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Nath Balakrishnan

High on tourist inflows, low on the forex game.

SHAREHOLDERS can continue to hold on to the stock of the travel services major, Thomas Cook. Those contemplating investments in the stock can do so when the business prospects become clear, once the inbound traffic season commences in October.

At the current market price of Rs 236, the stock trades at a price-earnings multiple of nearly 20 times its trailing four-quarter earnings per share. The stock appears richly-valued, but these are levels of valuation that the stock has enjoyed historically.

Between October and March, Thomas Cook stands to gain the most, as this represents the inbound traffic season. With travel services contributing close to 80 per cent of revenues (financial services contribute the rest), the magnitude of tourist inflow assumes paramount importance.

Script astray

A look at Thomas Cook's performance this calendar year reveals that the story has not panned out according to the script. A combination of factors took the sizzle out of Thomas Cook's earnings in the February-April quarter, which, otherwise, would have been one of the better quarters.

If the outbreak of war in Iraq was not bad news enough, the SARS epidemic only further compounded the crisis. Both played a pivotal role in ensuring that tourists either dropped or deferred their plans to travel to destinations in Asia. This immediately affected Thomas Cook's performance.

Extraneous events such as these will have a significant bearing on Thomas Cook's performance. For instance, the latest bomb blasts in Mumbai might make tourists perceive India as a high-risk destination and postpone their travel plans.

Muted tourism numbers

Tourist inflows this yearhave been consistently higher than that in the corresponding months in the previous calendar year. Nevertheless, the increase does not reflect in Thomas Cook's performance. Tourist inflows this year received a fillip with more business travellers coming into the country. While this has benefited high-end hotels, the effect on Thomas Cook has been more muted as it specialises in arranging leisure tour packages. Between April and September, the focus shifts to the domestic market, for which this period represents the holiday season. However, this is a market that is riddled with competition and companies have to resort to aggressive pricing to acquire business.

Financial snapshot

For the quarter ending July 2003, income from operations at Rs 26.7 crore registered a sluggish growth of 3.5 per cent. This probably reflects the pricing pressure faced by the company in the domestic market. Operating profit margins dropped 200 basis points on a year-on-year basis. This fall could have been more pronounced, if not for an improvement in the operating margins of the financial services business, which was a healthy 56.1 per cent compared to 52.5 per cent on a quarter-on-quarter basis. The company continues to be aggressive with its advertising, and the expenditure under this head has been ramped up by about 35 per cent to Rs 1.2 crore in the latest quarter.

Net profit at Rs 6.1 crore rose 13 per cent compared to the corresponding previous quarter because of a substantial decline in interest outflow and depreciation charges.

Outlook

The company's customer-friendly initiatives such as tie-ups for e-ticketing and facilitating online booking of tickets, apart from the improved visibility in bookings from Germany and other CIS countries for the forthcoming holiday season, could propel earnings growth. Remain invested.

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