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Taj GVK: Suffering off season blues - Views on News from Equitymaster
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Taj GVK: Suffering off season blues
Jul 30, 2009

Performance summary
  • Topline declines by 19% YoY during 1QFY10. The company’s hotels at Hyderabad as well as the one at Chandigarh witness occupancy of 58%.
  • Operating margins, being a play on room rates and occupancy, see a fall of 12.6% YoY.
  • Net profits fall by 67% YoY on the back of lower margins and higher interest costs.


Financials
Rs(m) 1QFY09 1QFY10 Change
Net sales 587 478 -18.6%
Expenditure 322 322 0.2%
Operating profit (EBDITA) 266 156 -41.3%
Operating profit margin (%) 45.2% 32.6%  
Other income - -  
Interest 6 33 452.5%
Depreciation 29 48 68.3%
Profit before tax 231 75 -67.5%
Tax 80 26 -67.8%
Profit after tax/(loss) 151 49 -67.4%
Net profit margin (%) 25.7% 10.3%  
No. of shares (m) 62.5 62.5  
Diluted earnings per share (Rs)*   6.8  
Price to earnings ratio (x)*   14.7  
* 12 month trailing earnings

What has driven performance in 1QFY10?
  • Taj GVK’s topline declined by 19% YoY largely led by the global economic slowdown. This coupled with the off season (first two quarters are generally off season) considerably hampered the company’s performance. With the slowdown affecting both the segments, the company did witness pressure on its room rates and occupancy rates. The company’s hotels at Hyderabad as well as the one at Chandigarh witnessed occupancy of 58% with the new hotel Taj Mount Road at Chennai touching 30% during 1QFY10.

  • The company’s new five star hotel project at Begumpet, Hyderabad is progressing as per schedule. The project would consist of around 189 rooms and is expected to be operational by 2010.The company is in the process of acquiring land in Bangalore for its hotel projects. It is also exploring the possibility of entering the value for money segment through the 'Ginger' brand in Andhra Pradesh. This would help it to diversify its presence across segments.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 7.9% 9.6%
    Staff Cost 15.2% 21.8%
    Power and fuel 6.5% 9.3%
    Other Expenditure 25.2% 26.7%

  • Decline in sales led to the 41% YoY fall in operating profits. The margins reduced from 45% to 33% during 1QFY10 as all costs (as percentage of sales) increased. Margins being a play on room rates and occupancy, lower sales added on to the pressure.
  • Contraction in the operating margins coupled with higher interest and depreciation costs led to the 67% YoY drop in the bottomline. The net margins reduced to 10% this quarter from 26% in 1QFY09.

What to expect?
At the current market price of Rs 100, Taj GVK’s stock is trading at a price to earnings multiple of 15.6 times our FY12 earnings. While the company’s performance has been poor, the onset of the peak season from September is likely to improve the scenario. The company expects demand in corporate travel to increase on the back of encouraging financial performance of most companies. It may be noted that the economic slowdown has impacted the industry, pressuring them to lower rates in the range of 30% to 40% in the first half of this calendar year. The pickup in demand is a positive sign for the hospitality industry as it will increase their occupancy levels.

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