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Nath Balakrishnan

SHAREHOLDERS can retain their holdings of the Thomas Cook stock. The current valuations are rich, at about 33 times the expected consolidated per share earnings for the year ending October 2005; the valuation is also in line with those commanded by leading names in the hotel business such as Indian Hotels and Hotel Leela, which share linkages with Thomas Cook's business. Thomas Cook has historically enjoyed a high valuation, part of which could also be a scarcity premium on account of being a one-off play in the market.

For the half-year ended April, though the topline remained more or less flat at Rs 61 crore, a rise across various cost heads led to a 25 per cent drop in earnings at Rs 9.5 crore.

Tourist inflows were also affected in the wake of the devastating tsunami of December 2004. Such events tend to have a damaging impact on Thomas Cook's business, as had happened post-9/11 and the SARS outbreak. That the tsunami occurred when the inbound tourist season was just about peaking did not help its cause either.

The next two quarters ahead would capture the impact of the outbound tourist season; though competitive, this is a segment that is gradually hotting up, thanks to the emergence of low-cost aircraft carriers that have made flying an affordable luxury to a wider cross-section of the population.

Further, with domestic carriers also allowed to fly abroad, the greater availability of seats should see more people winging their way to foreign destinations, both for business and leisure. This should augur well for Thomas Cook's business.

We also take a positive view of Thomas Cook establishing subsidiaries in such tourism-intensive destinations as Sri Lanka and Mauritius.

Though it may take some time for Sri Lanka to be back on the traveller's list as a preferred holiday destination, as it is still recovering from the destruction wrought by the tsunami, Thomas Cook should benefit once business rebounds; Mauritius, too, is promising.

The company's insurance venture, though not significant in the current scheme of things, has the potential to deliver value over the long term once it acquires scale.

At the current price, the stock appears to factor in the near-term growth potential. Downside risk appears limited, when one considers that the stock has been on firm ground even after the announcement of second-quarter results, which have been disappointing.

Remain invested.

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