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Buy Cox & Kings, target Rs 290: HSBC

Buy Cox & Kings Ltd. at a price target of Rs 290.|
Last Updated: Jun 04, 2018, 09.47 AM IST
HSBC has a buy call on Cox & Kings Ltd. with a target price of Rs 290.0 . The current market price of Cox & Kings Ltd. is Rs 219.3 Time period given by the brokerage is a year when Cox & Kings Ltd. price can reach defined target. Cox & Kings Ltd., incorporated in the year 1939, is a Mid Cap company with a market cap of Rs 3872.07 crore.

Investment rationale by HSBC
Upgrade COXK to Buy (from Hold) with unchanged INR290 TP, as risk-reward looks favorable at current valuations.

Upgrade post recent correction: COXK has corrected c25% y-t-d on concerns of rising receivables in the India business, as corporate customers are asking for favourable credit terms. In addition, the margins of the hotel business deteriorated as the company incurred higher costs to strengthen execution capabilities and lower profits from new hotels, adding five new hotels and 3,100 beds in FY18. We believe the stock looks attractive at the current forward EV/EBIDTA valuation, which is 1SD below the mean. We upgrade COXK to Buy from Hold.

Meininger (hotels) and Leisure India outlook remains robust:
The company was able to increase bed capacity by 43% in FY18, leading to 23% revenue growth for the segment. Management remains confident of its ability to add capacity aggressively, to 15k beds by 2019 and 25k by 2022, following an asset-light business model with minimal capital expenditure. Management sees upside to its guidance of 25k beds. The rent coverage ratio for the company remains the highest in the industry. The company is also planning to focus more on direct booking by adopting a better digital strategy. In addition, the India travel business continues to be strong, led by overall industry-wide strength and movement of customers from unorganised to organised companies. India travel saw c13% revenue growth in FY18. Both the Indian travel business and Meininger combined contribute just over 50% to overall consolidated revenues and EBITDA.

A deteriorating B/S remains a concern as short-term debt nearly doubled over the past two quarters, as customers are asking for favourable credit terms, which led to an increase in receivables. However, the company recently guided during Q4 results that it will focus on reducing indebtedness through better collections from B2B customers in FY18. Also, the company is planning to improve its business mix by increasing its focus on retail segment.

Valuation and risks
. We upgrade COXK to Buy from Hold; the recent correction has made valuations attractive. We value the domestic standalone business using the India travel industry's five-year average 12-month forward EV/EBITDA multiple of 9.0x (unchanged), and the international business at 6.0x EV/EBITDA (unchanged), in line with industry average. Key downside risks include: FX rates (40% of revenues are in GBP), a macro slowdown, and any sharp increase in competition.

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