Cox and Kings Ltd’s shares have risen by 14% in the last one month after the company said it used stake sale proceeds and fund infusion by promoters to reduce debt. Gross debt fell by 15% to Rs3,496 crore in the June quarter. The debt reduction can lower the company’s interest expense by about Rs10 crore in the September quarter, according to IIFL Institutional Equities’ estimates. In the June quarter, finance costs stood at Rs67 crore. So, based on IIFL estimates, this amount can come down by around 14% and make a meaningful impact on net profit.
In a post-results conference call, the management had said that it plans to use the cash flows generated in future to pare debt every year and focus on organic growth.
If it follows through on this, it can address investor concerns about debt. The company over the years chased an incoherent business growth strategy, notably in overseas markets. This strategy pushed up debt, undermining earnings and stock valuations.
Cox & Kings began corrective steps by initiating a balance-sheet clean-up last fiscal year. Meanwhile, terrorist attacks in Brussels overshadowed the process, sparking concerns about its business prospects in Europe, the key business region for the company. While these concerns have weighed on the stock for some time, the comments on debt reduction and organic growth focus have now come as a relief.
Besides, the June quarter results showed that the Indian business is growing at a strong pace. The international business, though not fully recovered, is showing signs of stabilization. According to analysts, the management expects the India business, which generates a quarter of Cox & Kings’ revenues, to grow at 15%. Bookings for the education business, which comes under international business and contributes another quarter of the company’s revenues, are said to have bounced back.
So, if the current momentum in the business continues and Cox & Kings delivers on the promise of further debt reduction, analysts expect the stock to rerate. “Valuations remain undemanding at 10x/8x FY17/18ii (estimates) EPS, leaving substantial room for upside predicated on steady growth in operating earnings and continued de-leveraging of the balance sheet,” IIFL said in a note.