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Taj GVK: Higher costs weigh on bottomline

Nov 1, 2010

Taj GVK Hotels & Resorts Limited has announced its 2QFY11 results. The company has reported 11.2% YoY and 6.1% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales of the company for 2QFY11 increased by 11.2% YoY.
  • Operating (EBITDA) margins fell by 2.6% during the quarter. This was a result higher costs of goods sold, higher staff costs and higher other expenditure.
  • Net profit increased by 6.1%. This increase came on the back of lower interest costs and lower depreciation.

Rs(m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 538 598 11.2% 1,016 1,207 18.9%
Expenditure 350 405 15.7% 672 786 17.0%
Operating profit (EBDITA) 188 193 2.8% 343 421 22.7%
Operating profit margin (%) 34.9% 32.3%   33.8% 34.9%  
Other income - -   - -  
Interest 33 30 -9.4% 66 56 -14.2%
Depreciation 48 50 3.7% 97 101 4.0%
Profit before tax 106 113 6.1% 181 264 46.0%
Exceptional Items - -   - -  
Tax 36 39 6.2% 62 89 43.1%
Profit after tax/(loss) 70 74 6.1% 119 175 47.4%
Net profit margin (%) 13.0% 12.4%   11.7% 14.5%  
No. of shares (m) 63 63   63 63  
Diluted earnings per share (Rs)*       6.7  
Price to earnings ratio (x)*         23.0  
* 12 month trailing earnings

What has driven performance in 2QFY11?
  • Taj GVK had been suffering due to the economic slowdown, specifically in the IT and KPO/BPO industry. More recently, the company, which has 3 of its 5 properties in Hyderabad suffered due to the Telengana issue. In spite of these challenges the company's top line grew by 11% YoY during what is the slowest quarter of the year.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 9.2% 10.1% 9.4% 9.8%
    Staff Cost 19.2% 20.6% 20.4% 19.5%
    Power and fuel 8.8% 8.8% 9.0% 8.7%
    Other Expenditure 27.8% 28.2% 27.3% 27.1%

  • Taj GVK's operating margins fell by 2.6%. This has been due to an increase in the cost of goods sold, staff costs and other expenditure. While cost of goods sold increased by 0.9% (as a percentage of sales) to stand at 10.1% for the quarter, staff costs and other expenditure increased by 1.4% and 0.4% (both as a percentage of sales) to stand at 20.6% and 28.2% respectively.

  • Net profit for 2QFY11 increased by 6.1% YoY while the net profit margins fell by 0.6%. This was a result of the fall in interest expense for the quarter and lower depreciation. Interest expense fell by 9.4% YoY.

What to expect?
At a price of Rs 154, the stock is trading at 13.6 times our estimated FY13 earnings (ResearchPro subscribers, kindly click here). As of now, the company has 5 hotels with the latest one in Chennai. It is putting up a 6th luxury hotel in Begumpet, Hyderabad along with a smart basic hotel under the Ginger brand of hotels, also in Hyderabad. The luxury hotel Taj Begumpet is expected to start operations by January - March 2011 while the 250 room Ginger hotel is expected to be launched in 2 years time. TAJGVK is a Hyderabad centric company and the new properties will ensure that it will continue to remain dependent on the city. While there have been new rooms additions in the city over the last year, new supply is not going to enter the market for atleast the next 3 years due to the Telangana issue as investors are cautious about investing money. This has put the company is a sweet spot as the economic recovery continues. However, at these levels the growth for the next 2-3 years is captured in the stock price. Hence we have a cautious view on the stock.

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