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Nath Balakrishnan

Buoyant tourist inflows should boost prospects.

FRESH exposure can be considered in the stock of travel and financial services major, Thomas Cook. Though the current stock valuation — at about 24 times the expected consolidated per share earnings for FY 04 (the company follows a November-October fiscal) — is high, we believe that there is scope for appreciation from the current levels as business prospects appear promising.

Thomas Cook has, historically, commanded a high valuation, driven by a combination of its pedigree and it being a one-of-a-kind play in the market.

Our current stance on the stock represents an upgrade from our earlier recommendation of `hold', which we have maintained for over a year and a half. Our past view was tempered by events that had a dampening impact on the flow of tourists both into and out of India: For instance, the outbreak of the SARS epidemic and the war in the Iraq region. Such events force tourists to either defer or shelve their travel plans; this directly impacts the fortunes of companies such as Thomas Cook.

As such, we maintain that an extraneous event of similar nature would be the key risk to our recommendation. However, we believe that the current geopolitical environment is comparatively more stable and should ensure a brisk flow of tourist traffic.

Our positive view on the stock stems from a combination of factors, particularly Thomas Cook's expansion in geographies such as Sri Lanka and Mauritius and the prospect of the company commencing outbound tourist charters by the early part of next year. The former initiative signals an intent to capture a greater share of business in geographies that hold high tourism potential.

Operating outbound charters was an area that Thomas Cook was keen on entering, as it could leverage upon the size of its aircraft fleet. With the government allowing operation of such charters, Thomas Cook should commence operations shortly. Given that such charters are more competitive compared to flying on commercial aircraft, this move could find favour with the cost-conscious domestic traveller.

With the gradual emergence of low-cost airlines in India, leisure travel within the country could get a shot in the arm and, by extension, work to Thomas Cook's advantage. The other aspect of Thomas Cook's business that could acquire significance is its insurance business (partnering Tata-AIG General Insurance). A significant ramp up in this business could positively impact Thomas Cook's earnings over the long term.

Thomas Cook's financial services division continues to be robust; with the tourism business set to see a boost in the months to come (from October begins the inbound travel season), the fortunes of this division should also witness an upswing, a good augury from an earnings perspective.

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