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Taj GVK: Higher occupancy boosts topline - Views on News from Equitymaster

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Taj GVK: Higher occupancy boosts topline
Apr 30, 2011

Taj GVK Hotels & Resorts Limited announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported a 10% YoY and 5.8% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales of the company for 4QFY11 increased by 10% YoY.
  • Operating (EBITDA) margins fell by 1.8% during the quarter. This was a result higher costs of goods sold and higher staff costs.
  • Net profit increased by 5.8%. This increase came on the back increase in effective tax rate partially offset by moderate increase in depreciation costs as compared to sales.
  • Net profit for FY11 increased by 19.5% YoY while the net profit margin increased by 0.8% to stand at 16.6%. This performance came on the back of strong operating income growth, fall in interest costs and moderate growth in depreciation costs as compared to sales.

Rs(m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 633 697 10.0% 2,293 2,607 13.7%
Expenditure 370 420 13.4% 1,425 1,630 14.4%
Operating profit (EBDITA) 263 277 5.2% 867 976 12.6%
Operating profit margin (%) 41.5% 39.7%   37.8% 37.5%  
Other income - -   - -  
Interest 29 27 -6.5% 122 113 -7.1%
Depreciation 51 53 4.3% 196 206 5.1%
Profit before tax 184 197 7.3% 550 657 19.6%
Exceptional Items - -   - -  
Tax 62 68 10.2% 187 224 19.8%
Profit after tax/(loss) 122 129 5.8% 363 433 19.5%
Net profit margin (%) 19.2% 18.5%   15.8% 16.6%  
No. of shares (m) 63 63   63 63  
Diluted earnings per share (Rs)*        6.9  
Price to earnings ratio (x)*         14.9  
* 12 month trailing earnings

What has driven performance in 4QFY11?
  • Top line of Taj GVK has grown on the back of improvement in occupancy especially in properties in Chandigarh and Chennai.

    Cost break-up
    As a % of net sales 4QFY10 4QFY11 FY10 FY11
    Total Cost of goods 9.0% 9.2% 9.3% 9.7%
    Staff Cost 14.5% 16.5% 17.9% 17.9%
    Power and fuel 7.5% 7.4% 8.1% 8.0%
    Other Expenditure 27.5% 27.1% 26.9% 26.9%

  • Operating margin of Taj GVK fell by 1.8%. This has been due to a sharp increase in costs of goods sold and staff costs. While costs of goods increased by 12% YoY, staff costs increased by 26% YoY due to increment given to staff to curb attrition.

  • Net profit for 4QFY11 increased by 5.8% YoY. This was on the back of moderating increase in depreciation costs as compared to sales for the quarter. Depreciation costs increased by 4.3% YoY. However, increase in effective tax rates capped net profit growth. Net effective tax rates increased from 34% in 4QFY10 to 35% in 4QFY11.

What to expect?
At a price of Rs 103, the stock is trading at 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 180 room luxury hotel Vivanta by Taj - Begumpet is expected to start operations this calendar year. The 250 room Ginger hotel is expected to be launched in 2 years time. Furthermore, the new car park being put up in Taj Krishna is expected to give a boost to the company’s F&B segment. TAJ GVK is a Hyderabad centric company and the new properties will ensure that it will continue to remain dependent on the city. In the city, properties which were launched in 2008 for other hotel chains have now come up. However, the management of Taj GVK now expects a lull in room addition in the city as no new properties have been launched recently. Once launched, the construction of a property would take between 2-3 years. This means that the Hyderabad market has at least 2-3 years to absorb new supplies. In fact, Taj GVK is contemplating increasing prices of its rooms by 5% for FY12. We shall update our assumptions shortly.

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