The Hindu Business Line : Taj GVK: Buy

Investors can consider exposure to the Taj GVK stock with an investment horizon of one-two years. Good growth prospects, continued buoyancy in foreign tourist arrivals and a robust economic environment have added thrust to the earnings of the hotel industry. We believe Taj GVK is well-placed to benefit from this boom in the economy.

At the current market price, the stock trades at 24 times its last four quarters' trailing per share earnings and at 16 times its expected 2007-08 per share earnings, assuming a conservative growth estimate. Its dominant presence in Hyderabad continues to be the cash cow and its expansion plans add further visibility to the earnings.

The company's profit-after-tax (PAT) has registered a 62 per cent growth on a year-on-year basis, for the second quarter of 2006. Taj GVK's dominant presence in Hyderabad and Chandigarh, coupled with its future expansion plans, underscore our recommendation for the stock.

Existing Properties

The company's strong presence in Hyderabad, where three of its four properties are operational, gives it an edge over the other late entrants in the city. Occupancy rates in Taj GVK Hyderabad have been around 85 per cent.

With Hyderabad emerging as the next IT and ITeS destination after Bangalore, coupled with the State's continued efforts to position itself as a health tourism centre, make Taj GVK the sole beneficiary of the tourist influx.

The international airport, which is expected to be operational by 2008, would further help keep the average room rent (ARR) and the occupancy rates (OR) in a northerly direction.

With the entry of other players, softening of ARRs in Hyderabad can be expected, and, hence, the company's decision to branch out (now concentrated in Hyderabad and Chandigarh) to Chennai and Bangalore appears far-sighted. This would help it diversify its hitherto location-specific risk and take advantage of the boom in the economy.

With Chandigarh emerging as the corporate hub and IT focal point, for Punjab and Haryana, the visitor inflow is expected to rise at a faster rate. Taj GVK Chandigarh's 62 per cent occupancy rates during the last quarter substantiate the growth potential. The lack of any other five-star accommodation in the city gives Taj GVK the first-mover advantage and, thus, the pricing power too.

Taj GVK's Chennai property, which would be operational only by mid-2007, may not be able to contribute significantly to its bottomline compared to its Chandigarh branch. The risk of competitive pricing, due to the already-existent and expected presence of other five-star accommodations, may lead to lower-than-expected revenue per available room.

Future Plans

The company had started the initial excavation works at the new five-star hotel project site at Begumpet in Hyderabad. This facility would house 200 rooms and is expected to be operational only by 2008. It also plans to expand the capacity of Taj Krishna, where it proposes to add 150 guest rooms, besides 75 serviced apartments. The foray into serviced apartments has been planned in the wake of a big jump in demand for the same from expatriates, non-resident Indians and corporates in recent months.

Taj GVK has already identified land in Bangalore and is in the process of acquiring the same. It also plans to mark its presence in the airport campus in Mumbai. Though these plans will take a couple of years to fructify, it would add visibility to its future earnings.

The prevalent demand-supply mismatch is expected to continue till 2008, when a fresh supply is likely to hit the market. Taj GVK plans to invest Rs 400 crore in the next three-four years for expansion by way of internal accruals and debt.

Slowdown in the growth of the economy, entry of foreign counterparts with comparable or lower tariffs and the possibility of expanding at a pace higher than demand growth pose downside risks to our recommendation.

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