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Taj GVK: Improved performance - Views on News from Equitymaster

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Taj GVK: Improved performance
Feb 6, 2008

Performance summary
  • Topline witnesses a 16% YoY growth in 3QFY08.
  • Operating margins remain stable at 46% for 3QFY08 and 9mFY08.

  • The bottomline grew by 23% YoY in 3QFY08. Higher operating income, other income and lower depreciation costs aided the performance

Rs( m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 605 704 16.4% 1,750 1,861 6.3%
Expenditure 327 377 15.2% 938 997 6.3%
Operating profit (EBDITA) 278 327 17.8% 812 864 6.4%
Operating profit margin (%) 45.9% 46.4%   46.4% 46.4%  
Other income 2 3 46.6% 7 13 78.7%
Interest 2 7 168.6% 24 21 -15.2%
Depreciation 31 29 -4.7% 96 86 -10.2%
Profit before tax 247 295 19.3% 699 770 10.2%
Tax 91 103 13.8% 244 266 9.2%
Profit after tax/(loss) 156 192 22.5% 456 505 10.8%
Net profit margin (%) 25.9% 27.2%   26.0% 27.1%  
No. of shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share (Rs)*         11.1  
Price to earnings ratio (x)*         13.1  
* 12 month trailing earnings

What has driven performance in 3QFY08?
  • The topline for 3QFY08 grew by 16% YoY. Room revenues contributed 60% to the topline, the F& B segment grew by 36%YoY to touch Rs 286 m. In terms of occupancy, while Hyderabad had 78%, Chandigarh touched 77%. In terms of average room rates, while Hyderabad witnessed a 3% YoY growth, Chandigarh grew by 15% YoY. With no new properties coming in Chandigarh, the management continues to remain bullish on that property. In Hyderabad, though growth is lower due to higher base in the last quarters, the management expects the properties to do well on account of the new airport that is expected to come up and the fact that Hyderabad is booming as a conference center.

  • In terms of its expansion plans, the Chennai hotel would come up by the end of the year and the management expects this hotel to generate revenues to the tune of Rs 600 m in FY09. An addition of 30 rooms in Taj Deccan would come by Sept 2008, while an hotel in Begumpet will come in by 2009. Further, the company is also opening a shopping arcade in Taj Krishna and is expected to earn revenues of Rs 15 m a year. Besides this, the company is funding a capex of Rs 1 bn for two level parking and service apartments near Taj Deccan with ARRs of around Rs 9,000.

    Cost break-up
    As a % of net sales 3QFY07 3QFY08 9mFY07 9mFY08
    Total Cost of goods 8.7% 9.0% 8.3% 8.5%
    Staff Cost 14.0% 12.3% 13.8% 13.7%
    Power and fuel 5.6% 4.4% 5.3% 5.0%
    Other Expenditure 25.8% 27.8% 26.1% 26.3%

  • Taj GVK witnessed a marginal increase of 0.5% YoY in operating margins. Lower raw material and power expenses led to the improvement. For 9mFY08, the margins remained stable at 46.4%. The margins are in line with our estimates.

  • The bottomline grew by 23% YoY in 3QFY08. Higher operating income, other income and lower depreciation costs aided the performance. However, interest costs increased by 169% YoY on account of lower base and capacity expansions. For 9mFY08, the net profits grew by 11% YoY.

What to expect?
At the current market price of Rs 145, Taj GVK’s stock is trading at a price to earnings multiple of 6.3 times our FY10 estimates. The company has lined up major expansion plans and is looking at new greenfield projects in Kodiakanal and Amristsar. The management has a positive view on its properties and the growth prospects of the same. It expects revenue growth of 20% in the next year. Based on our NAV calculation, we arrive at a fair value of Rs 205 for the stock on an FY10 basis. The expansion is likely to be beneficial for Taj GVK in maintaining its growth run in the future, considering that the hospitality industry in India is witnessing a supply crunch with demand for rooms far outperforming supply. However, there is an execution risk attached to this expansion.

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