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Taj GVK: Higher expenses take toll - Views on News from Equitymaster

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Taj GVK: Higher expenses take toll
Feb 3, 2011

Taj GVK Hotels & Resorts Limited has announced its 3QFY11 results. The company has reported 9.1% YoY and 5.9% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales of the company for 3QFY11 increased by 5.9% YoY.
  • Operating (EBITDA) margins fell by 1% during the quarter. This was a result higher costs of goods sold and higher other expenditure.
  • Net profit increased by 5.9%. This increase came on the back of lower interest costs and lower depreciation.
  • Net profit for 9mFY11 increased by 26.4% YoY while the net profit margin increased by 1.4% to stand at 15.9%. This performance came on the back of strong operating income growth and fall in interest costs and effective tax rates.


Rs(m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 644 702 9.1% 1,659 1,910 15.1%
Expenditure 383 424 10.8% 1,055 1,210 14.7%
Operating profit (EBDITA) 261 278 6.7% 604 700 15.8%
Operating profit margin (%) 40.6% 39.6%   36.4% 36.6%  
Other income - -   - -  
Interest 27 30 9.2% 93 86 -7.3%
Depreciation 49 53 8.0% 146 153 5.4%
Profit before tax 185 196 6.0% 366 460 25.8%
Exceptional Items - -   - -  
Tax 63 66 6.1% 125 156 24.6%
Profit after tax/(loss) 122 129 5.9% 241 305 26.4%
Net profit margin (%) 19.0% 18.4% 14.5% 15.9%
No. of shares (m) 63 63   63 63  
Diluted earnings per share (Rs)*       6.8  
Price to earnings ratio (x)*         16.3  
* 12 month trailing earnings

What has driven performance in 3QFY11?
  • Taj GVK had been suffering due to an economic slowdown, specifically in the IT and KPO/BPO industry. More recently, the company, which has 3 of its 5 properties in Hyderabad suffered due to the Telengana issue. In spite of these challenges the company's top line grew by 9.1% YoY during the quarter.

    Cost break-up
    As a % of net sales 2QFY09 2QFY10 1HFY09 1HFY10
    Total Cost of goods 8.6% 9.3% 8.3% 9.5%
    Staff Cost 15.3% 19.3% 15.3% 20.5%
    Power and fuel 6.3% 8.8% 6.4% 9.1%
    Other Expenditure 23.9% 28.0% 24.6% 27.4%

  • Operating margin of Taj GVK fell by 1%. This has been due to increase in costs of goods sold, power and fuel costs and other expenditure. While cost of goods sold increased by 0.7% (as a percentage of sales) to stand at 9.9% for the quarter, power and fuel costs and other expenditure increased by 0.2% and 0.5% (both as a percentage of sales) to stand at 7.5% and 26.3% respectively.

  • Net profit for 3QFY11 increased by 5.9% YoY while the net profit margins fell by 0.6%. This was a result of increase in interest expense for the quarter. Interest expense rose by 9.2% YoY.

What to expect?
At a price of Rs 111, the stock is trading at 9.9 times our estimated FY13 earnings (ResearchPro subscribers, kindly click here). As of now, the company has 5 hotels with the latest one in Chennai. It is putting up a 6th luxury hotel in Begumpet, Hyderabad along with a smart basic hotel under the Ginger brand of hotels, also in Hyderabad. The luxury hotel Taj Begumpet is expected to start operations by January March 2011 while the 250 room Ginger hotel is expected to be launched in 2 years time. TAJ GVK is a Hyderabad centric company and the new properties will ensure that it will continue to remain dependent on the city. While there have been new rooms additions in the city over the last year, new supply is not going to enter the market for atleast the next 3 years due to the Telangana issue as investors are cautious in investing money. This has put the company is a sweet spot as the economic recovery continues. We shall update our assumptions shortly.

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