Taj GVK Hotels - Long term growth visibility intact… :: ICICI Securities, report

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Long term growth visibility intact… • The Q3FY15 performance was marginally below our estimates in terms of revenue while better margins led to a net profit of | 2.7 crore, which was in line with our estimates. Revenues for the quarter grew 4.6% YoY to | 68.3 crore (vs. I-direct estimate: | 69.2 crore) • EBITDA margins improved 107 bps YoY to 25.6% (I-direct estimate: 24.6%), mainly on account of low power & fuel costs • Net profit for the quarter declined 18.3% YoY to | 2.7 crore (vs. Idirect estimate - | 2.9 crore) mainly due to higher interest cost 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 the Telangana issue to impact 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, which we believe would provide it with better scale and geographic diversity over the longer term. …expansion into newer geographies, 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. Long-term growth visibility intact; Maintain BUY… We expect the hotel business in Hyderabad to improve post resolution of the Telangana issue over the next three 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 4.7% and 41.5% (low base effect) during FY14-17E. At the CMP of | 85, the stock is trading at 11.3x and 10.8x its FY16E and FY17E EV/EBITDA, respectively. We continue to remain positive on the company and maintain our BUY rating with a revised target price of | 105/share (i.e. at 13.0x FY17 EBITDA, an average of last three year EV/EBITDA multiple).

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