The Hindu Business Line : Taj GVK: Buy

An investment can be considered in the stock of Taj GVK. FY06 has been yet another splendid year for the hotel industry and the company has surpassed expectations by more than doubling its profits.

The stock now trades at 33 times the FY06 per-share earnings and at about 17 times its likely FY08 per-share earnings. We have maintained a bullish stance on the stock since July 2003, when it traded at an adjusted price of Rs 11.

Our buy recommendation is underpinned by Taj GVK's strong presence in Hyderabad, where three of its four properties are located. Hyderabad is likely to remain a key destination for business travellers. More so, as the average room rates in the city remain competitive when compared with those of Bangalore. Venues for meetings and conventions may shift from Bangalore to Hyderabad. The latter is to play host to the 39th AGM of the Asian Development Bank in the first week of May. Such high-profile events may act as a referral point in drawing other such business events and tourists to the city.

The international airport is also expected to be operational in 2008, which will boost foreign traffic further. As the city is unlikely to witness any fresh supply until 2008, occupancy rates will remain at high levels, while room rates are likely to head further upwards; the increase may not, however, be as steep as the year gone by.

Importantly, hotels in the city may not witness much of a downside to room rates even once fresh supply comes in. With room rates relatively more reasonable, demand is likely to keep pace with the enhanced supply, if not outstrip it. Besides, Taj GVK is adding more than 400 rooms in the city and will be able to maintain its share of the market.

Meanwhile, its property at Chandigarh is likely to contribute more significantly to revenues and earnings from FY07. Its property in Chennai will also be commissioned in the last quarter of FY07.

An unanticipated slowdown in business traffic and delays in project execution are the risks to our recommendation. Buy with a two-year perspective.

Shanthi Venkataraman

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