Rating Rationale
January 21, 2019 | Mumbai
Thomas Cook India Limited
Long-term rating removed from 'Watch Developing' ; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.739 Crore
Long Term Rating CRISIL AA-/Stable (Removed from 'Rating Watch with Developing Implications'; Rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed) 
 
Rs.100 Crore Short Term Debt (Including Commercial Paper) CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has removed its rating on the long-term bank facility of Thomas Cook India Limited (TCIL; part of the Thomas Cook group) from 'Rating Watch with Developing Implications' and reaffirmed the rating at 'CRISIL AA-' and assigned a 'Stable' outlook to it. The rating on the short-term bank facility and Rs 100 crore short-term debt (including commercial paper) has been reaffirmed at 'CRISIL A1+'
 
The reaffirmation factors in CRISIL's belief TCIL's credit quality will remain unaffected even if Quess Corp Ltd (Quess) is demerged as the transaction will be funded through a share swap and will not result in any cash outgo for TCIL. Although revenue and operating profit of the group will decline with Quess moving out, debt will also reduce as a major proportion of the debt in the group was related to Quess. The group's financial flexibility will remain healthy, given strong cash and equivalent in the foreign exchange (forex) and travel businesses and absence of any major long-term debt and capital expenditure over the medium term.
 
The long-term rating was placed on watch on May 3, 2018, post the announcement of corporate restructuring by the company's board. The restructuring includes consolidation of related businesses under the travel and human resources (HR) services segments. As part of the scheme, the HR services business, mainly housed under Quess, is to be demerged. Also, the inbound business of Travel Corporation India Ltd (TCI; 'CRISIL AA-/Stable') is to be demerged into SOTC Travel Management Pvt Ltd, a wholly owned subsidiary of TCIL. Thereafter, the residual business of TCI will be merged with TCIL along with the other subsidiaries, TC Forex Services Ltd and TC Travel and Services Ltd. The scheme is subject to approval from the shareholders of the companies involved in the scheme, and to requisite statutory and regulatory approvals, and is expected to be completed in the next 6 to 9 months.
 
The ratings continue to reflect the Thomas Cook group's healthy business risk profile driven by a dominant position in the forex business and strong brand equity in travel-related services, and comfortable capital structure and adequate liquidity. These strengths are partially offset by vulnerability of the travel business to geo-political risks and suboptimal operating performance of the vacation ownership and resorts business. Moreover, the group is exposed to risks related to its strategy of growth through acquisitions, which could materially alter its business and financial risk profiles.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of TCIL and its subsidiaries, including Sterling Holiday Resorts Ltd (Sterling), TCI, SOTC Travel Ltd (SOTC; 'CRISIL AA-/Stable'), Travel Circle International Ltd, Horizon Travel LLC, and Travel Circle International (Mauritius) Ltd, together referred to as the Thomas Cook group, as these entities are strategically important to, and have considerable operational integration with, TCIL. Earlier, the business and financial risk profiles of Quess were also combined. However, following the announcement of restructuring, Quess has not been considered as a part of the group to arrive at the ratings.

The estimated goodwill arising from various acquisitions has been amortised over 5-10 years.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

 

Key Rating Drivers & Detailed Description
Strengths
* Dominant position in the forex business and strong brand equity in travel-related services
The Thomas Cook group leads both the wholesale and retail forex segments. The wholesale segment is strengthened by sound relationships with large banks in India. Strong position in the retail segment is supported by a wide distribution network and synergies with the travel segment. The group has presence across the retail and corporate segments in the travel business and enjoys strong brand equity.
 
* Comfortable capital structure and strong liquidity
Adjusted debt reduced to Rs 277 crore as on September 30, 2018 (Rs 426 crore as on March 31, 2018, and Rs 1,418 crore as on March 31, 2017), supported by early redemption of debt availed to fund capex as well as working capital requirement and acquisitions. Moreover, strong liquidity of Rs 1,122 crore in cash and cash equivalent (including current investments in mutual funds) as on September 30, 2018, and expected increase in profitability continue to support the financial risk profile. Cash flow protection metrics, which weakened in the past, are expected to improve over the medium term.
 
Weakness
* Susceptibility of the forex and travel businesses to geo-political risks and intense competition
Operating margin in the travel business is vulnerable to event and geo-political risks. Increasing competition from organised and unorganised players, along with the adverse impact of the global slowdown in the travel segment, led to pressure on pricing and profitability of players. The group also has to compete with online players. Though it has transformed itself from a brick-and-mortar player to its current omni-channel business model, ability to profitably increase low-cost e-business revenue share remains a key monitorable.
 
* Suboptimal operating performance of businesses
Performance of the traditional forex and travel businesses remained suboptimal given the evolving business environment. Moreover, incremental cost for building up digital capability hit profitability in these businesses. Nevertheless, investments in technology and initiatives to improve efficiency should benefit the group going forward. The performance of the vacation ownership and resorts business, housed under Sterling, has been modest on account of moderate occupancy and high fixed cost. Pace of improvement and any further write-offs (in fiscal 2016, there was significant one-time write-off of about Rs 100 crore towards vacation ownership receivables and capital work-in-progress) will be key credit monitorables.
 
In June 2017, TCIL completed acquisition of destination management specialist (DMS) entities of the Kuoni group, performance of which remained weak in the first year of operations post-acquisition. Also, the one time cost resulted in losses in fiscal 2018. The management's focus on increasing scale and containing losses in these entities resulted in profits in the second quarter of fiscal 2019, as compared to loss at the earnings before interest and taxes (EBIT) level in the second quarter of fiscal 2018. Nevertheless, ability to scale up operations (by integrating and enhancing end-to-end service delivery capabilities of acquired entities) and drive profitability (by leveraging investments in technology and targeting strategic benefits across businesses) remains a key rating sensitivity factor.
 
* Exposure to risks related to growth strategy through acquisitions, and its funding
TCIL is one of the acquisition vehicles for Fairfax Financial Holdings Ltd (Fairfax; rated 'BBB-/Stable' by S&P Global Ratings) in India. Over the years, the company has grown both organically and inorganically. It has completed multiple acquisitions (Quess, Sterling, and Kuoni) over the past five fiscals. While the financial risk profile has been stable despite these transactions, the strategy of growth through acquisitions could materially alter the business and financial risk profiles, and therefore, remains a key rating sensitivity factor.
Outlook: Stable

CRISIL believes the Thomas Cook group will improve its cash accrual over the medium term, supported by its healthy business risk profile in the travel and forex businesses. Moreover, recent investments in technology and synergic benefits of past acquisitions should result in improved profitability.
 
Upside scenario
Significant increase in scale and profitability without deterioration in capital structure and debt protection metrics
 
Downside scenario
Lower-than-expected profitability or weaker capital structure because of large, debt-funded capex or acquisitions

Liquidity
Liquidity remains ample, driven by the nature of operations. Financial flexibility is enhanced by ability to raise short- and long-term debt at short notice and at competitive rates. TCIL has prepaid Rs 67 crore NCDs (last 2 tranches of Rs 100 crore NCDs maturing in August 2020) along with preference shares of Rs 125 crore and term loan under a subsidiary. Working capital limit has been sparsely utilised. TCIL has no long-term debt. Its subsidiaries are expected to service debt through internal accrual and need-based support from TCIL.

About the Group

In May 2012, Fairfax bought 77% stake in the Thomas Cook Group Plc's India entity, TCIL, through its wholly owned subsidiary, Fairbridge Capital Mauritius Ltd (Fairbridge). As on September 30, 2018, FCML's shareholding in TCIL was 66.98%. Fairfax is a Toronto-based financial services holding company with global presence in insurance and reinsurance and an asset portfolio in excess of USD 3800 crore invested worldwide.
 
As part of the sale agreement, TCIL retains the right to use the Thomas Cook brand up to 2025 in its countries of operations'India, Sri Lanka, and Mauritius. Also, TCIL acquired the Kuoni group's travel-related businesses in Hong Kong (November 2015) and India (December 2015) for around Rs 535 crore; and the DMS business covering 17 countries across Asia, Australia, the Middle East, Africa, and the Americas in June 2017 for Rs 140 crore. In October 2017, the group acquired Tata Capital Forex Ltd (forex business) and TC Travel and Services Ltd (travel services business) from Tata Capital Ltd ('CRISIL AA+/Stable/CRISIL A1+').
 
Traditionally, TCIL has operated solely in the forex and travel-related service segments. In February 2014, it announced the acquisition of Sterling Holiday Resorts (India) Ltd (SHRIL), a vacation ownership company. The transaction was primarily funded using Rs 500 crore infused by the parent, Fairfax, through Fairbridge, in the form of compulsorily convertible preference shares. SHRIL became a subsidiary of TCIL in September 2014. Subsequent to the High Court order dated July 2, 2015, sanctioning the scheme of arrangement and amalgamation between SHRIL, Thomas Cook Insurance Services (India) Ltd (TCISIL), and TCIL, the timeshare and resorts business has been demerged into TCISIL (which has since been renamed Sterling Holiday Resorts Ltd), while the residual business of SHRIL has been amalgamated with TCIL by effecting a share swap between TCIL and SHRIL shareholders.
 
In February 2013, TCIL signed an investment agreement to acquire 74% stake in IKYA Human Capital Solutions Pvt Ltd (now known as Quess) for Rs 256 crore. The acquisition was completed in May 2013. Quess, based in Bengaluru, provides integrated business services to clients. It completed a Rs 400 crore initial public offering in July 2016, followed by a Rs 873 crore institutional placement programme in August 2017. In November 2017, TCIL divested 5.42% stake in Quess for about Rs 640 crore, while retaining controlling stake. On completion of the proposed corporate restructuring scheme by issuing 1,886 equity shares of Quess (of Rs 10 each) for every 10,000 equity shares (of Re 1 each) held in TCIL, Quess will be demerged from the TCIL group.

Key Financial Indicators*
Particulars Unit 2018 2017
Revenue Rs crore 5671 8625
Profit after tax (PAT) Rs crore 5894^ 15
PAT margin % 103.9 0.2
Adjusted debt/Adjusted networth Times 0.05 1.15
Interest coverage Times 1.74 3.48
*The numbers reflect analytical adjustments made by CRISIL Ratings; fiscal 2018 financials exclude contribution of Quess.
^Includes fair value gain of Rs 5903.21 crore with Quess being reclassified from a subsidiary to an associate of TCIL under Ind AS 110

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned
with Outlook
NA Short Term Debt (Including Commercial Paper) NA NA 7-365 days 100.0 CRISIL A1+
NA Bank Guarantee$$ NA NA NA 65 CRISIL A1+
NA Bank Guarantee NA NA NA 123 CRISIL A1+
NA Cash Credit** NA NA NA 65 CRISIL AA-/Stable
NA Letter of Credit## NA NA NA 260 CRISIL A1+
NA Letter of Credit NA NA NA 10 CRISIL A1+
NA Overdraft NA NA NA 25 CRISIL A1+
NA Overdraft@ NA NA NA 49 CRISIL A1+
NA Overdraft@@ NA NA NA 140 CRISIL AA-/Stable
NA Proposed Long Term
Bank Loan Facility
NA NA NA 2 CRISIL AA-/Stable
$$ Fully interchangeable with LC
** Fully interchangeable with working capital demand loan (WCDL) and Letter of Credit
## Facility of Rs 150 crore fully interchangeable with bank guarantee and post-shipment credit in foreign currency (PSFC) up to Rs 25 crore, Facility of Rs 75 crore fully interchangeable between LC and BG, Facility of Rs 35 crore interchangeable with BG to the tune of Rs 15 crore
@@ Facility of Rs 15 crore interchangeable with WCDL of up to Rs 12 crore, facility of Rs 75 crore fully interchangebale between LC and BG, facility of Rs 50 crore fully interchangeable with WCDL and Short term loan (STL), Rs 30 crore with bank guarantee and Rs 10 crore with LC
@Facility of 49 crore interchangeable with LC of up to Rs 25 crore,
 
Annexure - Details of consolidation
Sr. No Name of the Company
1 Asian Trails (Vietnam) Co. Limited
2 Asian Trails Co. Limited
3 Asian Trails Holdings Limited
4 Asian Trails Limited
5 Asian Trails SDN. BHD.
6 Asian Trails Tours Limited
7 AT Lao Co., Limited
8 Australian Tours Management Pty Ltd
9 Borderless Travel Services Limited
10 Chang Som Limited
11 Desert Adventures Tourism Limited
12 Desert Adventures Tourism LLC
13 Gulf Dunes LLC
14 Gulf Dunes Tourism LLC
15 Horizon Travel Services LLC (USA)
16 Indian Horizon Marketing Services Limited
17 Jardin Travel Solutions Limited
18 Kuoni Australia Holding Pty. Ltd
19 Kuoni Destination Management (Beijing) Limited
20 Kuoni Private Safaris (Pty) Limited
21 Kuoni Private Safaris Namibia (Pty) Limited
22 Luxe Asia (Private) Limited
23 Muscat Desert Adventures Tourism LLC
24 Nature Trails Resorts Private Limited
25 Private Safaris (East Africa) Limited
26 PT. Asian Trails Limited
27 Reem Tours & Travels LLC
28 SITA World Travel (Nepal) Private Limited
29 SITA World Travel Lanka (Private) Limited
30 SOTC Travel Limited (formerly Known as SOTC Travel Private Limited)
31 SOTC Travel Management Private Limited (formerly known as SITA Travels and Tours Private Limited)
32 Sterling Holiday Resorts (Kodaikanal) Limited
33 Sterling Holiday Resorts Limited
34 Sterling Holidays (Ooty) Limited
35 TC Forex Services Limited (formerly known as Tata Capital Forex Limited
36 TC Tours Limited (formerly known as Thomas Cook Tours Limited)
37 TC Travel and Services Limited
38 TC Visa Services (India) Limited
39 TCI-GO Vacation India Private Limited
40 Thomas Cook (Mauritius) Holding Company Limited
41 Thomas Cook (Mauritius) Holidays Limited
42 Thomas Cook (Mauritius) Operations Company Limited
43 Thomas Cook Lanka (Private) Limited
44 Travel Circle International (Mauritius) Limited
45 Travel Circle International Limited formerly known as Luxe Asia Travel (China) Limited
46 Travel Corporation (India) Limited
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT    --    --  03-05-18  Withdrawal  04-10-17  CRISIL AA-/Stable  09-12-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
                18-08-17  CRISIL AA-/Stable  07-12-16  CRISIL AA-/Stable   
                30-05-17  CRISIL AA-/Stable  15-11-16  CRISIL AA-/Stable   
Short Term Debt (Including Commercial Paper)  ST  100.00  CRISIL A1+      27-07-18  CRISIL A1+  04-10-17  CRISIL A1+  09-12-16  CRISIL A1+  -- 
            03-05-18  CRISIL A1+  18-08-17  CRISIL A1+       
                30-05-17  CRISIL A1+       
Short Term Debt Issue  ST                  07-12-16  CRISIL A1+  CRISIL A1+ 
                    15-11-16  CRISIL A1+   
Fund-based Bank Facilities  LT/ST  281.00  CRISIL AA-/Stable/ CRISIL A1+      27-07-18  CRISIL AA-/Watch Developing/ CRISIL A1+  04-10-17  CRISIL AA-/Stable/ CRISIL A1+  09-12-16  CRISIL AA-/Stable/ CRISIL A1+  CRISIL AA-/Stable/ CRISIL A1+ 
            03-05-18  CRISIL AA-/Watch Developing/ CRISIL A1+  18-08-17  CRISIL AA-/Stable/ CRISIL A1+  07-12-16  CRISIL AA-/Stable/ CRISIL A1+   
                30-05-17  CRISIL AA-/Stable/ CRISIL A1+  15-11-16  CRISIL AA-/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  458.00  CRISIL A1+      27-07-18  CRISIL A1+  04-10-17  CRISIL A1+  09-12-16  CRISIL A1+  CRISIL A1+ 
            03-05-18  CRISIL A1+  18-08-17  CRISIL A1+  07-12-16  CRISIL A1+   
                30-05-17  CRISIL A1+  15-11-16  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee$$ 65 CRISIL A1+ Bank Guarantee^ 185 CRISIL A1+
Bank Guarantee 123 CRISIL A1+ Cash Credit* 65 CRISIL AA-/Watch Developing
Cash Credit** 65 CRISIL AA-/Stable Letter of Credit# 180 CRISIL A1+
Letter of Credit## 260 CRISIL A1+ Overdraft& 174 CRISIL A1+
Letter of Credit 10 CRISIL A1+ Overdraft$ 135 CRISIL AA-/Watch Developing
Overdraft 25 CRISIL A1+ -- 0 --
Overdraft@ 49 CRISIL A1+ -- 0 --
Overdraft@@ 140 CRISIL AA-/Stable -- 0 --
Proposed Long Term Bank Loan Facility 2 CRISIL AA-/Stable -- 0 --
Total 739 -- Total 739 --
$$ Fully interchangeable with LC
** Fully interchangeable with working capital demand loan (WCDL) and Letter of Credit
## Facility of Rs 150 crore fully interchangeable with bank guarantee and post-shipment credit in foreign currency (PSFC) up to Rs 25 crore, Facility of Rs 75 crore fully interchangeable between LC and BG, Facility of Rs 35 crore interchangeable with BG to the tune of Rs 15 crore
@@ Facility of Rs 15 crore interchangeable with WCDL of up to Rs 12 crore, facility of Rs 75 crore fully interchangebale between LC and BG, facility of Rs 50 crore fully interchangeable with WCDL and Short term loan (STL), Rs 30 crore with bank guarantee and Rs 10 crore with LC
@Facility of 49 crore interchangeable with LC of up to Rs 25 crore,
^ Facility of Rs 120 crore interchangeable with letter of credit (LC) of up to Rs 25 crore
# Facility of Rs 85.0 crore interchangeable with post-shipment credit in foreign currency (PSFC) and bank guarantee of up to Rs 25 crore
& Facility of Rs 49.0 crore interchangeable with LC of up to Rs 25 crore; facility of Rs 100.0 crore fully interchangeable with LC and bank guarantee
$ Facility of Rs 15.0 crore interchangeable with working capital demand loan (WCDL) of up to Rs 12 crore; for facility of Rs 70.0-Rs 50 crore interchangeable with WCDL and short-term loan (STL), Rs 60 crore with LC; facility of Rs 50.0 crore fully interchangeable with WCDL and STL, Rs 30 crore with bank guarantee and Rs 10 crore with LC
* Fully interchangeable with WCDL, commercial paper, and LC
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Mapping global scale ratings onto CRISIL scale

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