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Taj GVK: Signs of recovery
Apr 27, 2010

TajGVK Hotels & Resorts Limited has announced its FY10 results. The company has reported 3.8% YoY and 31.3% YoY fall in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales of the company for 4QFY10 increased by 11.2% YoY.
  • Operating (EBITDA) income increased by a robust 25.5% YoY. This increase comes on the back of higher sales and fall in staff costs. However, the increase in operating profit was capped by sharp increase in raw material costs, power and fuel costs and other expenditure.
  • Net profit jumped by 54% YoY. This increase comes on the back of higher operating profits, fall in interest costs and fall in effective tax rates.
  • The company has declared a dividend of Rs 2 per equity share.
    Financials
    Rs(m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Net sales 569 633 11.2% 2,382 2,293 -3.8%
    Expenditure 360 370 2.9% 1,359 1,425 4.9%
    Operating profit (EBDITA) 210 263 25.5% 1,023 867 -15.2%
    Operating profit margin (%) 36.8% 41.5%   43.0% 37.8%  
    Other income - -   - -  
    Interest 36 29 -19.6% 62 122 97.4%
    Depreciation 47 51 7.3% 136 196 44.0%
    Profit before tax 127 184 44.9% 825 550 -33.4%
    Exceptional Items (2) -   (9) -  
    Tax 46 62 34.6% 289 187 -35.4%
    Profit after tax/(loss) 79 122 54.0% 528 363 -31.3%
    Net profit margin (%) 13.9% 19.2%   22.2% 15.8%  
    No. of shares (m) 63 63   63 63  
    Diluted earnings per share(Rs)*         5.8  
    Price to earnings ratio (x)*         29.7  
    * 12 month trailing earnings

    What has driven performance in FY10?
    • TAJGVK 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. However, with the economic recovery, the company has been able to arrest its falling topline. The topline fell by 3.8% YoY during the year as a result of the topline falling by 15.7% YoY during 1HFY10. The fall would have been sharper if not for the topline growing by 8.6% YoY over 2HFY10 as a result of the economic recovery. For the year, the company suffered due to lower average room rentals (ARR). ARR for FY10 stood at Rs 6,500 compared to Rs 7,200 for FY09. However, the company’s occupancy rate improved. The occupancy rate for FY10 was 60% compared to 58% in FY09.

      Cost break-up
      As a % of net sales 4QFY09 4QFY10 FY09 FY10
      Total Cost of goods 8.5% 9.0% 8.4% 9.3%
      Staff Cost 20.6% 14.5% 16.8% 17.9%
      Power and fuel 7.2% 7.5% 6.4% 8.1%
      Other Expenditure 26.9% 27.5% 25.4% 26.9%

    • Operating profit of TajGVK fell by 15.2% while the operating margin was lower by 5.2%. This was due to higher costs as a percentage of sales.

    • Net profit for FY10 fell by 31.3% YoY while the net profit margins were lower by 6.3%. This was a result of the economic slowdown for the better part of the year, resulting in fall in average room rates. Moreover, the company suffered due to higher interest costs.

    What to expect?
    At a price of Rs 172, the stock is trading at 28.5 times our estimated FY12 earnings. For the year, the company has performed better than our expectations. As of now, the company has 5 hotels with the latest one in Chennai. It is putting up a 6th hotel 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 2010 while the 250 room Ginger hotel is expected to be launched in 2 years time. TajGVK is a Hyderabad centric company and the new properties will ensure that it will continue to remain dependant 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 will have a relook at our assumptions for the company shortly.

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