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Taj GVK: High interest cost hurt profits
Aug 1, 2012

Taj GVK Hotels & Resorts Limited has announced the first quarter results of financial year 2012-2013 (1QFY13). The company has reported a 5.9% YoY increase in net sales and 68.6% YoY decline in net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales of the company for 1QFY13 increased by 5.9% YoY on account of lean season along with higher room inventory in the Hyderabad region.
  • Both Operating profit and operating margin saw a decline of 18.4% YoY and 8% YoY respectively.
  • Net profit for 1QFY13 declined by 68.6% YoY and net profit margin declined by 14.4%.

Financial Performance Snapshot
(Rs m) 1QFY12 1QFY13 Change
Net sales 590  625 5.9%
Expenditure 384  457 18.9%
Operating profit (EBDITA) 206  168 -18.4%
Operating profit margin (%) 34.9% 26.9%  
Other income -  -  
Interest (net) 30 50 69.4%
Depreciation 50 60 20.2%
Profit before tax 126 57 -54.3%
Exceptional Item -  -  
Tax  6 20 245.2%
Profit after tax/(loss) 120 38 -68.6%
Net profit margin (%) 20.4% 6.0%  
No. of shares (m) - 63  
Diluted earnings per share (Rs)   3.4  
P/E ratio (x)*   18.7  
* 12 month trailing earnings

What has driven performance in 1QFY13?
  • The net sales of the company for 1QFY13 increased by 5.9% YoY. The topline remained under pressure due to the oversupply scenario and muted demand in the Hyderabad region. ARRs in Hyderabad declined while occupancy improved in Hyderabad leading to flat RevPAR. Chandigarh witnessed a decline in both ARR and occupancy compared to last year.

    Cost break-up
    As a % of net sales 1QFY12 1QFY13
    Raw material cost 9.51% 10.23%
    Staff cost 20.13% 20.94%
    Power, fuel & light 9.03% 11.37%
    Other Expenditure 26.46% 30.59%

  • Operating profit declined by 18.4% YoY on account of increase in expenditure. This was due to rise in fixed costs from newly opened hotels. Operating margins have also declined by 8% YoY. This is because the company recorded high expenditure that eroded a substantial part of its revenues. Its fuel, power and electricity cost jumped 33% YoY.

  • At the bottomline level net profits declined by 68.6% YoY while net profit margin declined by 14.4% YoY. High interest (up 69.4% YoY) and depreciation (up 20.2% YoY) costs for the new property (Vivanta by Taj - Begumpet which opened last year) has impacted the company's profitability.

What to expect?
Vivanta by Taj - Begumpet, which opened last year, is in the process of scaling up operations and the company expects the investment to bear fruit once the operations stabilize. The expansion at Taj Krishna is nearing completion, and it has begun work on a hospitality project near the new international airport in Mumbai to diversify itself geographically over the longer term. The civil works for the Rs 1.1 bn project in Mumbai, being executed with Greenridge Hotels & Resorts, a GVK Group company, is at an advanced stage. However, this may put pressure on its profitability over the medium term amid a demand slowdown.

The slowdown in the Indian economy along with the global economic crisis has negatively impacted the financial performance of the company. Going forward, the hotel industry could see low ARRs due to increase in new room supply and low demand. However we expect margins and profitability of the company to improve steadily due to the strategic location of its hotels and competitive pricing policy, once demand improves. At a price of Rs 64, the stock is trading at 1.4 times our estimated FY15 earnings. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.

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