How A Rs 30-Crore Profit Decline Led To A Rs 1,000-Crore Wipeout For Thomas Cook

Following a nearly 40% decline in profit during the third quarter, shares of Thomas Cook (India) Ltd. fell as much as 12% when markets opened on Feb. 4.

The company reported a Rs 32-crore decrease in its bottomline, following which, its valuation, based on market capitalisation, fell as much as Rs 1,000 crore on an intraday basis.

This decline in profits was recorded, even as operational revenue for the company went up 8.9% during the quarter, and operating profits remained around the same level, when compared to the same quarter last year.

What Led To Profit Decline

Looking deeper into its financial statements reveals that the expense on taxes during the quarter rose as much as 43% against the year ago figure, led by a growth in its deferred tax expense, which over doubled during the period.

In the fine print, the company states that the effective tax rate for the fiscal year so far has increased to 34%, up from 24% for the comparable period last year.

A Deeper Dive

Thomas Cook highlights that upon establishing the "certainty of profitability" for its subsidiary, Sterling Holiday Resorts Ltd., the company has created a deferred tax asset worth Rs 23.1 crore during the quarter ended March 31, 2024.

In the financial year so far, the subsidiary has utilised as much as Rs 21 crore out of this asset, resulting in a higher effective tax rate.

Furthermore, this subsidiary resolved a contingent liability worth Rs 8.8 crore for a settlement worth Rs 3.71 crore during the quarter, which has been treated as an exceptional loss, further impacting the company's profits during the quarter.

Even with the overhang of a contingent liability gone, and a certainty of profitability established, a negative sentiment in the street, led by a focus on declining bottomline, drove an $11 billion wipeout in the company's valuation.