8/14/2019 TAJ GVK - Initiating Coverage
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TAJGVKHOTELSANDRESORTS
Price-Rs.145Target-Rs.225
OUTPERFORM
FinancialSummaryYear
Revenues(Rs.mn)
EBIDTA(Rs.mn)
PAT(Rs.mn)
EPS(Rs.)
P/E(x)
EV/EBIDTA(x)
FY08 2,575 1,221 705 11.3 12.9 7.7
FY09E 3,309 1,561 869 13.9 10.5 6.1
FY10E 4,025 1,931 1,083 17.3 8.4 5.0
Weinitiatecoveragewithan OutperformratingonTajGVKHotelsandResorts
(TajGVK),whichcurrentlyoperatesthreepropertiesoutofHyderabadandoneatChandigarh.Thedriversofoursanguineviewonthestockare:
StableoutlookinHyderabad,TajGVKskeycityofoperation
HyderabadaccountsforalionsshareofTajGVKsextantroominventory534roomsoutofatotalof684roomsareoutofthiscitywhichwillmakeitakeydeterminant of Taj GVKs fortunes in the medium term. We believe that thecommissioning of the new airport at Hyderabad, the establishment of a largeconventioncentrefor conferences, the emergenceof industries such as biotechand semicon as an adjunct to theinformation technology sector, with a parallelemphasisonimprovingconnectivityinfrastructure,willimpartastableundertonetoroomdemandacrossTajGVKspropertiesinthecityoverourforecastperiod.
Concernsonover-supplyareoverstated,inourview
With the rather spectacular rise inaverageroomrevenues(ARRs)witnessed inHyderabad over the past few years, every major hospitality player is making abeelinetocommenceoperationsinthecity.Indeed,inthepastfewmonths,pressreports have been awash with news of a massive build-out of room inventory,which, purportedly, will destabilise the demand-supply equation. We think theconcernsareoverstatedmostoftheseannouncementswilllikelytranslateintocapacityonlyoverthenextthreetofouryears;further,giventhehighrealestateandconstructioncoststhatprevailcurrently,wethinkroomrentswillbepeggedsignificantlyhighertoposeathreattoTajGVKscurrentdominanceofHyderabad
New roll-outs will partly reduce concentration risk; Taj GVKscaptivelandbankahugepositive
SincethecommissioningoftheChandigarhpropertythreeyearsago,therehas
not been any addition to Taj GVKs roster of properties. FY09 will see thecommissioningofitsnewpropertyatChennaifollowedbythelaunchofitsfourthpropertyatHyderabadinFY10.Further,TajGVKintendstoaddanewwingtoanexistingproperty(TajDeccan)andaddaserviceapartmentblocktoanother(TajKrishna). In both these instances, Taj GVK has captive access to a pricelessresource in an upscale area land. Though the effects of this expansion willmanifestonlyinFY11,expansionwithinanexistingpropertywithzeroexpendituretowardslandacquisitionwillsignificantlybolsterreturnratios.
Valuationandview
WeforecastsalesandEPSCAGRof25%and24%overFY08-FY10E.Thestockcurrentlytradesat10.5xFY09EEPSand8.4xFY10EEPS,whichisattractiveinthe context of our forecasted growth. Coupled with a clean balance sheet and
industry-leadingreturnmetrics(lowleverageof0.4x,RoE>30%,dividendyieldof2%),wethinkTajGVKisaqualitybrandedplayinthehospitalitysegmentgoingatcommodity-likevaluations.We initiatecoveragewithanOutperformratingandaP/E-based target price ofRs.225,an upsideof 55% fromcurrentlevels. Atourtarget,thestockwouldtrade13xFY10EEPS,a15%discounttocurrentmultiplescommanded by players such as IndianHotels, EIH and Hotel Leela.Our targetpriceisvalidatedbyourDCFvaluation,whichyieldsanobjectiveofRs.236.
Key risks to our recommendation would be an aggressive build-out by otherplayersinHyderabad,slower-than-expectedroll-outofTajGVKsnewpropertiesandasofteningofdemandtrendsinTajGVKskeymarketsofoperation.
InitiatingCoverage
Dated 6May2008
BSESENSEX 17373
NIFTY 5145
O/SShares(nosmn) 62.7
MarketCap(Rs.mn) 9,092
52weekHi-Lo Rs.205Rs.100
AverageDailyVolume(nos)
46,400
FreeFloat(%) 25.4
BSECode 532390
NSECode TAJGVK
Bloombergcode TAJGIN
Reuterscode TAJG.BO
ShareholdingPattern(%)asofMarch2008
Promoters 74.6
Institutions 10.3
Publ ic 15.1
P erfo rm ance (%) 1m 3 m 12m
TAJGVK 36.5 2.9 (15.7)
Sensex 14.8 (5.6) 26.4
-0.60
-0.20
0.20
0.60
1.00
1.40
1.80
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
Closeprice
TA J GV K S ens ex
TAJGVKvsSensex- Relativeperformance
NathBalakrishnan
+91.44.43440035
SriramSekhar
+91.44.43440040
SparkCapitalAdvisors(I)PrivateLimitedReflections,New#2,Leithcastlecenterst.
SanthomeHighRoad
Santhome,Chennai600028
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Contents
PageNo.
BusinessOverview 3
InvestmentRationale 4
ValuationDiscussion 10
KeyRisks. 12
IndustryAnalysis 13
Financialsummary.. 15
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BUSINESSOVERVIEW
TajGVKhasbenefited
fromstrongdemandtailwindsinHydbad
overthepastfouryears
Aggressivecapexplansontheanvil
Incorporated in 1999, Taj GVK is a venture between the GVK Group and IndianHotels, whichrunsthe Taj chainof hotels. IndianHotelsis a strategicinvestor andholdsa25.6%stakeintheventure.TheGVKGroupholdsa49%stake,withtherestheldbyinstitutionsandthepublic.
Taj GVK operates four properties currently, out of which three are in the city ofHyderabad and one in Chandigarh. The company is scheduled to commenceoperationsatitsnewpropertyinChennaiintheensuingquarter.
TajGVKisadominantplayerintheHyderabadmarket,whereitcontrolscloseto40%of the market forpremium rooms. Itsproperty at Chandigarh was the first brandedpropertytoroll-outoperationsinthecityandkickedoffinFY06.
Over the past few years, Taj GVK has been a principal beneficiary of the strongdemandtrendswitnessedintheHyderabadmarket.WiththetailwindofastrongsurgeinARRs,coupledwithincreasingoccupancylevels,thecompanyreportedasalesandearningsCAGRof30%and49%intheperiodbetweenFY03andFY08.
Source:Company,SparkResearch
Taj GVK has also embarked on an aggressive capex plan, which, apart from theChennaiproperty,envisagesopeningitsfourthpropertyatHyderabad;settingupanadditionalwingwithintheTajDeccanatHyderabad;andopeningablockofservice
apartmentsatTajKrishnainHyderabad.TajGVKalsohasplanstosetuppropertiesat Amritsar and Bangalore, plans for which are on the drawing board. Taj GVKscurrentroominventoryandcapexplansareillustratedinthetablebelow.
Hyderabad FY09E FY10E FY11E FY12E
TajKrishna 261 TajatChennai
TajDeccan 151 Rooms 215
TajBanjara 122 Capex(Rs.mn) 1,500
TotalroomsinHyderabad 534 NewHyd'badproperty
Chandigarh Rooms 190
TajChandigarh 150 Capex(Rs.mn) 800
Totalroominventory 684 Serviceapartmentblock
Rooms 50
Capex(Rs.mn) 750
NewwingatTajDeccan
Rooms 180
Capex(Rs.mn) 1,000
CapexplanofTajGVKwithlikelycommissioningtimelinesRoominventoryofTajGVKHotels
Mr G V Krishna Reddy is Taj GVKs Chairman and Ms Indira Krishna Reddy, theManagingDirector.MrSBKamathistheFinancialcontrollerandCompanySecretary.
Sales,earningsandEBIDTAmargintrends
700876
1,155
1,887
2,4292,575
95 127226
462651 705
27%
32%
38%
45%47% 47%
0
500
1,000
1,500
2,000
2,500
3,000
FY03 FY04 FY05 FY06 FY07 FY08
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Sales(Rs.mn) PAT(Rs.mn) EBIDTAmargin(RHS)
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INVESTMENTRATIONALE
Thecommissioningofthenewairportshould
provideaboostershottobusinesstravel
SEZsandtheemergenceofclusterssuchasFab
CityandGenomeValleywillaidtrafficgrowth
StableoutlookforHyderabad,TajGVKskeycityofoperation
Giventhat close to70% ofTaj GVKsroominventory will bein Hyderabad evenpost its expansion plans in FY09 and FY10, we believe that the city will play acriticalroleindeterminingthefortunesofthecompanyoverthemediumterm.Weaddress both the demand and supply side of the equation to assess the likelyimpactitwillhaveonTajGVK.Webelievethatroomdemandwillgrowannuallyinthemid-teens,evenasweassertthatsomeoftherecentconcernsonthemarkettippingoverintoastateofover-supplyareoverdone.Weaddressthedemandsideoftheequationfirstandthenexaminesupply-sidedynamics.
Severaldriversfordemandgrowthexist,inourview
ThefreneticpaceofgrowthwitnessedintheHyderabadmarket(ARRsgrewatacompoundedrateof20%betweenFY02andFY07)mightbeatoughacttorepeatintheyearstofollow;whileweexpectmarginalincreasesinroomrentsyear-on-year,wethinkgrowthindemandforroomsshouldbeinthemid-teens.
WebelievethatthecommissioningofthenewairportatShamshabadwillbethecentral driver of room demand. Hyderabad already hasa world-class conventioncentre (Hyderabad International Convention Centre), with a seating capacity of5,000.WhiletherewerebottleneckswithinfrastructureattheoldBegumpetairportonaccountofitscapacityconstraints,webelievethenewairportshouldprovideafillip to making Hyderabad a favoured MICE (Meetings, Incentives, Conferences,Exhibitions)venueinthecountry.
We identify a couple of other drivers, which we believe will provide a fillip todemand:
a) Asof Octoberlast year,close to30 special economiczones were notifiedinand around Hyderabad, of which a lions share would be accounted for theinformation technology and information technology-enabled services. In ourroadtriptoHyderabadrecently,wecontinuedtoseerobustofficedevelopmentactivity (primarily by IT companies) in the Madhapur - Manikonda belt. Webelievethisservesasagoodproxyforlikelygrowthinroomdemand.
b) Outside of the IT sector, there are other clusters emerging in Hyderabad,which,inourview,shouldoffsetanycool-offingrowthrelatedtoaslowdownintheITsector.TheseclustersincludetheFabCity,whichhasbeensetupwiththe intention to attract companies involved with semiconductor design andmanufacturing. The second is the Genome Valley, a biotechnology sector
cluster, which provides infrastructure to over a 100 biotech companiescurrently.
Driversofroom
demand
SettingupGenome
Valley,adedicated
biotechcluster
Newairportat
Shamshabadsetto
boosttraffic
Hyderabadpoised
tobecomepreferred
MICEdestination
Notificationofclose
to30SEZsinand
aroundHyderabad
DevelopmentofFab
Cityforsemicon
designandmfg
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TheproximityofTajGVKspropertiestothe
emergingbusinessdistrictisakeypositive
Theresbeenanoversupplyofnewsflow
onfreshroomadditions,butwethinkconcernssurroundingthemare
overblown
Strategiclocationofpropertiesshouldaidtrafficgrowth
AllofTajGVKspropertiesarecurrentlylocatedinthebusinessdistrictofBanjaraHills,whichisstrategicallyplacedbetweenthenewairportatShamshabadandtheemergingbusinesshubin theMadhapur-Manikonda-Gachibowlibelt.Eventhoughroadtransportationinfrastructureisyettocatchupwiththerapidpaceoftheairportdevelopment,webelievewiththecompletionoftheOuterRingRoad(ORR),andthelackofvisibilityonthedevelopmentofotherpropertiesinthevicinityofthenewairport (barring Novotel, which is scheduled to commence operations later thiscalendar)TajGVKslocationalonecanattractcustomersandmayenableittotakeshare away from some its competitors (who may be disadvantaged by lack ofproximitytotheemergingbusinessdistrict).
Asmarketleader,TajGVKshouldbenefitfromdemandstrength
Considering that Taj GVK controls almost 40% of all the premium rooms inHyderabadcurrently,wethinktheywouldbetheprincipalbeneficiaryofstrengthindemand tailwinds. As a result, we expect all properties in Hyderabad to reportoccupancylevelsofbetween75-80%overourforecastperiod.
Supply-sideconcernsoverdone,inourview
We now focus on room supply, a subject that has consumed considerablenewsprint,ifrecentpressreportageisanyindication.Muchlikewhatisseeninthecommodity sector, wherestocks tend togo into a free fall asand when capacityadditionplansareannounced,hotelstocksandspecificallyTajGVKhavebeenno different. We think the reaction is typically a knee-jerk one, as a closerexamination reveals that most of the announcements are just that, with littleevidenceonthegroundtosuggestthataroll-outisimminent.
Even if one goes by historical trends, Hyderabad has had its share of roomadditions. Since April 2003, when supply of rooms in Hyderabad (three-starcategoryandabove)was1,000tillnow,afurther1,000roomsofsupplyhascomein. But that has not deterred Taj GVKs RevPar (Revenue per available room, ametricthatcapturesbothoccupancyrateandARRs)frommovingupsignificantlyinthesameperiod,aCAGRof26%.
TrendsinRevPar
1,8722,452
3,299
4,530
5,881 6,030
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY03 FY04 FY05 FY06 FY07 FY08
RevPar(Rs.)
Source:Company,SparkResearch,HVSInternational
Roomsupply
at1000/day
Roomsupply
at1900/day
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Highlandpricesandescalatingconstruction
costsmakeshoteleconomicschallenging
fornewdevelopers
WethinktheTajisasgoodasanyglobal
hospitalitybranditmaybepittedagainstinthe
future
CurrenteconomicsfordeveloperstobechallengingSeveralmarqueenameshaveannouncedtheirintenttosetuphoteloperationsinHyderabad.TheyincludeleadingglobalnamessuchasWestin,Hyatt,HotelLeela,LeMeridienandHilton,tonameafew.Webelievethesecapacitieswillmanifestcompletelyonlyoverathree-to-four-yearperiod.OurrecentroadtriptoHyderabadalsoconfirmedournotionontheback-endednatureofsupplyadds,asacoupleofplayershavedeferredtheirlaunchtimelines.
Our workings also suggest that new capacitiesarenotgoingto come inat roomrentsthatcouldbeclassifiedasteal.Giventhesharpriseinpricesofrealestateand the escalation being witnessed in construction costs, operators will have toperforceadoptextremelyaggressivepricingtacticstogeneratedecentRoEs.
For a five-star project, at current prices in Hyderabad and assuming occupancy
rates of 70%, we believe upcoming hotels will have to price themselves at Rs.16,000perroomnighttogenerateRoEsof17%.
Landforafive-starproject(acres) 5 Noofrooms 300
Costperacre(Rs.mn) 250 Noofdaysinayear 365
Totallandcost(Rs.mn) 1,250 Revenueperroom(Rs.) 16,000
Noofroomson5acres 300 Occupancyrate 70%
Costperroom(Rs.mn) 10 Roomrevs(Rs.mn) 1,226
Totalcostofconstruction(Rs.mn) 3,000 Roomrevs:totalrev 70%
Totalcostofproject(Rs.mn) 4,250 Totalrev(Rs.mn) 1,752
Assumeddebt:equity 2:1 EBIDTAmargin 45%
Equity(Rs.mn) 1,417 EBIDTA 788
Debt(Rs.mn) 2,833 Depreciation 150Interestcost 283
PBT 355
PAT 234
RoE 17%
Economicsofafive-starhotel Revenueworkings
Scanning through the names that have announced plans to have a Hyderabadfootprint,highARRsmaywellbetheorderoftheday.Developerswouldindeedbelooking at stretched out payback periods in the existing environment, andcompetingwithaplayersuchasTajGVK,whoseassetshavebeenacquiredwellinthepast,wouldposeasignificantchallenge,inourview.
Whileitmaybearguedthatthechoiceofhotelisnotdictatedpurelybytrendsseeninpricingbutalsobytheservicequalityandaspirationalvaluethatahotelbrandstands for, we believe that the Taj is as exceptional a hospitality brand bothdomesticallyaswellasabroad,assomeoftheothernamesare.Therefore,wedonot believe thatthe entry of global players will lead to an erosion ofTaj GVKsmarketshare,atleastonthebrandperceptionplatform.
Expansionplanspartlyreduceconcentrationrisk
SinceFY06,therehasnotbeenanyadditiontoTajGVKsrosterofproperties.Asaresult,withthecoolingoffinARRgrowthinHyderabad,thecompanyhasreportedrathertepidearningsgrowthinFY08.WethinkthatthepropertiesatChandigarh(cameonstreaminFY06)andChennai(scheduledtoopensitsdoorsbytheendoftheensuingquarter)willpartlyreducetheriskofrevenuesoriginatingfromonlyonecity. We think the almost complete exposure to Hyderabad is also one of thereasonswhythestocktradesatalowvaluationinspiteofsolidreturnmetrics.
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ScalingupofChandigarhoperations
andnewChennaipropertypartlyaddress
concentrationrisk
ARRsandORsforpremiumhotelshave
improvedsharplyoverthepastfouryearsin
Chennai
From a complete dependence on Hyderabad till FY05, we expect properties inChennaiandChandigarhtoeachaccountfor17%ofrevenuesinFY10E.
TajGVKsrevenuemixissettochangeforthebetter
Source:Company,SparkResearchChennaitoaddanotherstringtotherevenuebow
TajGVKissettounveilitspropertyinChennaiinthecurrentquarter.Chennaihasbeenanattractivedestinationforhoteliersoverthepastfewyears,withasharprisein both occupancy levels and ARRs. With the IT and ITeS sectors being well-entrenched in the city, other industries such as automobile original equipmentmanufacturers,autocomponentplayersandconsumerelectronicscompanieshaveset up base in the city, providing a further leg-up to demand for premium hotel
rooms.
Source:CRISIL,SparkResearch;abovetrendsareforpremiumhotelsonly(5-starcategory)
ThestrengthinARRsandoccupancylevelscouldbeexplainedbynoadditionstothe premiumroomsegmentover the past threeyears (CRISIL states that supplyhas remained constant at1,541).That looks set tochange with players such as
MarriottandHotelLeelainthemidstofconstruction.Inourview,roomaddsinthecitywillbelumpyandweexpectasupplytoagainbebackended,withpropertieslikely to be operational only towards the end of FY10. We believe Taj GVKspropertylocatedintheheartofChennaisbusinessdistrictwillgarnerARRsofRs.7,000withanoccupancylevelof65%initsinitialyearofoperation.
FY10E
Hyd'bad,
66%
Chennai,
17%
Chandigarh,
17%
FY05
Hyderabad,
100%
ARRandORtrendsinChennai
53%
62%
72%78% 77%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY03 FY04 FY05 FY06 FY07
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
ARR(Rs.) OR
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TajGVKsdealwiththeIPLandICLguarantees
highoccupancylevelsinanotherwiselean
seasonforbusiness
traffic
NewpropertyatHyderabadpositionsTaj
GVKacrossthe
businesshotelvaluechain
Chandigarh,anattractiveopportunityWe are positive about Taj GVKs prospects in Chandigarh, considering that itcurrentlyistheonlyestablishedhotelbrandinthecity.ThecitycontinuestoattractafairshareofbusinesstrafficgivenitsproximitytoBaddi,LudhianaandMohali.Asthe graphic below demonstrates, the Chandigarh property has made sharpimprovementsinbothARRsandORs.Giventhelackofalternativesandthefactthatadditionalsupplyisstillsometimeaway,weexpectTajGVKtodominatetheChandigarhmarketoverourforecastperiod.
We note that Taj GVK has also entered into deals with both the Indian PremierLeague and the Indian Cricket League for providing block accommodations toteamswhenmatchesareinprogress.Thearrangementwillprovideasharpfilliptooccupancy levels, which acquire significance, giventhat the firstquarter typicallytendstobealeanoneforbusinesshotels.
Source:SparkResearch,Company
FourthpropertyatHyderabadwillpositionTajGVKacrossthebusinesshotelvaluechain
Taj GVK is in the process of setting upits fourth hotelin Hyderabad(on leasedproperty), which we assume will be operational in the latter half of FY10. To be
positionedasabusinesshotelwithARRsexpectedtobeintheRs.5,000Rs.5,500band.Webelievethatwiththisproperty,TajGVKwillcontrolclosetohalfthemarketforpremiumrooms;further,thiswillcompleteTajGVKsportfolio,offeringcustomers rooms across luxury, premium and business properties. Shouldexternalitiesatalaterdateforcecustomerstodowntrade,wethinkTajGVK,withitsrangeofproperties,willstillbeabletocapturetrafficinsuchaneventuality.
Futureexpansionscaptivelandbankahugepositive
GiventhevastexpanseoverwhichtwoofTajGVKsflagshippropertiesarespreadovertheTajKrishnaisspreadover11acresandtheTajDeccanoversixacresTJP hasaccesstoa pricelessresource inanupmarketarea ofHyderabadcityspareland.Wenotethatanewdeveloperlookingtosetupapropertyinalocalityofsimilarnature will need toforkabout Rs. 1,000mn per acre.In our view,such
steeplandcostsitselfwouldactasadeterrenttoprospectivedevelopersandactasasourceofcompetitiveadvantageforTajGVK.
ARRandORtrendsatChandigarhoverthepasteightquarters
56 %62 %
72 % 71%68%
74 % 77 %82 %
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY07 FY08
0%
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
ARR(Rs .) OR
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Atexistingproperties,TajGVKhasaccesstospareland,apricelessresourceinanupscale
area
AmritsarandBangalorearenextontheradar
ExpansionatTajDeccanandshoppingmallatTajKrishna
TajGVKisintheprocessofaddingawingtoitsexistingpropertyatTajDeccan(23rooms), which we expect will come on stream in the second half of this fiscal.Further,TajGVKisalsointheprocessofsettingupshoppingmallatitsTajKrishnaproperty, spread over an area of 15,000 square feet. The mall, expected to beoccupied by shops selling upscale brands, is assumed to be operational by thebeginningofFY10.Whileweestimatetherevenueopportunityfromthisspacetobebetween Rs. 60mn Rs. 70mn, we expect most of it to flow through to thebottomline,astherearenoassociatedcosts.
NewblockatTajDeccanandserviceapartmentsatTajKrishna
Capitalisingonthespaceavailablewithinitsexistingproperties,TajGVKwillsetupanadditionalblockwith180roomsattheTajDeccanandablockwithabout50
servicedapartmentsatTajKrishna.WeexpectthelattertocomeonstreaminthesecondhalfofFY11andtheformertobeoperationaltowardsendFY11.Giventhattheseexpansionswillrequire zeroexpenditure towards landacquisition,they willsignificantlyboostreturnratios.
ExpectnewpropertiesinAmritsarandBangalore
Evenasthecurrentexpansionplansarebeingexecuted,TajGVKhasarticulatedanintentiontoroll-outpropertiesinAmritsarandBangalore,tonameacoupleoflocations.WhileAmritsarmightbefirstofftheblock,webelieveBangaloremightbea fair time away from materialising. Expenditure likely to be incurred on thesepropertiesiscurrentlynotinourestimates.
Giventhestaggeredmannerinwhichnewpropertyroll-outshavebeenplanned,weseevisibilityonearningsgrowthbeyondourforecastperiodaswell.
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WeuseaP/E-basedmethodologytoarriveat
ourtargetpriceofRs.225andcorroborate
itwithaDCF-derivedtarget
Withindustry-leadingreturnmetrics,we
believeTajGVKshouldnottradeatadiscountgreaterthan10-15%to
large-cappeers
VALUATIONDISCUSSION
WhileaP/E-basedtargetisourpreferredmethodology,giventhesteadynatureofthehotelsbusiness,wealsousetheDCFmethodologytovalidateourP/E-basedtargetprice.
Aspeercomparison,weuseIndianHotels,EIHandHotelLeelaasbenchmarksforthepurposeofrelativevaluation.WhileitmaybearguedthatTajGVKneedstobecomparedwiththelikesofViceroyHotels,RoyalOrchidHotelsorKamatHotels,giventhesimilarityinmarketcapitalisation,werefrainfromdoingsoasconsensusestimatesforthesestocksisdifficulttocomeby.
We forecast Taj GVKs sales and EPS to log a CAGR of25% and 24%for theperiodbetweenFY08-FY10E.Onourestimates,thestocktradesat10.5xFY09E
EPSand8.4xFY10EEPS,whichwethinkiscompellinginthecontextofthegrowthweforecastinearnings.EvenasTajGVKadmittedlylacksthescaleandscopeofan Indian Hotels or an EIH, we believe that from the context of stock priceperformance, the critical drivers would be valuation and earnings growth,parametersonwhichwebelieveTajGVKscoresoveritspeers.
TajGVKslarge-cappeerstradeina bandof14-16xFY10Econsensusestimates,with RoEs in the case of all three peers under the 20% mark. As contrast, weexpectTajGVKtomaintainRoEsinexcessof30%overourforecastperiod,reportEBIDTAmarginsatcloseto50%andoperatewithadebt:equityof0.4x,which,inourview,providesitadequateheadroomtofundsubsequentgrowthopportunitiesthroughleveragingatalaterdate.
Scalemayormaynotmatter,butvaluationcertainlydoes
With solid return metrics and a dividend yield of 2% to boot, we argue that adiscountofhigherthan10-15%onthevaluationmultiplevis--vislarge-cappeerswouldbeoverdone.Consequently,weascribeatargetmultipleof13xtoourFY10EEPS estimateofRs.17.3toarriveatourprice objective ofRs.225, anupsideof55%fromcurrentlevels.InitiatecoveragewithanOutperformrating.
The table captures the relative standing of Taj GVK compared to its peers onvariousmetrics:
Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E
IndianHotels 36,406 40,181 27.4% 32.7% 17.1% 16.9% 14.5% 14.1%
EIH 13,979 16,739 32.0% 34.0% 22.0% 25.0% 16.0% 16.0%
TajGVK 3,309 4,025 47.2% 48.0% 23.3% 24.5% 32.2% 32.4%HotelLeela 6,116 6,662 44.0% 41.0% 23.0% 19.0% 10.0% 9.0%
Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E
IndianHotels 2.1 2.1 2.6 2.6 10 8.3 14.5 14
EIH 4.4 3.7 5 4.1 15.4 12.1 20.5 16
TajGVK 2.7 2.3 2.9 2.4 6.1 5.0 10.5 8.4
HotelLeela 2.9 2.6 4.9 4.1 10.2 10.0 12.3 14.0
Price/sales EV/Sales EV/EBIDTA P/E
Valuationmatrix
Metricsnapshotofkeyplayers
Sales EBIDTAmargin PATmargin RoE
Source:Sparkestimates,Bloomberg,Firstcall
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OurDCFmethodologyyieldsatargetofRs.236,validatingourP/E-based
priceobjective
DCF-based valuation methodology yields a target of Rs. 236,validatingourP/E-basedtargetprice
TocorroborateourpriceobjectivearrivedthroughtheP/E-multiplemethodology,wealsovalueTajGVKonDCFbasis.ThisleadsustotargetpriceofRs.236,whichvalidatesourP/E-basedtargetprice.
Debttocapital 28% PVofcashflows(Rs.mn) 5,860
Equitytocapital 72% Cashflowinterminalyear(Rs.mn) 2,745
Exitmultiple(x) 11.6
Risk-freerate 8% Terminalvalue(Rs.mn) 31,861
Riskpremium 6% PVofterminalvalue(Rs.mn) 9,420
Beta 1.2Costofequity 15.2% Enterprisevalue(Rs.mn) 15,280
Costofdebt 11% Netdebt(asofMar09;inRs.mn) 501
Taxrate 34%
Tax-adjusteddebtcost 7.3% Equityvalue(Rs.mn) 14,779
Shareso/s(mn.) 62.7
WACC 13.0%
Terminalgrowth 4% Targetprice(Rs.) 236
DCFvaluationforTajGVK(March-09yearend)
We also outline below our key assumptions for the different properties over ourforecastperiod.
FY09E FY10E
TajKrishnaRoomsatyearend 261 261
ARR(Rs.) 9,775 10,500
OR 78% 79%
TajDeccan
Roomsatyearend 174 174
ARR(Rs.) 7,675 8,200
OR 77% 78%
TajBanjara
Roomsatyearend 122 122
ARR(Rs.) 7,700 8,200
OR 78% 78%
TajChandigarh
Roomsatyearend 150 150
ARR(Rs.) 7,250 7,830
OR 74% 76%
TajMountRoad
Roomsatyearend 215 215
ARR(Rs.) 7,000 7,300
OR 65% 72%
NewpropertyatHyd'bad
Roomsatyearend 190
ARR(Rs.) 5,000
OR 53%
Notes:
TajMountRoadassumedtooperateonlyforninemonths
inFY09
NewHyd'badpropertyassumedtooperateonlyinsecond
halfofFY10
Keyassumptionsforvariousproperties
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NegativedevelopmentsinHyderabadcouldbe
detrimentaltoTajGVKsearnings
ShouldTajGVKemergeasafrontrunnertobuild
ahotelatMumbaiairport,itwouldpose
upsiderisk
KEYRISKSDependenceonHyderabad
ThoughTajGVKismakingeffortstoreduceitsdependenceonHyderabad,wenotethanevenpostitsexpansionplansinFY09andFY10,closeto70%ofitsentireroominventorywouldstillbelocatedinthecity.WhileTajGVKhasbenefitedfromasharpspikeinARRsoverthepastfewyears,potentiallynegativedevelopmentsinthecitythatdetertravelwouldbedetrimentaltoTajGVKsearnings.
Cool-offineconomicactivityleadingtosofteningdemandtrends
GiventhatallpropertiesofTajGVKcaterpredominantlytothebusinesstraveller,the companys prospects are largely a derivative of economic activity.While TajGVKhasbenefitedbythestrengthinIndiasbriskeconomicgrowth(ascapturedin
ourGDPnumbers),aslowdowningrowthcouldhavetheoppositeeffectandleadtoacontractionindemandforroomsatitsproperties.
Slower-than-anticipatedpaceofTajGVKsnewpropertyroll-outs
OurearningsmodelassumesthatTajGVKsstatedexpansionplanswouldcomeon stream at specified timelines. Any slippage in execution would result in ourforecastsnotbeingmetandposeadownsiderisktothestock
Proposed new capacities announced by other players come onstreamearlierthanexpected
A slew of players have announced their intent to set up hotels in Hyderabad,ostensiblywiththeideatocapitaliseonthegrowththenewairportisexpectedtobringinitswake.Whileplansonthegroundareyettotakeconcreteshapeandmostcapacityadditionsremainonlyonpaper,aneventsuchasasharpfallinrealestatepricesmayhastenplayerstoexpeditetheirlaunchplans.Asaconsequence,this could lead to a sharp spike in room availability with a potentially negativeimpactonoccupancyrates.
Unforeseeneventscouldleadtoafallintrafficandhurtoccupancy
Events such as the outbreak of the SARS epidemic or geo-political tensionsbetweenIndiaanditsneighborshasledtocountriesintheWestissuingadvisoriesthat restrain travel into the country. Though infrequent, such one-off events cancauseadislocationinearningsalbeittemporarily-andposedownsiderisktothestock.
Upsiderisks
Ahigher-than-expectedincreaseinARRsattheexistingproperties,whichwillleadtoahigherearningstrajectory
ShouldtheGVKGroup,whichishandlingthemodernizationoftheMumbaiairport,decidetodevelopahotelinthevicinityandTajGVKemergesasafrontrunner to set it up, it could be a significant sentiment positive andprovideafilliptothestock
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HyderabadhasseenasharpriseinARRsover
afive-yearperiod,whichispromptingaclutchof
newentrants
Whilestatedroomadditionplansare
aggressive,lessthanhalfthecapacity
announcedwilllikelytranslateintoroomson
thegroundoverthenextfiveyears
INDUSTRYANALYSISIn this section, we confine the analysis only to the key markets that Taj GVKoperatesinHyderabad,Chennai(whereitspropertyshouldbeoperationalbytheendofthecurrentquarter)andChandigarh.
Hyderabad
Hotels in Hyderabad have witnessed boom times over the past few years, asimbalances in supply-demand led toa ratcheting up of ARRs.Though therehasbeena dropin occupancylevelson account oftheaddition ofa couple ofhotelsthatcameonstreaminFY07,ARRscontinuetobeonanupwardtrend.ThetablebelowillustrateshowoccupancyratesandARRshavemovedinthecitybetweenFY02andFY07.
FY02 FY03 FY04 FY05 FY06 FY07 CAGR
OR 68% 69% 76% 79% 82% 74%
ARR(Rs.) 2,414 2,541 2,774 3,772 4,870 6,091 20%
Source:HVSInternational;datapertainstohotelsratedthree-starandabove
TrendsinARRsandoccupancylevelsatHyderabad
On the back of this sharp improvement in ARRs, coupled with infrastructuraldevelopments on the ground in the form of the new airport at Shamshabad, theopeningoftheHyderabadInternationalConventionCentreandtheemergenceofindustriessuchaspharmaceuticalsandbiotechinthecity,severalhoteldevelopershaveannouncedplanstosetupshopinHyderabad.
SeveralnamessuchasLeMeridien,HotelLeela,Westin,RoyalOrchidHotelsandLemonTree, toname afew,areinthe process ofestablishinga presencein the
city. However, capacity addition plans have not exactly panned according totimelines originally planned. Issues surrounding acquiring land with clear titles,obtaining requisite permissions from regulatory authorities and having to skirtaround issues pertaining to building height have been highlighted as a few keyfactorsthathaveimpededtheroll-outofroomsinthecity.
Existingplayers
TajGVK Westin
Novotel Hilton
Viceroy Hyatt
ITC HotelLeela
Manohar LeMeridien
LemonTree
Hyderabad-everythingtoplayfor
Newentrants
Source:Newsreports,SparkResearch
HVSInternational,initsstudyontheTrendsandOpportunitiesforHotelsinIndia,statesthatplannedroomcapacityadditionsatHyderabadoverthenextfiveyears(ranging from budget to luxury hotels) could well be in excess of 10,000 rooms.While the number does indeed sound staggering, HVS also adds that it expectsonly abouthalf of theseannouncedplans totranslate into rooms onthe ground.Importantly, this will likely lead to the addition of limited rooms in the luxurycategory,which,inourview,isapositivefromaTajGVKstandpoint.
Wealsobelievethatinthecaseofnewentrants,enteringastheyareatatimewhenrealestatepriceshaverisenrelentlesslyoverthepastfewyearsandwhenconstruction costs have escalated sharply, the duration over which they would
recoup their investments would only get stretched out more. We also add that itdoesindeedbecomeimperativetofocusontheshort-tomediumtermtodeterminewhich hoteliers provide visibility in terms of build-outs and commencement ofoperations,ratherthanjustbeingdrivenbynewsflow.
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WithARRsnotwitnessingthekindof
spikesseeninHydbad,occupancylevelsat
Chennaihavebeenhigh
Chennai
Unlikein Hyderabad, where ARRs grew at a compounded rate of 20% betweenFY02 and FY07, the growth of the same metric has been more sedate at 10%(however,ARRgrowthandoccupancytrendsinonlythepremiumroomsegmenthave been better, with ARRs registering a five-year CAGR of 15%) ThoughoccupancylevelshavecomeoffmarginallyinFY07asthefollowingtableshows,we believe that the rationality in pricing has ensured that hoteliers do not cedemarketsharetostandaloneservice-apartmentproviders,ashasbeenthecasewithcitieswhereroomrentssawasharpescalation.
Chennai,too,hasitsfairshareofoperatorseyeingashareofthemarket.LeadingnamesincludeHotelLeela,Marriott,ITCandLemonTree,tonamejustafew.Overthenextfiveyears,HVSforecaststhatproposedroomsaddscouldbeabout6,000outofwhichtheyexpectabout70%tomaterialise.Inourview,mostoftheseroomaddscouldbeback-ended,ascurrentlytherearejustahandfulofhotels(atleastinthe premium category) that have visibility tocommenceoperationsover thenextcoupleofyears.ChennaisattractivenessliesinfairlystabledemandgeneratedbytheITsector,withautomobilesandancillariesplayingasupportcast.
FY02 FY03 FY04 FY05 FY06 FY07 CAGR
OR 57% 58% 67% 73% 78% 75%
ARR(Rs.) 3,535 3,324 3,323 3,714 4,357 5,610 10%
Source:HVSInternational;datapertainstohotelsratedthree-starandabove
TrendsinARRsandoccupancylevelsatChennai
Chandigarh
GiventhecitysproximitytotheNCR,ithasmanagedtosnagafairshareoftrafficaway from Delhi, as mounting costs force event organizers to look at alternatevenues.Further,eventssuchas theIndianPremierLeagueandtheIndianCricketLeague have served up opportunities for hotel operators to stitch up blockaccommodationdeals.Further,withTajGVKbeingjustoneoftwopremiumhotelsinthe city, therehavealsobeenopportunities toput through aggressive hikesinroomrents.InQ4FY08,thecompanyrecordedalmosta20%jumpinARRswitha11-percentage-point improvement in occupancy levels, indicative of underlyingdemand. While players such as Radisson, JW Marriott and Sarovar Hotelshaveannouncedanintentof establishingpropertiesatChandigarh,supplycouldstillbesometimeaway.
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FINANCIALSUMMARYProfit&Loss(Rs.mn)
YearEnded31stMarch 2007 2008 2009E 2010E
NetSales 2,429 2,575 3,309 4,025
OperatingCosts 1,290 1,354 1,748 2,094
OperatingProfit/EBIDTA 1,139 1,221 1,561 1,931
OtherIncome 13 16 13 16
Depreciation/Amortization 112 124 191 221
Interest 31 29 62 81
PBT 1,009 1,084 1,321 1,644
PAT-asreported 644 705 869 1,083
PAT-afteradjustments 651 705 869 1,083
BalanceSheet(Rs.mn)
YearEnded31stMarch 2007 2008 2009E 2010E
Equitycapital 125 125 125 125
Reserves&Surplus 1,734 2,199 2,771 3,484
Totaldebt 734 800 1,050 1,300
DeferredTax 81 89 89 89
TotalLiabilities 2,674 3,213 4,036 4,999
GrossFixedassets 2,581 2,751 4,252 4,952
Accl.Depreciation 644 768 959 1,180
Netfixedassets 1,937 1,983 3,293 3,772
CapitalWIP 760 1,021 500 1,000Investments 0 0 0 0
Totallong-termassets 2,697 3,004 3,793 4,772
Currentassets,loans&adv.
Inventory 31 36 46 56
Sundrydebtors 60 72 92 112
Cash 253 508 549 643
Loans&Advances 276 276 276 276
Currentliabilities&provisions 669 709 747 886
Netcurrentassets -50 182 216 200
Miscexpensesnotwrittenoff 27 27 27 27
TotalAssets 2,674 3,214 4,036 4,999
CashFlows(Rs.mn)
YearEnded31stMarch 2007 2008 2009E 2010E
Cashflowsfromoperations 717 854 1061 1406
Cashflowsfrominvestments -349 -415 -967 -1184
Cashflowsfromfinancing -258 -183 -53 -128
Cashgeneratedduringtheyear 110 256 41 93
Openingcashandcashequivalents 142 253 508 549
Closingcashandcashequivalents 253 508 549 643
Ratios
Yearended31March 2007 2008 2009E 2010E
Growthratios
Sales 29% 6% 28% 22%
EBIDTA 35% 7% 28% 24%
PAT 41% 8% 23% 25%
EPS 41% 8% 23% 25%
Marginratios
EBIDTA 46.9% 47.4% 47.2% 48.0%
EBIT 42.3% 42.6% 41.4% 42.5%
PAT 26.8% 27.4% 26.3% 26.9%
Leverage&WCratios
Debttoequity 0.4 0.4 0.4 0.4
Currentratio 1.5 2.1 2.4 2.3
Inventorydays 5 5 5 5
Debtordays 9 10 10 10
Creditordays 100 105 105 105
Performance&turnoverratios
RoAA 21% 19% 20% 20%
RoACE 26% 24% 25% 25%
RoAE 37% 32% 32% 32%
Totalassetturnover 0.8 0.7 0.8 0.8
Fixedassetturnover 0.9 1.0 0.9 0.9
Valuationmetrics
YearEnded31stMarch 2007 2008 2009E 2010E
Currentprice(Rs.) 145 145 145 145
Sharesoutstanding(mn) 63 63 63 63
Marketcapitalisation(Rs.mn) 9,092 9,092 9,092 9,092
Marketcap/Sales(x) 3.7 3.5 2.7 2.3
Totaldebt(Rs.mn) 734 800 1,050 1,300
Cashandcashequivalents(Rs.mn) 253 508 549 643
Enterprisevalue(Rs.mn) 9,573 9,383 9,592 9,749
EBIDTA(Rs.mn) 1,139 1,221 1,561 1,931
EV/EBIDTA(x) 8.4 7.7 6.1 5.0
EV/Sales(x) 3.9 3.6 2.9 2.4EV/room(Rs.mn) 14.0 13.7 10.4 8.8
Per-shareearnings(Rs.) 10.4 11.3 13.9 17.3
Price-earningsmultiple(x) 14.0 12.9 10.5 8.4
Dividendpershare(Rs.) 3 3 4 5
Dividendyield(%) 2.1% 2.2% 2.8% 3.5%
Roominventoryatyear-end
YearEnded31stMarch 2007 2008E 2009E 2010E
TajKrishna-Hyd'bad 261 261 261 261
TajDeccan-Hyd'bad 151 151 174 174
TajBanjara-Hyd'bad 122 122 122 122
Taj-Chandigarh 150 150 150 150
TajMountRoad-Chennai 215 215
NewpropertyatHyd'bad 190Totalrooms 684 684 922 1,112
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RatinginterpretationOUTPERFORM Greaterthan15%upsidefromcurrentpriceNEUTRAL Upsideordownsidefromt hecurrent priceiswit hin15%UNDERPERFORM Greaterthan15%downsidefromthecurrentprice
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