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Taj GVK: The party is still on! - Views on News from Equitymaster
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Taj GVK: The party is still on!
May 28, 2007

Performance summary
Taj GVK has announced strong results for the fourth quarter and twelve months ended March 2007. During the quarter, while the topline has grown by 11% YoY, operating profits have risen by 18% YoY, due mainly to the expansion in the operating margins owing to lower staff costs (as percentage of sales). Reduction in interest costs and lower depreciation charges has resulted in the bottomline growing at a faster pace than the operating profit growth. For the full year, while the topline and operating profits have risen by 29% YoY and 35% YoY respectively, the bottomline has grown by a significant 39% YoY.

Rs( m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 610 678 11.2% 1,887 2,428 28.7%
Expenditure 325 341 4.9% 1,034 1,279 23.7%
Operating profit (EBDITA) 284 336 18.3% 852 1,148 34.7%
Operating profit margin (%) 46.6% 49.6%   45.2% 47.3%  
Other income 0 7 1830.6% 6 14 119.3%
Interest 12 7 -40.5% 39 31 -20.2%
Depreciation 39 28 -29.7% 120 124 2.7%
Profit before tax 233 308 32.2% 699 1,007 44.1%
Tax 79 121 53.3% 237 364 53.6%
Profit after tax/(loss) 154 187 21.5% 462 643 39.2%
Net profit margin (%) 25.3% 27.6%   24.5% 26.5%  
No. of shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share (Rs)*         10.3  
Price to earnings ratio (x)*         17.1  
* 12 month trailing earnings

What is the 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 FY07?
Robust revenue growth: The foreign tourist arrival in India during 2006 is provisionally estimated to be around 4.4 m, an increase of 13% YoY (3.9 m during 2005). This led to higher ARRs across the hotels in the country. For the 4QFY07 quarter, Taj GVK reported ARR of Rs 8,356 leading to the 11% YoY growth in the topline. For the whole year, the ARR’s were up 28% YoY touching Rs 7,700. This led to the strong sales performance for the full year and is in line with our estimates. Taj GVK is planning to expand its room inventory by an additional 410 in its business hotels in the next one year. The hotel in Chennai got delayed and is expected to be operational during the last quarter of this year. Overall, the company will be adding 526 rooms in the next three years. This will take the total room inventory from the current levels of 684 to 1,210 in FY09 and 1,400 in FY10. With the industry scenario continuing to remain strong, the company is expected to capitalize on the same going forward.

Cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 7.4% 7.9% 8.1% 8.2%
Staff Cost 15.8% 12.5% 14.7% 13.4%
Power and fuel 3.5% 3.5% 5.5% 4.9%
Other Expenditure 26.7% 26.4% 26.5% 26.2%

Buoyant margins: The 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 and any incremental business revenues flow straight through to the bottomline). For the full year, operating margins have expanded by 210 basis points (2.1%), largely led by a reduction in staff and power and fuel costs (as percentage of sales).

It all flows to the bottomline: The net profit growth (up 39% YoY) has significantly outperformed both the topline growth and the operating profit growth for the full year. Besides the strong topline growth and the improvement in operating margins, higher other income, lower interest and depreciation costs have contributed to the robust growth in the bottomline. As a result, we shall have to upgrade our bottomline estimates for FY07.

What to expect?
At the current market price of Rs 175, Taj GVK’s stock is trading at a price to earnings multiple of 17.1 times its trailing 12-month earnings. The company is well poised to capture the boom in the tourist inflow. Also, it is expanding its room inventory from the current 684 rooms to 1,400 rooms by FY10. This may affect margins in the medium term, but given the favourable industry scenario, it is a good move from a long-term perspective. We had recommended a ‘HOLD’ on the stock in May 2006 and we maintain our view on the stock.

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