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Taj GVK: Favourable gap! - Views on News from Equitymaster
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Taj GVK: Favourable gap!
Oct 27, 2006

Performance summary
Taj GVK announced a robust set of numbers for the second quarter and half-year ended September 2006. The topline grew by strong 37.9% YoY due to a significant surge in business and tourist travel. A 400 basis point expansion in operating margin and lower depreciation costs have led to the buoyancy in bottomline growth for 2QFY07.

Rs( m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 420 579 37.9% 757 1,145 51.3%
Expenditure 240 311 29.3% 434 611 40.8%
Operating profit (EBDITA) 180 269 49.5% 323 535 65.4%
Operating profit margin (%) 42.8% 46.4%   42.7% 46.7%  
Other income 1 2 146.5% 2 5 158.2%
Interest 9 10 1.4% 15 22 39.8%
Depreciation 34 32 -5.1% 55 65 18.2%
Profit before tax 137 229 67.1% 255 453 77.9%
Tax 43 78 79.0% 86 153 77.6%
Profit after tax/(loss) 94 152 61.6% 168 300 78.1%
Net profit margin (%) 22.3% 26.2%   22.2% 26.2%  
No. of shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share (Rs)*         9.5  
Price to earnings ratio (x)*         24.3  
* 12 month trailing earnings            
The Company has subdivided the face value of the equity shores of Rs 10/- paid up to Rs 2/- paid up during the quarter ended December 2005

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 2QFY07?
Favourable demand supply gap: In line with the last few quarters, the robustness in tourist inflow has continued to have a benign impact on the hotel industry in this quarter. This has helped not only Taj GVK but also all the major hotels to post strong results in the last few quarters. Taj GVK, which enjoys monopoly positions in Hyderabad and Chandigarh, continues to benefit from the demand supply gap in these cities. The room revenues increased by 41% YoY for the quarter led by a strong 35% increase in average room rates (ARRs). The ARRs increased from Rs 5,400 in 2QFY06 to Rs 7,300 in this quarter. The occupancy rates touched around 85% in Hyderabad properties and 62% in Chandigarh. This strong rise in ARR and occupancy rates led to a 37.9% YoY growth in the topline for 2QFY07. The food and beverage (F&B) revenues too witnessed a 35% YoY increase. Going forward, with no significant supply coming in these cities, Taj GVK will be amongst the major beneficiaries in the coming quarters, due to the favourable demand supply gap.

Buoyant margins: The hotel sector is a high fixed cost industry and thus benefits from operating leverage (profits improve sharply once the business generates enough revenues so as to meet the fixed costs and any incremental business revenues flow straight through to the bottomline). On a YoY basis, operating margins have witnessed strong expansion of 360 basis points (3.6%), which has been driven by a reduction in the operating heads (as a percentage of sales).

Cost break-up
As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 8.7% 8.3% 8.5% 8.1%
Staff Cost 15.9% 14.1% 15.1% 13.7%
Power and fuel 6.8% 5.2% 7.1% 5.2%
Other Expenditure 25.8% 26.0% 26.5% 26.3%

It all flows to the bottomline: The net profit growth has significantly out-performed the topline growth as well as the operating profit growth. Taj GVK’s net profits for 2QFY07 have risen sharply by 61.6% YoY. Higher other income and lower depreciation costs expanded the net margins by 390 basis points.

Quarterly trend
  2QFY06 3QFY06 4QFY06 1QFY07 2QFY07
Net sales growth 59.1% 68.8% 74.0% 68.0% 37.9%
Operating profit margin 42.9% 47.1% 46.7% 47.0% 46.4%
Net profit growth 22.4% 26.9% 25.5% 26.2% 26.2%

What to expect?
At the current market price of Rs 231, Taj GVK’s stock is trading at a price to earnings multiple of 24.3 times its trailing 12-month earnings. Taj GVK is establishing new hotels as well as augmenting existing properties to benefit from the robust prospects of the domestic economy. 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 1,400 rooms by FY10. Considering the strong growth plans 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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