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Thomas Cook India's latest promoter is transforming it completely

Manisha Singhal     February 13, 2014

When Canadian investment firm Fairfax Financial acquired a 77 per cent stake in travel operator Thomas Cook India in May 2012, one question many asked was: will this be third time lucky for the company? It had already changed hands twice before in less than 10 years even though it was a profitable company. "Thomas Cook (India) was a well-behaved orphan who actually brought happiness to the family but was asked to go away," says Thomas Cook India Managing Director Madhavan Menon, sitting in the company's head office in a heritage building in South Mumbai's Fort area.

More than a year after the $150-million deal, Thomas Cook India is in transformation mode. To begin with, the venerable travel company ' born of the 142-year-old Thomas Cook, UK ' has already changed its fuddy-duddy image to a more diversified modern business with its finger on the pulse of the customer. Fairfax plans to make the travel company its investment vehicle in India ' but its new acquisitions will not be in the travel business alone. Thomas Cook intends to hunt for acquisitions in the services sector which Menon describes as a "sunshine industry". "If you look at the travel industry there is nothing to buy," says the 58-year-old banker by profession who has previously worked with Grindlays and Citibank. "Outsourcing has vast opportunities, any opportunity that comes to us as a service industry will be evaluated."

Market analysts see the India acquisition by Fairfax as part of a bigger plan. "The idea behind acquiring the company is to build a diversified conglomerate here," says Abhijit Akella, analyst at Mumbai-based institutional equities research firm IIFL. "Fairfax, which itself is an insurance company, uses the premium float in various kinds of businesses and the common thread for their acquisition is a company with a high generation of cash flows."

Menon points to Fairfax subsidiary Fairbridge Capital's acquisition of a 74 per cent stake through Thomas Cook India in Ikya, a Bangalore-based human capital solutions firm, for Rs 256 crore in February 2013. It was a sound business decision that paid off: Thomas Cook India posted a 77 per cent increase in profit after tax in the third quarter of 2013, with its core travel and foreign exchange business accounting for 23 per cent of profit from operations. Thomas Cook India sales stood at Rs 440.5 crore in 2012 while its market cap is Rs 2,118 crore. "Fairfax is a long-term shareholder which will not sell this company," says Menon. "We could become a holding company for their acquisitions in India ? TCIL will still be the cash cow that generates cash to acquire companies or at least pay for part of these acquisitions." Prem Watsa, the Indian born Canadian investor and chairman of Fairfax, agrees. "Thomas Cook India is not an investment ' it is strategic, it is forever," he said in an email to Business Today. "We invested in Thomas Cook with a view that its future cash flow can be used to purchase further investments in India in the future. Thomas Cook will look for companies run by great management teams that are good clean businesses, run for the long term."

Thomas Cook seems to be in hurry to make acquisitions. Steering clear of travel firms with the same product capability , it is aspiring to enter the hospitality sector. It is in talks with timeshare hospitality firm Sterling Holiday Resorts (India) for a buyout. "We are in preliminary discussions with various companies in the travel and related businesses, including Sterling Holiday Resorts (India) Ltd, as an avenue for investment," it told the stock exchange on February 4. (Thomas Cook India and Sterling Resorts announced their merger on February 8, as this issue was going to press.)

Critics say Thomas Cook's strategy will lead to a dilution of its core businesses: travel and foreign exchange. Some say Thomas Cook will eventually be sold off. "So they will gradually cease to be true travel company," says a competitor who did not not want to be identified. But Menon dismisses the suggestion and insists travel will remain the core business. "We are not diluting the core business and if detractors say so, it is because they do not understand what we are doing."

Analysts also question Thomas Cook India's diversification into new businesses on the grounds that its listing agreement clearly says it is a foreign exchange and travel company. "It defeats the very purpose of their original mandate, and investors have the right to question the diversion of resources and use of profits for unrelated businesses," says an official at a major travel company not wanting to be identified. "If they want to use Thomas Cook as a holding entity, will they convert it into an NBFC?" He says Fairfax may just be interested in Thomas Cook India's forex business as it is a perfect fit with the Canadian investor's core business.

Certainly, the travel business hasn't disappeared from Thomas Cook India's radar screen. If anything, the company has launched several innovative products to tap the enormous tourism potential. Abraham Alapatt, head of marketing at Thomas Cook India, says the company is moving towards a hybrid model that combines brick-and-mortar with digital efforts. "The idea is to have some component online and a large component offline as well," he says.

The most successful new product is the pre-paid forex card which Alapatt says has already notched up 70,000 customers since its launch in 2013. Apart from offering such a convenience for corporate travellers, the company is also targeting younger customers with products tailored to suit their budget. Thomas Cook's online push is driven by the Indian demographic where 50 per cent of the customer base is below 25 years and tech savvy. "We need to have products designed for them and according to their budgets," says Menon. "There are two clear-cut growth engines: outbound holidays and domestic holidays."

The efforts are paying off. Despite a challenging economic environment, Thomas Cook India's revenue grew 47 per cent in 2011 and nearly 30 per cent in 2012, outpacing the industry average of around 15 per cent. The company says it logs 300 to 350 online transactions a month today compared with none in 2012. Analysts expect its overall travel business to grow 10 per cent to 15 per cent a year. "The depreciation in the Indian rupee should help accelerate growth in inbound travel," says Akella.

Akella's report say the cost-cutting measures have bumped up business. It posted 34 per cent growth in the travel segment in the third quarter of 2013. "This was driven principally by cost reduction initiatives, including personnel cuts in the corporate travel, inbound travel and forex businesses and discontinuation of certain unprofitable businesses," he writes. The company has also signed an outsourcing deal with global business processes management firm WNS and the target is to save between Rs 20 crore and Rs 25 crore annually, says the report.

A slow economy has put a dampener on corporate travel, pushing Thomas Cook India to target independent travellers with personalised travel options. Alapatt says the company is focusing on the domestic market, especially smaller cities. Thomas Cook is already present in 99 such cities and plans on strengthening that network. "We are building franchise partnerships in these cities, we're spending more money in our advertising in vernacular languages and changing our advertisement strategy," says Menon.

Menon says Watsa has given them enough leeway to develop the business and has moved Thomas Cook away from just quarterly results mode to a long-term profitability view with a focus on cash generation as well as conservation. "In my past avatars, we were looked at from every quarter and if I had a bad result I would be asked what went wrong. Now in Fairfax we look at free cash and it is a relatively new concept to our world," he says.

Menon describes the stability that Fairfax has brought to the company as an investor as his legacy. "I am very relaxed, I shout less and I enjoy working for Thomas Cook as I know I am contributing to creating value for shareholders and in creating wealth."


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