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Taj GVK: Low on occupancy. - Views on News from Equitymaster
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Taj GVK: Low on occupancy.
Aug 6, 2007

Performance summary
  • Topline witnesses a marginal decline in 1QFY08. Room revenues fall by 3% YoY mainly due to a 5% drop in the occupancy rates in Hyderabad.

  • Operating margins decline by 110 basis points (1%) in 1QFY08.

  • Poor performances both at the topline and the operating profit level leads to a marginal 1.9% YoY rise in the bottomline despite a lower interest and depreciation charges.

Rs( m) 1QFY07 1QFY08 Change
Net sales 566 565 -0.1%
Expenditure 300 306 2.0%
Operating profit (EBDITA) 266 259 -2.5%
Operating profit margin (%) 47.0% 45.9%  
Other income 3 7 145.3%
Interest 12 7 -41.4%
Depreciation 33 30 -8.5%
Profit before tax 224 229 2.3%
Tax 76 78 3.1%
Profit after tax/(loss) 148 151 1.9%
Net profit margin (%) 26.2% 26.7%  
No. of shares (m) 62.5 62.5  
Diluted earnings per share (Rs)*   10.3  
Price to earnings ratio (x)*   15.0  
* 12 month trailing earnings

What is 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 1QFY08?
Low occupancy effects: Taj GVK’s topline witnessed a marginal decline in 1QFY08. The room revenues fell by 3% YoY mainly due to a 5% drop in the occupancy rates in Hyderabad. In 1QFY07, there was ADB conference call in Hyderabad, which led to strong inflows of visitors. Hence the occupancy rates were high at 83% in the last quarter of the previous year. Also additional 100 rooms were added in the city in the last 12 months leading to higher supply. The room rates however remained stable. The company’s Chandigarh property has stabilised and witnessed 68% occupancy for the quarter (up 12% YoY). The room rates were up 3% YoY at Rs 6,200. The management however expects the performance to be better in the coming quarters. Also in October 2007, there is a sporting event is scheduled to be organised in Hyderabad, as a result of which the company expects better revenues. Also its expansion plans are progressing well. The company is contemplating setting up a 120-room hotel at Amritsar. We expect the topline performance to get better as no new rooms would come in Hyderabad until 2009.

Lower margins: Taj GVK’s operating margins declined by 110 basis points (1%) in 1QFY08. Except other expenses, all the costs witnessed an increase as a percent of sales. The company is augmenting its room inventories and hence the expenses have increased. The margins are lower than our estimates for the year. However, we expect the margins to stabalise as the occupancy rate gets normalised.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 7.9% 8.7%
Staff Cost 13.2% 14.8%
Power and fuel 5.3% 5.5%
Other Expenditure 26.6% 25.1%

Muted bottomline: Poor performances both at the topline and the operating profit level have contributed to the just 1.9% YoY rise in the bottomline despite a lower interest and depreciation charges. Even a 145% YoY rise in other income could not improve the profits.

What to expect?
At the current market price of Rs 155, Taj GVK’s stock is trading at a price to earnings multiple of 6.8 times our FY10 estimates. Taj GVK is establishing new hotels as well as augmenting existing properties to benefit from the robust economic activity in the country. The company has ambitious expansion plans to be executed over the next 4 years in the cities of Chennai, Hyderabad and Bangalore. It is also looking at newer cities to get the first mover advantage. Despite the fact that prospects of the Indian hospitality industry look promising in the future, and that companies are gearing up to meet the demand supply gap by adding room inventory, there is always a risk attached in terms of execution and price versus value equation.

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