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Taj GVK: Monopolistic advantage! - Views on News from Equitymaster

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Taj GVK: Monopolistic advantage!
Aug 9, 2006

Performance Summary
The party for the hotel chain, Taj GVK, continues. The company reported robust numbers, yet again, for 1QFY07. The topline grew by 68% YoY aided by the buoyancy in the tourist inflow. Also, operating leverage has helped the company perk up its profitability, as seen in the strong rise in operating and net margins.

Rs( m) 1QFY06 1QFY07 Change
Net sales 337 566 68.0%
Expenditure 194 300 55.0%
Operating profit (EBDITA) 144 266 85.4%
Operating profit margin (%) 42.6% 47.0%  
Other income 1 3 170.0%
Interest 6 12 100.0%
Depreciation 21 33 56.2%
Profit before tax 118 224 90.6%
Tax 43 76 76.2%
Profit after tax/(loss) 75 148 98.8%
Net profit margin (%) 22.1% 26.2%  
No. of shares (m) 62.5 62.5  
Diluted earnings per share (Rs)*   8.6  
Price to earnings ratio (x)*   23.7  
* 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 1QFY07?
Locational advantage: Though occupancy rates and numbers with respect to the growth in average room rates (ARR) of the company are not available, growth can be viewed in respect to its position in the city of its presence and the robustness of tourist inflow. In the first quarter of calendar year 2006, the rise in tourist inflow was 14% YoY. Also, Taj GVK has three hotels (one luxury property and two business hotels) in Hyderabad totaling to 534 rooms, which is 50% of the total five-star rooms available in the city. Even in Chandigarh, the company enjoys a monopoly position. With Chandigarh emerging as a corporate destination and IT hub for Punjab and Haryana and given the fact that it is a key commercial and trading centre for Northern India, the tourist inflow is expected to increase at a faster rate than in the past. Taj GVK will be amongst the major beneficiaries, as it has no competition in this city in the five-star category.

Cost break-up
As a % of net sales 1QCY06 1QCY07
Total Cost of goods 8.2% 7.9%
Staff Cost 14.2% 13.2%
Power and fuel 7.4% 5.3%
Other Expenditure 27.3% 26.6%
Strong margins: Hospitality being a fixed asset intensive business, operating leverage has played its part in perking up margins for Taj GVK during 1QFY07. During the quarter, all the major cost heads (raw materials, staff, power and fuel) have witnessed declines as percent of sales.

Just missed a century: The company reported a 99% YoY rise in the bottomline. Aided by the healthy expansion in the operating profits and higher other income, the company’s net margins improved by 410 basis points. The interest cost is expected to rise going forward as the company has embarked on capital expenditure of Rs 4 bn (of which Rs 1.2 bn would be funded from internal accruals and the remaining will be funded through debt) to expand its room inventory to 1,400 rooms by FY10.

Visible expansion plans: Taj GVK is establishing new hotels as well as augmenting existing properties to benefit from the robust economic activity in the state of Andhra Pradesh. Apart from Hyderabad, the company commissioned a business class hotel in Chandigarh last year (it is yet to operate full steam). The property acquisition in Chennai will also diversify its revenue stream going forward. 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 rooms to 1,210 rooms by FY09 and 1,400 rooms by FY10.

What to expect?
At the current market price of Rs 203, Taj GVK’s stock is trading at a price to earnings multiple of 23.7 times its trailing 12-month earnings. Given its expansion plans (majority of which will start reflecting fully starting FY08), we are convinced about the company's growth plans and derive comfort from superior earnings growth over the next three years. We had a recommend a HOLD* on the stock in May 2006, with a FY09 target price of Rs 360. We maintain our view.

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