The Hindu Business Line : Taj GVK Hotels: Buy

INVESTORS can consider fresh exposure to the stock of Taj GVK Hotels. The hotel industry is now buoyant. Both occupancy and average room rates are ruling at higher levels on the back of strong tourist arrivals. Hyderabad, the company's main market for the hotel and tourism industry, is also enjoying robust growth.

If these levels were to sustain over the October-March period, the peak season for hotels, there is room for appreciation in the stock in the near term.

The stock now trades at a price earnings multiple of 14. This valuation is relatively inexpensive vis-a-vis other hotel stocks, which makes it an attractive option for investors seeking exposure to the hotel sector.

The risks associated with hotel stocks are high as the industry is vulnerable to global events that affect business and leisure travel.

Hyderabad, a strong market

Taj GVK operates three hotel properties — Taj Krishna, Taj Residency and Taj Banjara — all in Hyderabad. Besides being a hub for BPO and IT-related companies, Hyderabad has, in recent years, played host to a number of national and international events. Occupancy and room rates have, therefore, been on the rise.

In 2002-03, the average occupancy rate in Hyderabad was 71 per cent, second only to Bangalore. Hotel consultant, HVS International, expects Bangalore and Hyderabad to witness the highest growth in occupancy rates the next couple of years.

Against this backdrop, the dominant presence of Taj GVK in Hyderabad augurs well for earnings growth. ITC Hotel Kakatiya Sheraton is the only other leading five-star hotel in the city, which ensures robust demand for Taj GVK properties. While Taj Krishna is positioned as a luxury hotel, Taj Residency and Taj Banjara are business hotels. The hotels also operate at different price points, catering, therefore, to different classes of customers. This positioning appears to have paid off in the past.

Taj GVK posted a growth in revenues and profits in the 2001-02, when, as fallout of the 9/11 attacks, most hotels, including Indian Hotels and Hotel Leela, witnessed a decline in revenues.

Multi-location player

The complete dependence on Hyderabad for revenues and profits exposes the hotel to higher risks. Moreover, with Andhra Pradesh emerging as a major destination for health tourism, the demand-supply gap is expected to narrow.

Upcoming five-star hotels, such as the Viceroy, which is being developed by the international chain of hotels, The Marriott, could emerge as strong competitors to Taj GVK.

Taj GVK has already taken a step towards exploring other lucrative cities. It is completing a project in Chandigarh, which it acquired from ITDC in 2002.

The hotel is to be the first in the five-star category in Chandigarh, which is also a growing destination for business and leisure travellers.

Tourist arrivals to Chandigarh grew 24 per cent in 2003 and the business traffic is expected to be stronger as the city gains prominence as a BPO/ITES hub. Taj GVK is exploring opportunities in other cities as well.

Future plans

The Chandigarh hotel is expected to commence operations within this fiscal. The additional revenues from this property should give a boost to overall revenue growth.

Taj GVK is renovating rooms in its Taj Residency hotel and also plans to add rooms to cater to the growing demand.

The company recently passed a resolution to increase its borrowing powers by Rs 200 crore to fund these projects and any future expansion or acquisition. The debt is only marginal now.

Assuming they utilise the entire borrowing limit, the group's debt would increase substantially. While expansion would augur well for revenue growth, their timing is crucial as long gestation periods are involved.

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