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Taj GVK: Focus pays!

Apr 26, 2006

Performance Summary
Hospitality major, Taj GVK has announced strong results for the fourth quarter and fiscal ended March 2006. Buoyancy in room rates and occupancies has led to the company reporting superlative growth in topline and a strong expansion in operating margins during both the periods.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 350 610 74% 1155 1887 63%
Expenditure 213 325 53% 709 1034 46%
Operating profit (EBDITA) 137 285 108% 446 853 91%
Operating profit margin (%) 39.1% 46.7% 38.6% 45.2%
Other income 2 0 -85% 6 6 0%
Interest (net) 6 12 100% 13 40 208%
Depreciation 20 39 95% 81 121 49%
Profit before tax 113 234 107% 358 698 95%
Tax 43 79 84% 136 236 74%
Profit after tax/(loss) 70 155 122% 222 462 108%
Net profit margin (%) 20.0% 25.5% 19.2% 24.5%
No. of shares (m) 12.5 62.5 12.5 62.7
Diluted earnings per share (Rs) 7.4
Price to earnings ratio (x)** 33.9

What is company's business?
Hyderabad-based Taj GVK Hotels is a joint venture between the Tatas (26% stake by Indian Hotels) and the GVK Group. The company, with 681 rooms, operates four luxury hotels - three in Hyderabad (529 rooms) and one in Chandigarh (152 rooms). In Hyderabad, the company operates the Taj Krishna - its flagship luxury hotel, Taj Residency and Taj Banjara (both business hotels). Taj GVK Chandigarh is the only five star hotel in Chandigarh.

What has driven performance in FY06?
Buoyant ARRs and Occupancies: Tourist inflows into India touched new heights during FY06 with international tourist arrival growing by about 13% YoY (January to December 2005). This led to strong ARRs (average room rates) for hotel companies, and Taj GVK has not been any exception. Strong ARRs combined with higher occupancy have helped the company post a strong 63% YoY growth in its topline during the fiscal. Occupancy rates touched 80% in FY06 (78% in FY05). The ARRs were up 33.8% YoY, from Rs 4,247 per day in FY04 to Rs 5,684 per day in FY05.

Over the last 3 years 2004 2005 2006
Occupancy rate (%) 75 78 80
ARR (Rs) 3,279 4,247 5,684
RevPar (Rs) 2,452 3,299 4,530

Taj GVK Chandigarh (149 rooms) is the only five star hotel in Chandigarh. Given this fact, the company retains the pricing power and this was visible in strong ARRs during the period under consideration. In fact, the company commanded ARRs of Rs 5,500 in its very first year of operations, which helped it to break even (in 2QFY06). Going forward, with the emergence of Hyderabad and Chandigarh as key business hubs, we believe that demand for new rooms will grow rapidly, thus benefiting Taj GVK. With no new players entering the region, the company is well set to enjoy the fruits of its leadership position. As a matter of fact, during the fiscal, the company earned nearly 60% of its topline from room revenues, which is likely to remain stable over the coming years.

High Margins: Hotel sector is a high-fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs). This is reflected in Taj GVK’s performance as well. On a YoY basis, both in 4QFY06 and in FY06, operating margins have witnessed strong expansion, which has been driven by reduction in all the operating heads (as % of sales).

As % of sales 4QFY05 4QFY06 %Change FY05 FY06 %Change
Raw material and cost of goods 28 45 60.7% 104 153 47.1%
as a % of sales 8.0% 7.4%   9.0% 8.1%  
Staff cost 49 96 95.9% 164 278 69.5%
as a % of sales 14.0% 15.7%   14.2% 14.7%  
Power & Fuel cost 22 21 -4.5% 83 103 24.1%
as a % of sales 6.3% 3.4%   7.2% 5.5%  
Other expense 114 163 43.0% 358 500 39.7%
as a % of sales 32.6% 26.7%   31.0% 26.5%  

What to expect?
The stock currently trades at Rs 250, implying a price to earnings multiple of 33.9 times its FY06 earnings. The company will be expanding its room inventory over the next 4 years, which seems in line with the expected growth in demand from across the spectrum (business, leisure, international and domestic). Considering the growth strategy and its leadership position in the regions of operations, we are positive on the company from a long-term perspective.

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