in this area. <\/span>TCI <\/span>offers
\na large portfolios of services like foreign exchange, corporate travel,
\nmeetings and incentives, leisure travel, insurance, visa and passport services
\nand this has ensured asset light balance sheet and stable margins.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nf)Tough to create strong brand in Packaged Holidays:<\/span><\/u><\/b> <\/span>In 2018 Makemytrip was the worst
\nperformer among all the online travel portals with de-growth of 18% in its
\nrevenues and is trading at most expensive valuations and in spite of being in
\nthe business for more than 20 years it has not had a single quarter of positive
\nEBITDA since 2012. It has done better in 2019 but that is more due to decrease
\nin marketing spend by some 60%. The likes of Makemytrip are still playing the
\nrole of middleman between ticket\/hotel bookings but off late they are also
\ntrying to provide packaged tour business because even they know that they can\u2019t
\nsurvive on low margin ticket bookings and packaged tour business is the natural
\nprogression of their ticket\/hotel booking business. And most important thing is
\nthat there is a strong demand for packaged tour in fact quality packaged tour. People
\ntry on their own not because of costs involved in packaged tour but their
\ndoubts on any value addition. If packaged tour operators like TCI can provide
\ntop notch quality then there is no reason why people won\u2019t opt for their
\nservices. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nBut
\nbuilding a successful brand in packaged tour requires altogether different
\napproach and service quality. It requires building huge network of
\nrelationships with hotels, cruise liners, restaurants, transporters etc. and
\nthis is very different from being a middleman and it requires expertise and
\nbuilding a dedicated and professional team for this because the only
\ndifferentiator here is the customer service and experience and this will result
\nin the creation of customer loyalty and strong brand image.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nAnd
\nthis strong brand image was the reason when Swiss tourism major Kuoni was
\nselling its India business, the likes of Makemytrip was very aggressive for the
\nsame. Makemytrip knew very well that they need a strong brand in packaged tour
\nand Kuoni was just that. Makemytrip was well aware that their current strengths
\ncan\u2019t ensure the success in packaged tour business as the same require highly
\nsophisticated service levels. Others like Club7 and many other private equity
\nplayers were also in the foray but Thomas cook emerged as the ultimate winner.
\nSo Thomas cook is going to use Kuoni and SITA brands in
\nfuture after their deal with Thomas cook ends in 2025. But in the wake of
\ncurrent crisis they may choose to shed the name Thomas cook but I still feel
\nafter this initial crisis sanity will prevail and with proper publicity TCI can
\neven think of acquiring the Thomas cook brand forever. <\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\ng)Acquisition of Kuoni\u2019s global DMS business:<\/span><\/u><\/b> <\/span>After Kuoni india business buyout, TCI<\/st1:stockticker> has acquired the destination management
\nspecialists (DMS) of Kuoni spanning across 17 countries. This acquisition was
\ndone by TCI<\/st1:stockticker> to focus on the
\ncapturing the outbound Indian travel. With the acquisition of DMS business of
\nKuoni, TCI<\/st1:stockticker> has become a true
\nmultinational company and TCI<\/span> added leading DMS entities like
\nAsian Trails (APAC), Desert Adventures (MENA), ATM-Australian Tours Management
\n(Australia), Allied T Pro (North America), Private Safaris (Eastern Africa) and
\nPrivate Safaris (Southern Africa) under its network. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nDMS
\nis an entity which can handle the travel, meeting, sight-seeing or
\nentertainment needs of a group of tourists or an individual at a specific place.
\nThey are local experts and can arrange anything from airport pick up, local
\ntransportation, Hotel and convention booking, site selection, local sight-seeing,
\ntour guides etc. Like TCI may be sending a group of tourists to Singapore, Hong
\nkong and Macau and instead of planning and arranging for facilities at these
\nplaces it may outsource entire tour to local DMS in these cities. So as we can see, with the acquisition of worldwide DMS
\nbusiness now TCI can micro manage the vacation tours of its customers to these locations
\nand all this ensures much better and seamless experience for a traveller.<\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\nBecause
\nof the size of operations of TCI in travel and forex, each and every
\nacquisition is getting fit in the whole scheme of the entity and big synergy is
\ncreated due to diversified and interconnected revenue streams of TCI like the
\nadditional revenue of some 1200 cr from Kuoni DMS will also bring the business
\nfor forex and other foreign travel services. So every acquisition is worth more
\nin the hands of TCI than any other rival. For India bound tourism, TCI is providing
\nDMS services under 3 brands-SITA, TCI, and Distant Frontiers and it earned revenue
\nof Rs. 632 cr from this in FY 2018-19.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nh)Online vs Brick and Mortar presence:<\/span><\/u><\/b> <\/span>The management of TCI could easily
\nforesee that the ticketing business is going to become a commodity soon and
\nthis will not be having much business sense. So they focused instead on
\nbuilding the products which could provide the experience to customers and so
\nthey invested in planning specialized packaged tours. Buying
\na ticket online is very different from buying a tour package online as one
\nwould need to consult and discuss a lot about the package with the provider and
\nthis necessitated the need of having brick and mortar offices. <\/span>TCI has
\nnever closed its physical offices and that proved a game changer because even
\nthe likes of Makemytrip, Firstcry, yatra opened brick and mortar stores all
\nover India because there are few products where customers want to feel, discuss
\nand know before pressing the buy button on a portal. Bargaining is also
\ninvolved as Indian customers always want so it is very difficult to sell a
\npackaged tour online in India. The opening of offices by OTA players for
\ngrowing their Packaged tour business clearly shows the visionary insights of
\nTCI about the travel industry and this also meant that these OTA players do not
\nhave any edge over TCI when it comes to offer packaged tours and in fact here
\nTCI has much wider networks, history, brand, management expertise which will
\nensure further periods of high growth of its travel business.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThese
\ndays customers use online channel when they are booking small low value
\ndomestic package but when they are booking costly and large international
\npackage then they prefer to have a physical touch point like visiting offices
\nand talking over phone. Also TCI gets majority of
\nrevenues from outbound travel where local OTA\u2019s like Makemytrip have very low
\nimpact and their capability to build network with international hotel chains is
\nalso limited.<\/span><\/span><\/div>\n
\n
<\/span><\/span><\/div>\n
\ni)TCI managed growth and survival in tough and competitive scenario:
\n<\/span><\/u><\/b>The advent of OTA channels could not hit
\nthe business of TCI is evident from the fact that the travel business of TCI
\nhas grown bigger and bigger in last 8-10 years. Even in 2018-19 its travel
\nbusiness grew by some 20% to 6000 cr with EBIT at 182 cr vs 135 cr. Its
\ndomestic leisure travel business grew by some 70% from 106 cr to 176 cr. Its
\nMICE (Meetings, Incentives, Conventions and Exhibitions) has grown very fast
\nand touched revenue of 1114 cr vs 810 cr last year. MICE segment is
\nnon-discretionary in nature as this is business oriented. This is an area where
\nthere is huge scope of growth as apart from Indian companies growing their
\ninternational reach so many global firms are also opening businesses in india. Even
\nin June-19 quarter, MICE business has shown the growth of 15%. Thomas cook has
\nnegative working capital business model where customers pay them in advance but
\nthey pay to the supplier later.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFurther,
\nThomas cook India does not see the OTA\u2019s as their competitors because TCI main
\nthrust is on comprehensive tour business and in fact TCI is the largest
\nsupplier of business to the likes of OYO and Makemytrip.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThomas
\ncook is continuously creating new innovative packages like woman only tours,
\npackages for senior citizens etc. and they are spending big on advertising
\nbecause they have the money. As we can see the specified packages like senior
\ncitizens require much deeper specialization in providing special diets, medical
\nfacilities etc. on tour and this requires specialization and investments. This
\nis the value addition which customers need and specific packages like these
\ncan\u2019t be executed in individual capacity.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nj)Consolidation in the tough business environment is the key:<\/span><\/u><\/b> <\/span>The business environment is very tough
\nfor tour and travel guys and the demise of Cox & Kings and Thomas cook Plc
\nhas created the doubts in the mind of every supplier of the industry and they
\nare getting very cautious in extending credit to the industry especially small
\nplayers. So we\u2019ll see that banks will not advance credit to small unorganized
\nplayers and this will hit the unorganized sector very hard and consolidation
\nwill follow where only the strong players like TCI will survive. So the present
\ntime is just about the survival and only those who can withstand the hard blows
\nwill survive. Low entry barriers are illusionary as everybody thinks that they
\nhave the ace factor to succeed but in reality low entry barrier businesses are
\none of the toughest to run profitably because more often too much money will
\nchase the low volume of business which hits the margin hard. But this creates the
\nproblems only for small players and after a long battle these small players put
\ndown their guns.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFurther
\nwith the fall of Cox & kings and now Thomas cook Plc there is a golden
\nopportunity for TCI to capture this business. Just
\nlike the share price of Tui group the competitor of Thomas Cook Plc UK which has
\nsurged some 15-20% after the demise of Thomas cook UK because analysts are
\nconfident about Tui to fill the vacuum created by Thomas cook UK.<\/span> Similarly,
\nTCI may acquire some businesses of cox & kings or may even looking at
\nbuyout the same as it can use the brand name but this all depends upon the
\nfinal decision taken by management on the future viability of brand name of
\nThomas cook. But I feel that they should stick to Thomas Cook and even consider
\nbuying out the Thomas cook brand at least for India. Also, I am sure that the
\nlikes of Makemytrip may do anything to acquire a brand like Cox & kings as
\nthey badly need something in this segment.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nThe
\nmain reason behind the fall off Thomas cook Plc and Cox & Kings (I even
\nhave doubts at the management taking so much debt) is the high debt acquired
\nfor pricey acquisitions so this shows that this is one of the toughest
\nbusinesses to be in because value proposition to customer is highly
\nsophisticated and during difficult times travel and vacation is the first
\ndiscretionary spend cut by the people. They can go on watching movies weekly as
\nthey do not require much money but tour and travel is a significant expense and
\nthis is something which is highly avoidable. So one has to be very wise in
\nacquiring businesses in this sector at hefty valuations especially with debt
\nbecause due to low entry barriers any deep pocketed startup can make their life
\nmiserable just like what Paytm has done to Makemytrip. The winner in this
\nsector will be decided on the base of volumes only and there is no scope for
\nlarge number of players competing with high overheads and customer acquisition
\ncosts.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nk)High growth potential of outbound tourists from India:<\/span><\/u><\/b> <\/span>At present some 5 million Indians do
\nforeign leisure trips and this number is going to touch 15 million within next 5
\nyears or so. For a perspective, numbers of outbound tourists from China are
\nsome 150 million. Indian tourists are among the world\u2019s highest-spenders and
\nthey usually spend much higher than that of the Chinese and Japanese. The average
\nstay of Indian traveller is around 12-15 days. To capture this great business
\nopportunity global airlines have lined up at Indian airports. This also means
\nthat more of such tourists will take the services of premium packaged holiday
\nplayer like TCI. Indians generally prefer to stay in premium hotels. They value
\ncomfort of packaged holiday more than self endeavors in micro managing
\neverything.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nC)Why Prem Watsa wants to demerge the holdings of Quess corp<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\n <\/span>One thing which I want to add on TCI demerging
\nthe holding in Quess corp to the shareholders of TCI-earlier Prem watsa
\nutilized the sale proceeds from Quess holdings to clear the debt and
\nacquisitions for TCI so with this demerger can we assume that Prem Watsa has
\ndone with the acquisitions spree of TCI and now wants TCI to grow these businesses
\nfirst? Or if Watsa wants to utilize the demerger for raising Fairfax stake in
\nQuess as he sees great potential in it?<\/span><\/div>\n
\n
<\/span><\/div>\n
\nIf
\nwe go by the recent happenings where Fairfax has bought more shares of Quess
\n(some 2.56 lac) from open market to raise their stake in Quess one thing is
\nsure-that Watsa values Quess very high. The founder of Quess Ajit Issac is a
\nvery dangerous man and has done some great acquisitions in the recent past.
\nLike recently Quess has raised money from Amazon (51 cr) to to grow the
\nbusiness of wholly owned subsidiary Qdigi Services Ltd. Qdigi is into the after
\nsales services for mobile phones and consumer electronic goods through pan
\nindia service centers.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nQdigi
\nearlier was owned by HCL Infosystems Ltd (one of the reasons I wanted to invest
\nin HCL Infosys but after initial small entry could not make more investment)
\nand later on Quess acquired it from HCL. This after sales services business is
\ngoing to see great growth in the future if one can see the growing trend of
\nbuying much costlier mobile phones and other electronics goods where repair
\npresents cost effective option (along with data) rather than buying a new one.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nAmazon
\npicked .51% stake at Rs.676 per share when market price was Rs. 480-at 40%
\npremium to the current market valuation. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo
\nPrem watsa is not going to sell Quess corp and I think neither shall we and to
\nme this also means that TCI may not venture into any new high valued acquisition
\nand instead the focus will be on consolidating the recent buyouts. Its recent
\nresults were good as far as topline is concerned but bottom lines growth was missing
\nbut I feel this is due to the consolidation phase of recent acquisitions and as
\nthey mature we\u2019ll the impact on bottom line also.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nFurther,
\nthe growth of travel and tourism also mean that Sterling Holidays will have
\nstrong earnings growth in the future and this may prove to be the dark horse
\nfor TCI. Under TCI Sterling has improved markedly in every metrics whether it
\nis occupancy ratio, revenue per room, Certifications, debt reduction, customer satisfaction,
\ncontrol of expenditure.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nTCI\u2019s
\nforex business is seeing high growth and has very high margins. TCI has
\nconstantly created innovative product in forex like Forex card which has made handling
\ncash on foreign travel very comfortable. Its charges for remitting foreign exchange
\noutside India are much lower than banks and money is transferred much faster as
\ncompared to many days by banks. TCI acquired forex business from Tata capital
\nin 2017. <\/span><\/div>\n
\n
<\/span><\/div>\n
\nConclusion<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nI
\nwanted to cover the strength of its Forex business and Sterling Holiday business in details. I also wanted to
\ncover the comparative analysis of customer acquisition cost of OTA (in the form
\nof heavy discounts and marketing) and the likes of Thomas cook (in the form of office
\nrent, marketing etc.). But I am leaving it here due to length and will cover
\nthese aspects in the next post. At present I am working on GIC Re Ltd which I have
\nstarted buying at 170 but as I was busy so could not post the study at the blog
\nand in the meantime it has already touched 225 but it is still a stunning
\ninvestment and if you ask me now to choose to between TCI and GIC then I\u2019ll
\nchoose GIC without any second thought.<\/span><\/div>\n
\n
<\/span><\/div>\n
\nSo
\nI think there are valid reasons to believe that TCI is going to witness
\ncontinued growth in its travel and forex businesses in the future and it is
\nmore than competent to fight the competition and living out the drought period
\ncomfortably. Moreover the valuation of some 800 cr assigned to the core
\nbusiness of travel and forex of TCI is very low and thus provides margin of
\nsafety. But as the sector is facing headwinds, severe competition, low entry
\nbarriers, damage to Thomas cook brand image so it is a Tier 2 stock and money
\nshould be allocated accordingly.<\/span><\/div>\n
\n<\/div>\n
\n <\/span>(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.<\/span> <\/span>Reach me at oscillationss@yahoo.in<\/span>).<\/span><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1154","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1154","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1154"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1154\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1154"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1154"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1154"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}