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Taj GVK: Spreading wings - Views on News from Equitymaster
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  • Dec 21, 2004

    Taj GVK: Spreading wings

    Performance Summary
    Taj GVK, an associate of the Indian Hotels Company (Taj chain of hotels), reported impressive numbers for the quarter and half year ended September 2004. For 1HFY05, while the topline growth was 36.5% YoY backed by robust occupancy and average room rates (ARRs), net profit grew at a much faster pace of 89% YoY. The company's announcement of acquiring a new property in Chennai yesterday holds it in good stead to capitalise on the long-term growth opportunity in the tourism sector.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 195 264 35.3% 362 494 36.5%
    Expenditure 144 174 21.1% 268 323 20.7%
    Operating profit (EBDITA) 51 90 74.9% 94 170 81.7%
    EBDITA margin (%) 26.4% 34.1%   26.0% 34.5%  
    Other income 0 1 327.3% 2 3 78.6%
    Interest 1 2 371.2% 1 5 442.0%
    Depreciation 15 20 33.1% 33 41 24.0%
    Profit before tax 36 68 90.2% 62 128 107.0%
    Extraordinary income/(expense) - - - - - -
    Tax 10 27 168.9% 19 47 147.7%
    Profit after tax/(loss) 26 41 59.2% 43 81 89.0%
    Net profit margin (%) 13.2% 15.5%   11.9% 16.5%  
    No. of shares (m) 12.5 12.5   12.5 12.5  
    Diluted earnings per share (Rs)* 8.2 13.0   6.9 13.0  
    Price to earnings ratio (x)         25.8  
    (* annualised)            

    What is the company's business?
    Taj GVK is a relatively small-sized hotel chain with three properties in Hyderabad (Taj Krishna, Taj Banjara and Taj Residency) with an estimated room inventory of 519 in FY04. The company is in the process of setting up a hotel in Chandigarh, which is likely to commence operation in FY06. Indian Hotels, the owners of the Taj Group, holds 25.5% stake in the company.

    What has driven performance in 2QFY05?
    It's is the same story: International tourist arrivals into the country is estimated to have increased by more than 26% for the first five months of the fiscal. More importantly, the overall increase in dollar spends is estimated to have gone up by 39% in the same period. Since the company derives revenues only from its presence in Hyderabad (Andhra Pradesh) for now, it is of relevance to consider the tourist arrival data for the state. Though latest data is unavailable, last year tourist arrivals in Andhra Pradesh went up by 128% YoY. In absolute terms, the number is close to 0.5 m (17% of all India international tourist arrivals, based on our estimate). We expect this trend to have continued in this fiscal and this is reflected in the performance of Taj GVK.

    Operating leverage benefits: Hotels is a high fixed cost sector with fixed cost to total cost ranging between 65% to 70%, depending on the hotel chain. So, whenever there is a growth in ARR, the expansion in margins is much higher than the topline growth. The graphs above indicates the movement in operating and net margins of Taj GVK and the relative movement of Taj GVK's operating margin with respect to its competitors. We expect margins to improve further in the second half of the fiscal, as it is typically the busy season for tourists (margins in 3QFY04 was 39%).

    Costs schedule - Benefits from operating leverage
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Raw materials 20 25 23.6% 39 47 21.4%
    % sales 10.5% 9.6%   10.7% 9.5%  
    Staff cost 37 37 -0.9% 69 73 5.9%
    % sales 19.0% 13.9%   19.1% 14.8%  
    Power and fuel 21 23 6.1% 42 45 5.7%
    % sales 10.9% 8.6%   11.7% 9.1%  
    Other expenses 65 90 37.9% 118 158 34.5%
    % sales 33.2% 33.9%   32.6% 32.1%  

    What to expect?
    The stock currently trades at Rs 334, implying a price to earnings multiple of 25.8 times 1HFY05 annualised earnings and a price to book value multiple of 4.3 times FY04 book value. While valuations are on the higher side as compared to much larger chains like Indian Hotels, there is visibility in expansion in the near-term. Apart from the new property in Chandigarh, which is likely to commence operation in the next calendar year, Taj GVK also has plans to expand rooms in Taj Residency in Hyderabad. Besides, the latest acquisition of a property in Chennai is also a positive (as per media reports, the acquisition would cost Rs 320 m for a 212 room hotel, which will be renovated). Overall, the company is well poised to reap the benefits of higher tourist inflow into the country.



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