The Hindu Business Line : Taj GVK: Hold

SHAREHOLDERS can hold the Taj GVK stock. Sustained buoyancy in tourist arrivals and shortage in supply of rooms in key metros are likely to ensure that the hotel industry enjoys another year of strong growth.

Taj GVK, which has a dominant presence in Hyderabad, where demand has been particularly strong, would continue to benefit from the upswing in the tourism industry. Revenues would also get a boost from its Chandigarh property, which is to open shortly.

Further expansion would, however, involve significant investment, requiring the hotel to tap debt or equity, which would strain growth in earnings per share. At the current market price, the stock trades at about 25 times its FY-05 earnings. As earnings prospects are bright, the valuations are likely to be sustained.

Strong performance to continue

Taj GVK is among the strong performers in the hotel industry. Although a smaller chain compared to peers such as Indian Hotels and EIH, Taj GVK's concentrated presence in Hyderabad, which has seen the strongest rise in occupancy after Bangalore, has had its cash registers ringing.

In FY-05, the group posted a revenue growth of 30 per cent and an earnings growth of 60 per cent. It had a spectacular fourth quarter, recording a 60 per cent growth in profits, while its peers saw only a 10-15 per cent growth in profit on a higher base.

The demand situation in Hyderabad, where Taj GVK has three of its hotels, is likely to remain buoyant.

Aside from being an IT/BPO hub, it has emerged a centre for international conventions and events; the annual general meeting of Asian Development Bank is to be held there in May 2006. A shortage of capacity has had room rates in the city zoom.

Taj GVK reported a 6 per cent rise in occupancies in FY-05 and a 32 per cent rise in room rates. Room rates are likely to spiral upwards, as capacity is unlikely to come up for another year at least.

The company's margin of 40 per cent is likely to remain stable, if not edge upwards.

Expansion of rooms at Taj Residency, Hyderabad, and newer properties are also likely to give a boost to revenues over the long term.

Foray into new cities

As the supply situation in Hyderabad is likely to improve in the next two years, Taj GVK's decision to spread its presence in other cities bodes well. Revenues from the Chandigarh property, are likely to kick in from the second quarter.

The company has also taken over a property in Chennai through its subsidiary. As it is redeveloping it from scratch, this hotel is likely to be operational only in mid-2007. Taj GVK is also in the race for a five-star project in Madhapur, the Hi-tech city in Hyderabad.

If Taj GVK secures the project, it would be another feather in its cap, as there would be strong demand for rooms from business travellers.

Funding expansion

Even as the group looks towards expansion, it is likely to be strained for resources. Taj GVK now has reserves of about Rs 100 crore. A part of this is likely to be deployed towards developing its Chennai property.

A luxury hotel, which is the segment it has till now operated in, demands substantial investment; a five-star deluxe hotel room costs about Rs 1 crore.

Debt has, till now, remained at low levels. The company's gearing is, however, likely to increase as it gets serious about its expansion plans.

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