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Taj GVK: Deferred tax sinks profits - Views on News from Equitymaster

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Taj GVK: Deferred tax sinks profits
Nov 4, 2011

Taj GVK Hotels & Resorts Limited announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a 0.9% YoY and 41.3% YoY decline in sales and net profits for the quarter respectively. Here is our analysis of the results.

Performance Summary
  • Net sales of the company for 2QFY12 declined by 0.9% YoY.
  • Operating (EBITDA) margins increased by 0.7% during the quarter. This was a result of lower costs of goods sold.
  • Net profit for 2QFY12 declined by 41.9%. This decrease came on the back of adjustment for deferred tax.
  • Net sales and net profits for the half year ended September 2011 declined by 2.2% YoY and 6.9% YoY respectively.


Financial Performance Snapshot
(Rs m) 2QFY11  2QFY12  Change 1HFY11 1HFY12 Change
Sales 598 592 -0.9% 1207 1181 -2.2%
Expenditure 405 397 -1.9% 786 781 -0.7%
Operating profit (EBDITA) 193 195 1.2% 421 400 -5.0%
Operating profit margin (%) 32.3% 33.0%   34.9% 33.9%  
Other income
Interest (net) 30 32 6.3% 56 61 8.2%
Depreciation 50 50 -0.3% 101 100 -0.4%
Profit before tax 113 113 0.5% 264 239 -9.5%
Exceptional Item
Tax 39 70 82.0% 89 76 -14.7%
Profit after tax/(loss) 74 43 -41.9% 175 163 -6.9%
Net profit margin (%) 12.4% 7.3%   14.5% 13.8%  
No. of shares (m)         63  
Diluted earnings per share (Rs)*         6.7  
P/E ratio (x)*         13.5  
* 12 month trailing earnings

What has driven performance in 2QFY12?
  • Taj GVK's topline was primarily hit by lower occupancy and muted room rates (ARR) across the Hyderabad region, which suffered from the Telangana agitation. However, Chandigarh and Chennai recorded higher occupancy levels of 67% and 63% respectively for the quarter. ARRs across these cities remained muted on account of a lower than expected pick-up in the demand. It should be noted that this quarter is considered an off season time for the sector.

    Cost break-up
    As a % of net sales 2QFY11 2QFY12 1HFY11 1HFY12
    Total Cost of goods 10.09% 9.69% 9.85% 9.61%
    Staff cost 20.58% 20.90% 19.50% 20.52%
    Power, fuel & light 8.81% 9.48% 8.70% 9.26%
    Other Expenditure 28.24% 26.97% 27.07% 26.72%

  • Operating margin of Taj GVK increased by 0.7%. The operating margin improved on account of various cost control measures taken by the company during Q2FY12. As a result of which operating expenditure declined by 1.9% YoY. The decline in operating expenditure was because of decline in total cost of goods sold and other expenses.

  • At the bottomline level net profits declined by 41.9% YoY on back of rise in tax expenses by 82% YoY as the company made deferred tax provision of Rs 70.3 m in 2QFY12.

What to expect?
As of now, the company has 5 hotels with the latest one in Chennai. The company is exploring the possibility of entering the value for money segment through Ginger brands in Andhra Pradesh. This involves a total investment outlay of Rs 450 m for 250 rooms on which the company has already incurred over Rs 200 m till date. Apart from this, the company's new hotel at Begumpet in Hyderabad will be available for premium clients from Q3FY12 onwards. However, full impact of this property will be seen from 4QFY12 onwards. The company is also exploring opportunities in the IT hub of Bangalore to capitalise on its six acre land bank in Bangalore.

At a price of Rs 91, the stock is trading at 7 times our estimated FY14 earnings. We will soon have a relook and revise our estimates for the stock.

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Nov 14, 2018 03:35 PM

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