BUY Taj GVK Hotels, :: ICICI Securities,

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Modest scale of operation with high concentration in Hyderabad…
The company has a modest scale of operation, with significant
geographic concentration in Hyderabad i.e. 67% share in room portfolio.
The remaining 33% is contributed by Chandigarh and Chennai. In line
with the subdued performance of the Indian hotels industry, Taj GVK also
witnessed a considerable moderation in performance since the peak of
FY08. The Hyderabad-centric business also led to the Telangana issue
impacting the company severely. Between FY08 and FY14, its revenue
growth remained flattish while increase in fixed overheads led to a sharp
contraction in margins (i.e. down from 47% in FY08 to 21.5% in FY14). To
reduce the dependence on one location, the company is expanding into
newer geographies of Bangalore and Mumbai. We believe this would
provide it with better scale and geographic diversity over the longer term.
…expansion into newer geographies and economy segment
The company jointly with M/s. Greenridge Hotels and Resorts LLP
(Greenridge - a GVK company) through its SPV M/s Green Woods Palaces
& Resorts Pvt Ltd (Green Woods) is setting up a five-star deluxe (luxury
category) hotel project comprising 275 rooms near Terminal 1C, at
Mumbai International Airport Pvt Ltd (MIAL), Santacruz, Mumbai under
the ‘Taj’ brand. The company is also planning to enter the value for
money segment through the ‘Ginger’ brand in Andhra Pradesh. The
excavation works on the first Ginger hotel on a site near the Shamshabad
International Airport is complete and civil work is expected to commence
in due course.
Strong parentage, sound balance-sheet remain key positives
The company’s muscular parentage [GVK and Indian Hotels Company
(IHCL)], operational support from IHCL and strong balance sheet remain
key positives for a long-term growth opportunity. Its current debt-equity
stands at 0.6x. This is unlikely to change as the company is only an equity
partner in the SPV formed for setting up a hotel in Mumbai.
More room for growth; Maintain BUY…
We expect the hotel business in Hyderabad to improve post resolution of
the Telangana issue over next two years. Further, expansion into newer
geographies of Bangalore and Mumbai would provide the company with
better scale and geographic diversity over the longer-term. We expect
sales and PAT CAGR of 5.4% and 34.1% (low base effect) during FY14-
16E. At the CMP of | 103, the stock is trading at 14.4x and 12.7x its FY15E
and FY16E EV/EBITDA, respectively. We continue to remain positive on
the company and maintain our target price of | 116/share (i.e. at 14.0x
FY16 EBITDA, an average of last three year EV/EBITDA multiple). We
maintain our BUY rating on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_TajGVK_Q2FY15.pdf