Cox & Kings default on commercial paper stumps the Street and experts

The default by travel company Cox & Kings on its commercial paper (CP) has confounded the Street and sector experts.
 
On Wednesday, it had failed to pay the principal amount of Rs 150 crore on unsecured CP and said this was due to a cash flow mismatch. However, it was supposed to have been sitting on Rs 1,830 crore of cash at the end of 2018-19 (the financial year ended March 31).
 
In fact, it indicated it had sufficient liquidity only two weeks before the default. According to a recent note by CARE Ratings, at the time of a review it had undertaken of Cox & Kings  on June 11, the latter had reported cash and bank balances of Rs 1,726 crore. Of which, it told CARE, there was about Rs 1,300 crore available for deployment at any point for debt payment.
 
In addition to cash in the account books, its leverage (debt to equity ratio) was also comfortable at 0.7 times. Short-term debt did increase by 16 per cent in FY19 but long-term debt, which was more than half the overall debt, came down by half.
 
The default could raise more questions on the reported numbers and its debt payment ability. Compounding the worry is that the promoters had pledged 63 per cent of their shares as of March-end.
 
Unsurprisingly, the share price has lost 83 per cent since its high in November last year, half the loss coming over the past week. 
 
A sector expert said, “Tour costs are collected from customers in advance but payments are made according to credit terms. In some cases, payments are also made after completion of a tour. Thus, the working capital need for a leisure tour business is not significant. We don’t understand how a tour operator should face such a cash shortfall. It looks to be an external reason and not business related.”
 
Others said aggressive expansion and poor management could be responsible.
 
Over recent years, the company has expanded in India and invested in creating new travel products. These are run through various divisions.
 
“Many of these are unprofitable and this is putting pressure on the company’s core leisure tour business to deliver growth,” a source said.
 

Cox & Kings has a corporate travel business. The promoters also operate a business-to-business travel company called eezego1.
 
While the latter sells tickets and packages to other travel companies, it also taps into Cox & Kings’ ticket inventory. And, accounts for a large chunk of the payments Cox & Kings makes to airlines every week. Often, there is a backlog in payments from corporates and ezeego1 — this adds to Cox & Kings receivables and increases its working capital need, the source added.
 
Last week, Cox & Kings delayed its payment to the International Air Transport Association for airline ticket sales. It said this was due to a technical delay and IATA withdrew its risk report after receiving the sum. “There was no default on IATA payments. We are in touch with our customers and ensuring normal operations continue,” a Cox & Kings executive said.
 
However, after this development, airlines are cautious. Some have reduced their credit exposure to Cox.
 
Kranthi Bathini, analyst at Wealthmills Securities, said, “Though the company has given some explanation after the default, the management has to give greater clarity on the recent default despite showing a cash balance. Till then, investors should avoid the stock.”