Taj GVK Hotels (TAJGVK) 85

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1 Result Update Rating matrix Rating : Buy Target : 105 Target Period : months Potential Upside : 24% What s Changed? Target Changed from 116 to 105 EPS FY15E Changed from 1.0 to 0.8 EPS FY16E Changed from 1.0 to 1.1 EPS FY17E Introduced at 1.2 Rating Unchanged Quarterly Performance Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY14 FY15E FY16E FY17E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15E FY16E FY17E PE (x) Target PE (x) EV to EBITDA (x) Price to book (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Cap 533 crore Debt 204 crore Cash 2 crore EV 735 crore 52 week H/L ( ) 130/54 Equity capital 12.5 Face value ( ) 2 Price performance (%) 1M 3M 6M 12M Indian Hotels Taj GVK Hotel Leela EIH Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Long term growth visibility intact February 3, 2015 Taj GVK Hotels (TAJGVK) 85 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. I- direct estimate 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). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY15 Q3FY15E Q3FY14 YoY (%) Q2FY15 QoQ (%) Comments Improvement in occupancy of Taj Banjara and Begumpet led to sales growth during Total Operating Income the quarter Raw Material Expenses Employee Expenses P&F cost Other Expenses EBITDA EBITDA Margin (%) bps bps Margin expansion is attributable to fall in P&F and employee costs during the quarter Interest Depreciation PBT Total Tax PAT Higher interest cost led to fall in profitability despite improved margins during the quarter EPS Change in estimates FY15E FY16E FY17E ( Crore) Old New % Change Old New % Change Old New % Change Comments We marginally lower our revenue expectations due to lower than expected recovery in demand Revenue NA NA during the quarter EBITDA NA 66.1 NA EBITDA Margin (%) bps bps NA 23.5 NA With cost control measures initiated by the management, we expect margins to reach close to 24% by FY17E PAT NA 7.5 NA EPS ( ) NA 1.2 NA Expect EPS to improve gradually over next two years Assumptions Current Earlier Comments FY13 FY14 FY15E FY16E FY17E FY15E FY16E FY17E Rooms , , , , , ,357.0 NA Launch of new properties along with demand revival should lead to better growth in FY16 ARR 5,833 5,541 5,652 5,754 5,909 5,652 5,821 NA We expect average growth of 2-3% during FY14-17E Occupancy NA Post resolution of Telangana issue, we expect occupancy levels to improve, going ahead ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis 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 has 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 the company with better scale and geographic diversity over the longer term. Exhibit 1: Peak of 2008 revenue yet to be achieved despite addition of hotels in Hyderabad (Begumpet) and Chennai Exhibit 2: Hotel details Hotel Name Location Rooms Taj Krishna Hyderabad 261 Taj Banjara Hyderabad 122 Taj Deccan (Residency) Hyderabad 151 Taj Chandigarh Chandigarh 152 Taj Mount Road Chennai 215 Taj Begumpet (Vivanta) Hyderabad 181 Total FY08 FY09 FY10 FY11 FY12 FY13 FY Revenue ( crore) - LHS Growth (%) - RHS ARR, occupancy takes hit in Hyderabad due to Telangana issue; expect recovery, going ahead The business of TajGVK has been hit hard over the past two years due to concerns over the Telangana issue. Due to this, ARR and occupancy both declined sharply in Hyderabad. However, with resolution of this political issue, we expect the company to reach to occupancy and ARR levels of early 2013, which would help it to grow at a healthy rate, going forward. Exhibit 3: Trend of average room rates (ARR) across properties FY13 FY14 FY15 ARR trend Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Hyderabad Taj Krishna Taj Deccan Taj Banjara VBT Begumpet Chandhigarh Taj Chandhigarh Chennai Taj Mount Road Exhibit 4: Occupancy trend FY13 FY14 FY15 Occupancy Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Hyderabad Taj Krishna 47% 45% 45% 49% 42% 42% 44% 47% 35% 37% Taj Deccan 70% 61% 57% 64% 60% 58% 63% 59% 56% 59% Taj Banjara 70% 64% 56% 52% 48% 44% 51% 48% 50% 58% VBT Begumpet 56% 40% 43% 53% 58% 43% 40% 53% 48% 51% Chandhigarh Taj Chandhigarh 60% 48% 57% 64% 55% 55% 58% 69% 58% 52% Chennai Taj Mount Road 67% 60% 58% 63% 54% 55% 63% 59% 58% 57% ICICI Securities Ltd Retail Equity Research Page 3

4 Expect revenue CAGR of 4.7% in FY14-17E The Hyderabad centric business has led the Telangana issue to impact the company severely. Between FY08 and FY14, its revenue growth remained flattish while it declined 2% per annum in FY However, with the resolution of this political issue, we expect the company to reach occupancy and ARR levels of early 2013, which would help it to grow at a healthy rate, going forward. Taking this into account, we expect revenue CAGR of 4.7% during FY14-17E. Exhibit 5: Q2FY15 reports revenue grows 4.6% YoY Exhibit 6: Expect revenue CAGR of 4.7% during FY14-16E Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Quarterly sales ( crore) - LHS YoY Growth (%) - RHS Revenue ( crore) - LHS Growth (%) - RHS Margins to improve led by improvement in demand While revenue growth remained flattish due to a slowdown in Hyderabad, an increase in fixed overheads coupled with addition of new properties led to a sharp contraction in margins (i.e. down from 47% in FY08 to 21.5% in FY14). During the quarter, cost control initiatives led to margin expansion of 107 bps YoY to 25.6%. With the demand recovery in the Andhra region along with cost control initiatives, we expect margins to recover by 200 bps to 23.5% in FY17E. Exhibit 7: Quarterly trend in margins Exhibit 8: Annual trend in margins (%) Q2FY13 Q3FY13 Q4FY13 Q1FY Q2FY Q3FY14 Q4FY14 Q1FY15E Q2FY Q3FY15E (%) FY08 FY09 FY10 FY11 FY FY FY14 FY15E FY16E FY17E Operating margin PAT margin Operating margin PAT margin Expansion into newer geographies and in economy segment The company jointly with M/s. Greenridge Hotels and Resorts LLP (Greenridge - a GVK Company) is setting up a luxury hotel comprising 275 rooms near Mumbai International Airport, 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 located near the Shamshabad International Airport are complete and civil work is expected to commence in due course. ICICI Securities Ltd Retail Equity Research Page 4

5 Outlook and valuations We expect the hotel business in Hyderabad to improve post resolution of the Telangana issue. Further, expansion into newer geographies of Bangalore and Mumbai would provide the company with better scale and geographic diversity over the longer term. The company s muscular parentage [GVK and Indian Hotels Company (IHCL)], operational support from IHCL and strong balance-sheet remain key positives for further growth once the economy turns around. We expect sales and PAT CAGR of 4.7% and 42.9% (low base effect), respectively, during FY14-17E. At the CMP of 84, the stock is trading at 12.7x and 11.3x its FY16E and FY17E EV/EBITDA, respectively. We continue to remain positive on the company. However, given the medium term concern over low recovery in demand, we lower our target valuation multiple from 14.0x to 13.0x. Further, we roll over our valuation base to FY17E and revise our target price to 105/share (i.e. at 13.0x FY17E EBITDA, an average of last three year EV/EBITDA multiple). We continue to maintain our BUY rating on the stock. Exhibit 9: One year forward EV/EBITDA ( Crore) Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 EV 13.0x 12.0x 11.0x 10.0x 8.0x Exhibit 10: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY15E FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 Company snapshot Target Price: Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Mar-07 Jul-07 Jul-07 Dec-10 Dec-11 Event Announces the launch of its new premium Five Star Hotel in the centre of Chennai under the name Taj Mount Road Adds new facilities in the existing block of Taj Deccan at a cost of 25 crore and also proposes to construct spa and other facilities at the existing premise of Taj Krishna The company s hotels at Chandigarh and Chennai clocked improved occupancy levels of 75% and 63%, respectively in Q1 Opens new brand in Sri Lanka Announces the setting up of a luxury hotel comprising 275 rooms near the Mumbai International Airport, Santacruz, Mumbai, jointly with M/s. Greenridge Hotels and Resorts LLP (Greenridge - a GVK Company) under the Taj brand Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Vertex Projects, Ltd. 31-Dec Tata Group of Companies 31-Dec Reddy (Indira Krishna G) 31-Dec Altavista Capital India Fund, Ltd. 31-Dec Damani Estates & Finance Pvt. Ltd. 31-Dec Reddy (Sanjay G V) 31-Dec Bhupal (Krishnaram) 31-Dec Kabra (Kamal Shyamsunder) 31-Dec Bajaj Allianz Life Insurance Company Limited 31-Dec Max Life Insurance Co. Ltd. 30-Sep Shareholding Pattern (in %) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Promoter FII DII Others Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Bajaj Allianz Life Insurance Company Limited 1.27m 0.72m Caspian Capital & Finance, Ltd m m Max Life Insurance Co. Ltd. 1.03m 0.67m Damani Estates & Finance Pvt. Ltd m -0.13m Franklin Templeton Asset Management (India) Pvt. Ltd m -0.10m Sahara Asset Management Company Pvt. Ltd m -0.06m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Total operating Income Growth (%) Raw Material Expenses Employee Expenses Power & Fuel Exp Other Exp Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Others Total Tax PAT Growth (%) EPS ( ) Source: ICICIdirect.com Research Balance sheet Crore (Year-end March) FY14 FY15E FY16E FY17E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Deferred tax Assets Application of Funds Cash flow statement Crore (Year-end March) FY14 FY15E FY16E FY17E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities Net Cash flow Opening Cash Closing Cash Key ratios (Year-end March) FY14 FY15E FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 7

8 ICICIdirect.com coverage universe (Hotels) CMP M Cap EPS ( ) P/E (X) EV/EBITDA (X) RoCE (%) RoE (%) Sector/Company ( ) TP( ) Rating ( Cr) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E Indian Hotel (INDHOT) HOLD NA EIH (EIH) BUY TajGVK Hotels (TAJGVK) BUY ICICI Securities Ltd Retail Equity Research Page 8

9 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 9

10 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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