Stake sale to aid Cox & Kings, but earnings quality still a concern

For a company facing working capital pressure and a consequent rise in borrowings and finance costs, fund infusion should ideally bring relief. But that was not how it played out at Cox & Kings Ltd last week. The stock mimicked broader market losses even as the company announced a stake sale in an overseas unit for Rs450 crore. Cox & Kings plans to use the funds to pare debt which can bring down the finance cost by Rs36 crore per annum. That would amount to 15.9% of the combined finance costs in the last four quarters, a sizeable amount.

Still, as can be seen from the stock movement, not everybody is excited. One, given the backdrop and the management commentary in the past, some are expecting a much larger asset monetisation announcement. “A larger trigger may come if the company can successfully execute its plan to IPO or sell a larger stake in the education business,” says an analyst with an institutional broking firm.

Second, it is not clear if the latest stake sale will result in a lasting improvement in earnings quality. The business recovery in the first nine months of the current fiscal coincided with a sharp rise in debt and higher working capital requirement.

So, even as the company reported visibly better headline numbers (revenues and operating profits), the deterioration in balance sheet position and working capital situation weighed on the stock, which was up 11.5% in the last one year compared to a 11.9% rise in the BSE 500 index.

According to the analyst cited above, the corporate travel segment, housed in the domestic business, is largely responsible for the deterioration in the working capital situation.

The company will have to address this to see a tangible improvement in earnings quality. “The company may want to reconsider its growth plans in the corporate travel business, which has been the main reason for the increase in working capital. The rest of the business is not facing working capital pressures. Cox & Kings’ peer Thomas Cook India has consciously slowed down its growth in corporate travel the last few years for this same reason,” says the analyst.

Kaustubh Pawaskar, senior research analyst at Sharekhan Ltd says that apart from strengthening the balance sheet, the company should also focus on improving the business fundamentals. That will reassure investors. “If the company manages to further strengthen its balance sheet through internal accruals, it will enhance investor’s confidence in the near future,” Pawaskar adds.

While the stake sale and the resultant fund infusion can bring some relief for Cox & Kings, much depends on the follow-up actions on asset monetization and earnings quality improvement.livemint


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