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For 2QFY2011, Taj GVK reported lower-than-expected sales growth of 11.2%
yoy. The below-expectation growth was mainly due to slower-than-expected
ramp-up in occupancy rates (OR) and average room rates (ARR) in Hyderabad
hotels. Going ahead, we expect the company’s operating environment to
improve. Hence, we continue to maintain our Buy rating on the stock.
Sales and OPM remain sluggish: During the quarter, the company’s sales grew by
11.2% yoy to `59.8cr on the back of improved OR in Chennai and Chandigarh
hotels. However, OR and ARR in Hyderabad hotels was below our expectations.
OPM also declined by 261bp yoy to 32.3% because of wage hikes and lower
sales that could not absorb fixed costs effectively. During the quarter, the
company reported a 6.4% yoy increase in PAT to `7.4cr.
Outlook and valuation: We expect the entire hotel industry to witness improved
business scenario, as the broader economic activity increases. Considering
Taj GVK’s robust growth prospects and attractive valuations, we believe Taj GVK
is best poised amongst peers. However, given the below-expectation results, we
have revised our sales and OPM estimates downwards for FY2011 and FY2012.
Going forward, we expect Taj GVK to post a 20.7% CAGR in sales and a 40.5%
CAGR in PAT over FY2010–12E. At the CMP, the stock is trading at attractive
valuations of FY2012E EV/Room of `1cr and 13.0x FY2012E EPS of `11.4.
Hence, we maintain our Buy rating on the stock with a revised Target Price of
`228 (earlier `240).
Net sales up 11.2%
During the quarter, Taj GVK posted 11.2% yoy top-line growth mainly on account
of a yoy increase in OR and ARR. However, sequentially, sales declined by 2.0%.
Over the past few quarters, sales have remained more-or-less flat. However, the
sales growth trend, which was on a rise since 4QFY2009, fell in 2QFY2011 due to
seasonality effect.
OPM falls to 32.3%
OPM for 2QFY2011 fell to 32.3% compared to 34.9% in 2QFY2010 and 37.4% in
1QFY2011. EBITDA came in at `19.3cr, which was below our expectations. The
reason for the below-expectation operating margin was lower-than-estimated
sales. As a result of this, fixed costs could not be absorbed effectively, resulting in a
decline in OPM. However, going ahead, we expect OPM to increase as the
traditional strong season for travel is around the corner.
PAT falls sequentially to `7.4cr
During the quarter, PAT fell to `7.4cr, compared to `10.1 in the previous quarter,
due to flat top line and lower OPM. The company’s PAT has dropped consistently
over the past few quarters because of flat sales and declining margins. However,
as sales and margins get back on track, we expect PAT to improve over the next
quarters.
Other developments
The Hyderabad-based Begumpet Hotel’s start has been delayed till FY2012,
as against the earlier expectations of 4QFY2011.
OR in Chandigarh and Chennai has increased by nearly 5–6 percentage
points yoy, while that of Hyderabad properties increased by only 2–3
percentage points yoy.
ARR increased by `400–500 yoy.
Investment arguments
Strengthening its foothold in the Hyderabad market: Taj GVK is the market leader
in the Hyderabad market, where it has a share of nearly 30% in premium-segment
rooms. In order to strengthen its foothold further and to tap mid-market room
demand, the company is coming up with a 189-room property in Begumpet. The
company also plans to add service apartments and retail space in its existing
Taj Krishna property. Post the expansion, we believe Taj GVK would emerge as an
even-stronger player in Hyderabad.
Diversification strategy to de-risk the business model: In FY2008, 78% of Taj GVK's
room inventory was located in Hyderabad. To diversify its presence, the company
came up with Taj Mount Road in Chennai in December 2008. With this, the
company has toned down room inventory concentration in Hyderabad to 59% of
the total room inventory in FY2010 from 78% in FY2008. Management is also
planning to enter Bangalore and is exploring the possibility of entering the midmarket
segment through tie-ups with IHCL's 'Ginger'. We believe this strategy will
prove beneficial in the long run, as it would reduce the company’s overexposure to
the Hyderabad market.
Asset-light strategy to keep the balance sheet healthy: Taj GVK is adding 189
rooms at its Begumpet property, using an asset-light strategy. This would require a
lower capital outlay as compared to a greenfield expansion, and we expect the
company's debt-equity ratio to be at a comfortable level of 0.2x in FY2012E, which
provides Taj GVK adequate room to plan further expansions, without hampering
its balance sheet quality.
Outlook and valuation
With the economic recovery gathering steam, we expect business destinations (such
as Hyderabad, Chandigarh and Chennai), where Taj GVK has a significant
presence, to considerably benefit. Signs of improving demand are visible, with OR
improving in general, which would consequently be followed by higher ARR in the
coming quarters. However, in this quarter, both these parameters were below our
expectations. Besides, the start of the new 189-room hotel in Begumpet has been
delayed till FY2012. Factoring these developments into our estimates, we have
revised our FY2011 and FY2012 sales estimates downwards by 7.2% and 2.8% to
`277cr and `333cr, respectively. OPM has also been reduced to 39.1% and
41.8% for FY2011 and FY2012, respectively. However, we continue to remain
bullish on the prospects of the hotel industry, given the improved business
dynamics. Overall, we estimate Taj GVK’s top line and bottom line to witness
CAGR of 20.7% and 40.5%, respectively, over FY2010–12E. At `149, the stock is
trading at attractive valuations of 13.0x its FY2012E EPS of `11.4 and an EV/Room
of `1cr. We maintain our Buy rating on the stock with a revised Target Price of
`228 (`240).
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