For the third quarter of FY10, Taj GVK Hotels and Resorts Ltd reported a 6.2% year-on-year (y-o-y) growth in net sales to Rs64.4 crore. The performance improved significantly on sequential basis with revenue and earnings before interest, tax, depreciation and amortization (Ebitda) registering a rise of 19.7% and 39%, respectively. Since the slowdown in the hotel industry was aggravated after the 26 November 2008 terrorist attacks, we believe that the sequential improvement in performance is significant, giving clear signals of an ongoing recovery in the industry.
The Ebitda margin declined by 150 basis points (bps) y-o-y to 40.5%. However, as demand picked up, the company’s margins surged by 560 bps on a sequential basis on the back of improved occupancy rates (OR) and average room rates (ARRs). We expect the company to post decent performance on the back of improving dynamics. We maintain our buy rating on the stock.
Graphic: Yogesh Kumar / Mint
Taj GVK’s Chennai property, which got operational recently, added 31% to the total room inventory, enabling a marginal rise in revenue. On the Ebitda front, the company witnessed a marginal rise of 2.6% y-o-y to Rs26.1 crore, while the operating profit margin (OPM) declined by 150 bps y-o-y to 40.5%. Although the ORs have gone up on a y-o-y basis, the ARRs (albeit recovering) are still lower than those in the third quarter of FY09, putting pressure on margins. Profits witnessed a decline of 9.7% y-o-y as interest and depreciation costs surged by 127.3% and 56.2% y-o-y, respectively, during the quarter.
A majority of Taj GVK’s properties are in areas that attract business travellers. As the economic revival gathers steam, we believe that the industry will continue witnessing an uptrend. The occupancy levels have shown encouraging signs in the December quarter for Taj GVK.
In Hyderabad, occupancy levels surged to about 72% y-o-y compared with around 64% in the December quarter of 2009. In Chandigarh, the ORs were same as that for 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 y-o-y basis, they have registered a rise on a quarter-on-quarter (q-o-q) basis, which we believe is a positive signal for future performance.
Until the previous quarter, the management was focusing on the rooms per day route, where it was attempting to occupy as many rooms as possible at competitive rates in order to improve revenue per room. However, we believe that with ARRs surging on a sequential basis, this strategy has been modified.
The company has a majority of its room inventory in Hyderabad. Hyderabad witnessed tough times during the quarter due to the Telangana issue. However, Taj GVK suffered a minimal effect on its operations during the period as the issue occurred around the Christmas season, which is a lean period for the company.
Taj GVK’s Chandigarh property is expected to benefit from the Indian Premier League 2010 scheduled in March-April. We expect the occupancy to surge to 80% for the property during this time. The development of the company’s new 190-room property in Begumpet (Hyderabad) is also on track.
With the economic recovery gathering steam, we expect business destinations (such as Hyderabad, Chandigarh and Chennai) to significantly benefit. In this category, Taj GVK 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 the current market price, the stock is trading at attractive levels of 12.2 times its estimated FY12 earnings, 2.3 times its estimated FY12 price/book value and an enterprise value/room of Rs1.1 crore.