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Taj GVK: Subdued performance - Views on News from Equitymaster

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Taj GVK: Subdued performance

Nov 14, 2007

Performance summary
  • Topline witnesses a marginal increase for 2QFY08 and 1HFY08.
  • Operating margins remain stable at 46% for 2QFY08 and 1HFY08.

  • Lower interest and depreciation cost lead the bottomline to grow by 7% YoY in 2QFY08.

Rs( m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 579 592 2.2% 1,145 1,157 1.0%
Expenditure 311 314 1.2% 611 620 1.5%
Operating profit (EBDITA) 268 278 3.4% 534 537 0.5%
Operating profit margin (%) 46.4% 46.9%   46.7% 46.4%  
Other income 2 3 18.5% 5 10 94.0%
Interest 10 7 -26.3% 22 14 -35.7%
Depreciation 32 27 -17.0% 65 57 -12.7%
Profit before tax 229 247 7.7% 452 476 5.2%
Tax 78 85 9.2% 153 163 6.4%
Profit after tax/(loss) 151 162 7.0% 299 313 4.6%
Net profit margin (%) 26.1% 27.3%   26.1% 27.0%  
No. of shares (m) 62.5 62.5   62.5 62.5  
Diluted earnings per share (Rs)*         10.0  
Price to earnings ratio (x)*         14.2  
* 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 2QFY08?
Subdued growth: Taj GVK’s topline witnessed a mere 2% YoY increase in the topline. The reason for the subdued performance was due to lower occupancy and room rates in Hyderabad as new rooms were added in the city. Taj GVK derives significant portion of its revenues from its properties located in Hyderabad. However, given that the coming quarter is the peak season and that a sporting event is being organised in Hyderabad, better performance is expected. The company is venturing into new locations like Chennai and Chandigarh (also is looking for land in Bangalore). 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 in FY09 and 1,400 rooms in FY10. The company has earmarked capital expenditure to the tune of Rs 4 bn towards the same. We expect the topline performance to get better in the coming quarters as no new rooms would come in Hyderabad until 2009.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 8.3% 7.9% 8.1% 8.2%
Staff Cost 14.1% 14.2% 13.6% 14.5%
Power and fuel 5.2% 5.3% 5.2% 5.4%
Other Expenditure 26.0% 25.7% 26.3% 25.4%

Stable margins: Taj GVK witnessed a marginal increase of 0.5% YoY in the operating margins. Lower raw material and other expenses led to the improvement. For 1HFY08 however, the margins marginally reduced to 46.4%. All the cost overheads, other than other expenses, witnessed an increase as percentage of sales. The margins are lower than our estimates for the year. However with the coming quarters being the peak season, we expect the margins to expand.

Profit view: Inspite of lower interest and depreciation charges, the bottomline witnessed a staid 7% YoY growth. Muted performance of the topline and operating profits led to the slow growth. The performance is in line with our estimates.

What to expect?
At the current market price of Rs 142, Taj GVK’s stock is trading at a price to earnings multiple of 6.2 times our FY10 estimates. Considering the long gestation period (expansion takes 2-3 years to complete), the dependence on Hyderabad is not likely to reduce in the medium term. Also with many global brands entering the city, competition is likely to increase. Overall, we advise investors to practice caution while investing in the stock.

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