Thomas Cook is cooking up a magic potion.

Thomas Cook has been time and again dissected and written about by Prof. Sanjay Bakshi. I can dare to say, his reports are probably the most convincing reports ever. His style of story like writing is rare and extremely enjoyable to read. Whether one agrees with him or not, his reports are deeply satisfying and they make you think you are super smart just to have read it 🙂

https://fundooprofessor.wordpress.com/2015/01/08/ajit-issac/

http://www.quesscorp.com/Quess_Group%20Overview_Final_01022015.pdf

http://businesstoday.intoday.in/story/thomas-cook-india-transformation-new-owner/1/203043.html

http://www.livemint.com/Leisure/11A5PHPUOuejjRS6FDLXMJ/Madhavan-Menon–A-man-for-changing-time.html

However, this is my two pence on Thomas Cook.

12 months	Financial Serv	Travel	Human Capital	Sterling	Total
Capital Employed	182	(54)	169	253	552
Common Capital Employed	266	(77)	241	362	790
Total Capital Employed	442	(131)	410	615	1,342
Sales	227	263	1840	60	2390
Expenses	105	199	1738	57.3	2098
EBIT	122	64	102	2.7	292
Apportioned Interest	20.46	+6	18.6	28	62
Apportioned Common Expenses	22.77	+6.6	20.7	31.74	69
PBT	78.77	76	62	(57)	161

1. Thomas Cook is the only company apart from Banks that is licensed to provide Multi-Currency prepaid cards. The Financial services business is robust and will largely benefit with the increased tourism in and out of India.
2. The travel business is to significantly boom with the MICE ( Meetings, Incentives, Conference and Exhibitions business ). Thomas Cook has continuously been ranked amongst the top providers of the service by Lonely Planet, Trip Advisor and Conde Nest.
3. Quess Corp will be able to rake in an EBIT of 300 cr from the current 102 cr by 2019-20. With the Modi Govt increasing trade relations with a host of countries Quess will easily be employing Indians by the hordes in countries that do not have a youth population. Irrespective of this probability, the scope in India’s temp industry is huge and has years of growth in just getting this sector organised.
4. With just 3 organised players in the industry – Mahindra Holidays, Country Club and Sterling, the vacation ownership business is still hugely untapped. I expect Sterling to not only become profitable in a few years but also provide a huge float for the company. Mahindra holidays had a negative working capital of 250 cr on a 650 cr balance sheet last year.
5. Assuming that by the end of the decade the Financial Services and Travel Business have an EBIT of 360 cr 2x from here, Quess has a 300 cr 3x from here and Sterling has a modest 20 cr EBIT, it is a total of 680 cr EBIT or a PAT of about 500 cr.
6. At 20x the company would be valued at 10,000 cr and at 30x its would trade at 15,000 cr. That’s 2x-3x from the current optimistic valuations. This company is not one that is undiscovered or under understood which means that it will always trade at premium valuations. The uncertainty in achieving this growth is kind of low, and therefore the valuations are high.

Applying a few of Thomas Phelps 100 to 1 filters.

1. Small – Each of its businesses though leaders in the industry are still small.
2. Relatively unknown – Most people still perceive Thomas Cook to be in the Travel business only.
3. Unique Product that makes an essential job faster, cheaper or better – Quess certainly falls in this category. Sterling and Thomas Cook on the other hand just do good business.
4. Strong progressive research minded management – All ticks here.
5. Stocks that professional managers like but are not sure off – This company is not easy to project on an excel. Thus funds will take a little while longer to get into it and leave most of the stock to value investors.
6. Promoters Self Interest Parallel to yours – This is Prem Watsa we are talking about.
7. Multi-bagger ideas and not just doublers – The possibility is huge.
8. Great Assets are sometimes better than Great Earnings – Sterling Resorts
9. Earning potential and re-rating – Re rating has already happened, one can only profit from earnings increase.
10. Quality of earnings is of utmost importance – The new segment reporting classification is very clear.
11. Is this a selling to a bigger fool venture  – The company judges itself on a free cash flow basis, not like an internet company and it purchases companies on the same basis too.
12. Continuos re-investing of cash into ventures with high return on capital.

Mohnish Pabrai’s Dhandho Filters :

1. Existing Business – Yes
2. Business with ultra-low levels of change – Yes
3. Distressed business in Distressed Industries – Sterling was distressed when bought over. Guess corps acquisitions have been distressed businesses. This company is one that looks at buying distressed businesses in distressed industries.
4. MOAT, high ROCE > 30% – Yes
5. Margin of Safety – When you follow cash flow based acquisitions , your MoS is automatically high.
6. Low Risk – High Uncertainty – Couldn’t be more true.
7. Copycat or Innovator – Not in the innovation business. In the efficiency business.
8. Can lift and scale ? – Oh yeah.

Pat Dorsey on Moats :

1. Intangible Assets : Patents, Regulatory Licenses & Brands – Thomas Cook
2. Customer Switching Costs : Quess Corp
3. Network Economics : Thomas Cook, Sterling Holidays
4. Cost Advantages : Scale : Quess Corp, Thomas Cook, Sterling

Factors of Production :

Land, Labor, Capital and Entrepreneurship – Of all India has Labor in abundance and the market here is very unregulated. Quess Corp is an attempt of literally owning people. I believe Quess can easily become the invisible partner to every growing business at various levels. At a very fundamental level, Quess will be a huge force to reckon with in the future and the changing labor laws is pure serendipity.

Thomas Cook has multiple tail winds working in its favour, and most of them have a very high probability of success. The only call that you have to take here is whether you would still bet for increase in earnings as the multiples are as high as they can get.

I will.