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Taj GVK: Marred by a slowdown - Views on News from Equitymaster
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Taj GVK: Marred by a slowdown
Aug 4, 2008

Performance summary
  • Topline grew by just 3% YoY during 1QFY09 on account of lower room rates.
  • Margins decline 0.9% YoY on account of substantially higher staff and fuel costs.
  • The bottomline remains flat on account of a marginal increase in operating profits.


Rs (m) 1QFY08 1QFY09 Change
Net sales 565 585 3.4%
Expenditure 306 322 5.1%
Operating profit (EBDITA) 259 263 1.4%
Operating profit margin (%) 45.9% 45.0%  
Other income 7 3 -56.7%
Interest 7 6 -17.5%
Depreciation 30 29 -4.3%
Profit before tax 229 231 1.0%
Tax 78 80 2.7%
Profit after tax/(loss) 151 151 0.2%
Net profit margin (%) 26.7% 25.9%  
No. of shares (m) 62.5 62.5  
Diluted earnings per share (Rs)*   11.3  
Price to earnings ratio (x)*   8.2  
* 12 month trailing earnings

What has driven performance in 1QFY09?
  • TAJ GVK’s topline grew by a mere 3.4% YoY in 1QFY09. The room revenues grew by 5% YoY on account of stable occupancy rates but lower room rates. The company achieved 76% occupancy in Hyderabad and 70% in Chandigarh. Hyderabad being an IT hub, did witness lower tourist inflow owing to slowdown in corporate spending. Taj GVK gets about 50% of its earnings in foreign currency in Hyderabad. Further, the hospitality players have been compelled to correct rates in a bid to increase occupancy levels, especially in cities such as Bangalore, Hyderabad and Pune. There has been a dip in both leisure and corporate travel, owing to inflation and sharp increase in airfares, which has affected Taj GVK. Its Chennai property, which was originally planned to open in May, was delayed on account of government approvals and is scheduled to open this August.

    Cost break-up
    As a % of net sales 1QFY08 1QFY09
    Total Cost of goods 8.7% 8.0%
    Staff Cost 14.8% 15.3%
    Power and fuel 5.5% 6.5%
    Other Expenditure 25.1% 25.3%

  • Operating margins declined by 90 basis points (0.9%) in 1QFY09. Barring raw material costs, all other costs witnessed an increase as a percent of sales. Power and fuel costs increased substantially by 21% YoY.

  • The bottomline growth was almost flat inspite of interest costs and depreciation charges being lower. Strong cash flows led to lower interest costs. Muted growth in the topline and the fall in operating margins were the main culprits.

What to expect?
At the current market price of Rs 92, Taj GVK’s stock is trading at a price to earnings multiple of 6.4 times our FY11 estimates. Like its peers, Taj GVK too has been affected on account of the weakening economic scenario globally and in India. With a slowdown in tourist arrivals, the company is facing rough weather. The management has indicated the opening of the new wing in Deccan in 3QFY09 and the shopping mall in the last quarter of this fiscal, along with the Chennai property, which is expected to open shortly. However, execution risk remains, as in the past the company has witnessed a delay in its plans. Further, the gloomy economic outlook indicates that ARRs are not likely to see a spectacular increase this season.

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