Buy Taj GVK Hotels & Resorts Ltd.
CMP Rs145.40
Target Price Rs240
Performance Highlights
For 3QFY2010, TajGVK reported a 6.2% yoy growth in net sales to Rs64.4cr (Rs60.6cr). The performance improved significantly on a qoq basis, with the top-line and EBITDA registering a rise of 19.7% and 39%, respectively. Since the slowdown in the hotel industry was aggravated after the November 26, 2008 terrorist attacks, we believe that the qoq improvement in performance is significant, giving clear signals of an ongoing recovery in the industry. The EBITDA margin declined by 150bp yoy to 40.5% (42%). However, on a qoq basis the company’s margins surged by 560bp, on the back of improved ORs and ARRs, as demand picked up. Going ahead, we expect the company to post a decent performance on the back of improving dynamics. We maintain our Buy rating on the stock.
ORs and ARRs on the rise; performance gradually recovering: During the quarter, TajGVK reported a 6.2% yoy growth in net sales to Rs64.4cr (Rs60.6cr). TajGVK’s Chennai property, which got operational recently, added 31% to the total room inventory thereby enabling a marginal rise in revenues. On the EBITDA front, the company witnessed a marginal rise of 2.6% yoy to Rs26.1cr (Rs25.4cr), while the OPM declined by 150bp yoy to 40.5%. Although the ORs have gone up on a yoy basis, the ARRs (albeit recovering) are still lower than those in 3QFY2009, thereby putting pressure on the margins. The bottom-line witnessed a decline of 9.7% yoy, as interest and depreciation costs surged by 127.3% and 56.2% yoy, respectively, during the quarter.
Outlook and Valuation: With the economic recovery gathering steam, we expect the business destinations (like Hyderabad, Chandigarh and Chennai) to significantly benefit, where TajGVK has a significant presence. Signs of improving demand are visible, with occupancy rates improving, which would consequently be followed by higher ARRs in the coming quarters. We maintain our positive stance on the hotel industry, on the back of the improving dynamics. At Rs148, the stock is trading at attractive levels of 12.2x its FY2012E Earnings, 2.3x its FY2012E P/BV and an EV/Room of Rs1.1cr. We maintain our Buy rating on the stock, with a Target Price of Rs240.
Key Business Highlights
Occupancy rates surge, ARRs may follow: A majority of TajGVK’s properties are in areas that attract business travelers. As the economic revival gathers steam, we believe that the industry will continue witnessing an uptrend going ahead. The occupancy levels have shown encouraging signs in 3QFY2010 for TajGVK. In Hyderabad, occupancy levels surged to 72% yoy (as compared to 64% in 3QFY2009). In Chandigarh, the ORs were same as that of last year, at 73%, while for the Chennai property the same were lower, at 39% during the quarter. Although the ARRs are down on a yoy basis, they have registered a rise on a qoq basis, which we believe is a positive signal for future performance. Until the previous quarter, the management was focusing on the RPD route, where it was attempting to occupy as many rooms as possible at competitive rates in order to improve the Revenue per Room (RevPAR). However, we believe that with ARRs surging up on a qoq basis, this strategy has been modified.
Other developments:
• The company has a majority of its room inventory in Hyderabad. Hyderabad witnessed tough times during the quarter, due to the Telangana issue. However, TajGVK suffered a minimal impact on its operations during the period, as the issue occurred around the Christmas season, which is a lean period for the company.
• TajGVK’s Chandigarh property is expected to benefit from the IPL2010 scheduled during March-April, 2010. We expect the occupancy to surge to 80% for the property during this time.
• The development of the company’s upcoming 190-room property in Begumpet (Hyderabad) is on track.
Outlook and Valuation
With the economic recovery gathering steam, we expect the business destinations (like Hyderabad, Chandigarh and Chennai) to significantly benefit, where TajGVK has a significant presence. Signs of improving demand are visible, with occupancy rates improving, which would consequently be followed by higher ARRs in the coming quarters. We maintain our positive stance on the hotel industry, on the back of the improving dynamics.
Considering the improving demand, the company’s dominant position in Hyderabad, the growing demand for its recently launched Chennai property, and its on-track expansion plans, we estimate the top-line and bottom-line to witness a CAGR of 23.7% and 60.3%, respectively. At Rs148, the stock is trading at attractive levels of 12.2x its FY2012E Earnings, 2.3x its FY2012E P/BV and an EV/Room of Rs1.1cr. We maintain our Buy rating on the stock, with a Target Price of Rs240.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 17.03 | 08/02/10 |
| EPS (Rs) | 8.42 | Mar, 09 |
| Sales (Rs crore) | 64.36 | Dec, 09 |
| Face Value (Rs) | 2 | |
| Net profit margin (%) | 22.11 | Mar, 09 |
| Last dividend (%) | 100 | 04/05/09 |
| Return on average equity | 19.58 | Mar, 09 |
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