2QFY2012 Result Update | Hotels

November 4, 2011

TajGVK
Performance Highlights
Y/E March (` cr) Net sales Operating profit OPM (%) Net profit 2QFY2012 58.4 18.8 32.1 4.3 1QFY2012 58.9 20.4 34.7 12.0 % chg (qoq) (0.7) (8.3) (265)bp (64.1) 2QFY2011 59.5 19.1 32.0 7.4 % chg (yoy) (1.8) (1.6) 6bp (42.0)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Hotels 572 0.8 154 / 84 17,857 2 17,563 5,284 TAJG.BO TAJG@IN

`91 `121
12 Months

Source: Company, Angel Research

TajGVK reported a 1.8% yoy decline in its top line to `58cr (`60cr) for 2QFY2012. OPM came in at 32.1%, as against 32.0% in 2QFY2011, up 6bp yoy. Occupancy rates (OR), especially for Hyderabad, remained weak during the quarter due to political unrest in the city. Chandigarh hotels showed strong improvement over the previous quarter, with overall OR at 63% for the quarter, while average room rate (ARR) came in at `7,000. We are positive on the outlook of the company, given that its key markets, Hyderabad and Chennai, are showing signs of stabilizing. We maintain our Buy recommendation on the stock. OR fluctuates in Hyderabad properties yoy: With the ongoing issues over Telangana, OR and ARR fluctuated across Hyderabad properties. Taj Krishna reported a 2% yoy increase in OR and its ARR improved to 7,700 from 7,200 in 2QFY2011. On the other hand, Taj Deccan and Banjara witnessed a decline in OR to 67% and 57% from 72% and 71% in 2QFY2011, respectively. ARR remained flat for these properties yoy at 5,000. Taj Chandigarh and Club House reported 63% OR each, while both witnessed a decline in ARR to 7,000 and 4,700 in 2QFY2012 from 7,300 and 5,200 in 2QFY2011, respectively. Going ahead, we expect 2HFY2012 to be better as it is seasonally stronger for the industry. Also, Taj Begumpet is expected to be fully operational in 3QFY2012. Outlook and valuation: We maintain our positive outlook on the entire hotel industry, as increasing foreign tourist arrivals (FTA) and economic growth will lead to a further increase in demand for hotel rooms. TajGVK is expected to benefit from the addition of its 189-room property in Begumpet, which will take its owned rooms to 1,086 from 897 currently. The stock is currently trading at attractive valuations of 11.5x and 9.1x its FY2012E and FY2013E EPS, respectively. We have valued the stock at 12x its FY2013E earnings. We maintain our Buy view on the stock with a revised target price of `121.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 75.0 8.7 1.2 15.1

Abs.(%) Sensex TajGVK

3m

1yr

3yr 65.2 67.2

(0.7) (15.9) (3.6) (38.8)

Key financials
Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA Margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV / Sales (x) EV/Room (` cr.) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 228.3 (3.9) 36.3 (31.3) 37.6 5.8 15.8 2.0 12.9 15.4 3.0 0.8 8.1

FY2011E 259.3 13.6 43.3 19.5 37.1 6.9 13.2 1.8 14.1 16.5 2.7 0.8 7.4

FY2012E 310.0 19.6 49.7 14.7 35.5 7.9 11.5 1.6 14.6 17.3 2.2 0.6 6.3

FY2013E 359.6 16.0 63.2 27.2 36.3 10.1 9.1 1.4 16.4 19.9 1.8 0.6 5.0

Sharan Lillaney
+91 22 3935 7800 Ext: 6811 Sharanb.lillaney@angelbroking.com

Please refer to important disclosures at the end of this report

TajGVK | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance highlights

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Power, Fuel and Oil (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`) Adjusted PAT
Source: Company, Angel Research

2QFY2012 58.4 5.7 9.8 12.4 21.2 5.6 9.6 16.0 27.3 39.7 18.8 32.1 3.2 5.0 0.8 11.3 19.4 7.0 62.0 4.3 7.4 6.3 0.7 4.3

1QFY2012 58.9 5.6 9.5 11.9 20.2 5.3 9.1 15.6 26.5 38.4 20.4 34.7 2.9 5.0 0.1 12.6 21.4 0.6 4.5 12.0 20.4 6.3 1.9 12.0

% chg (qoq) (0.7) 2.3 4.2 5.4 2.3 3.4 (8.3) (265)bp 9.0 (0.5) (9.9) 1,130.1 (64.1) (1,303)bp (64.1) (64.1)

2QFY2011 59.5 6.0 10.1 12.3 20.6 5.3 8.8 16.9 28.4 40.5 19.1 32.0 3.0 5.0 0.2 11.3 19.0 3.9 34.2 7.4 12.5 6.3 1.2 7.4

% chg (yoy) (1.8) (4.8) 0.7 6.6 (5.4) (1.9) (1.6) 6bp 6.3 (0.3) 0.4 81.9 2,776.3 (42.0) (511)bp (42.0) (42.0)

1HFY2012 117.3 11.3 9.7 24.2 20.7 10.9 9.3 31.6 26.9 78.1 39.2 33.4 6.1 10.0 0.8 23.9 20.4 7.6 31.8 16.3 13.9 6.3 2.6 16.3

1HFY2011 120.1 11.9 9.9 23.5 19.6 10.5 8.7 32.7 27.2 78.6 41.5 5.6 10.1 0.6 26.5 22.0 8.9 33.7 17.5 14.6 6.3 2.8 17.5

% chg (2.3) (4.6) 3.0 4.2 (3.4) (0.6) (5.6)

34.6 (114)bp (0.4) (9.5) (14.7) (6.9) (68)bp (6.9) (6.9)

Net sales down by 1.8% yoy

TajGVK posted a yoy decline of 1.8% in 2QFY2012, largely due to low OR in Hyderabad because of political unrest in the city as well large inventory build-up during the year. Going ahead, we expect sales growth to pick up from current levels, with the peak season coming ahead.

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TajGVK | 2QFY2012 Result Update

Exhibit 2: Sales trend

72 70 68 66 64 62 60 58 56 54 52 70 69 30 25 20 63 61 60 59 58 15 10 5 0 (5)

64

(` cr)

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

OPM remain flat yoy

TajGVK posted OPM of 32.1% for 2QFY2012, which was 6bp higher than its OPM of 32.0% in 2QFY2011. Sequentially, OPM declined by 265bp. We expect OPM to improve going ahead, as cost pressures ease and ORs increase in the peak season coming ahead.

Exhibit 3: OPM trend

30 25 20 26 26 22 19 18 28 20 45 40 35 30 20 15 10 5 0 19 25

(` cr)

2QFY12

15 10 5 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

EBITDA (LHS)
Source: Company, Angel Research

OPM (RHS)

PAT down by 42.0% yoy to `4cr on the back of higher tax rate
PAT declined by 42.0% yoy to `4cr during 2QFY2012, despite flat OPM, mainly on the back higher tax provision during the quarter. Tax provision increased by 81.9% yoy to `7cr. Going ahead, we expect the company to post higher PAT growth on the back of sales and OPM expansion.

November 4, 2011

2QFY12

(%)

(%)

TajGVK | 2QFY2012 Result Update

Exhibit 4: PAT growth trend

14 12 10 12 12 10 7 6 4 13 12

(` cr)

8 6 4 2 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Source: Company, Angel Research

Key takeaways from management call

The hotel property in Begumpet is on track to be opened in 3QFY2012. Work on the Ginger hotel is also progressing well. Construction of the car parking facility at Taj Krishna is also expected to be completed by the end of 3QFY2012. This would give a boost to the hotels F&B revenue. F&B revenue continued to perform slightly better than room revenue during the quarter. Going ahead also, management expects growth of 15% in F&B revenue in FY2012E. Hyderabad and Chennai markets are showing signs of stabilizing, with the new hotels opened there recording relatively high OR and ARR.

November 4, 2011

2QFY12

TajGVK | 2QFY2012 Result Update

Investment arguments
Strengthening its foothold in the Hyderabad market: TajGVK is the market leader in the Hyderabad market, where it has a share of nearly 30% in premium-segment rooms. The company is coming up with a 189-room property in Begumpet to strengthen its foothold further and to tap mid-market room demand. The company also plans to add service apartments and retail space in its existing Taj Krishna property. We believe TajGVK would emerge as a prime beneficiary in Hyderabad after the expansion. Diversification strategy to de-risk the business model: In FY2008, 78% of TajGVK's room inventory was located in Hyderabad. To diversify its presence, the company came up with Taj Mount Road in Chennai in December 2008. With this, the company has toned down Hyderabads concentration to 59% of the total room inventory in FY2009. The company is also planning to enter Bengaluru and is exploring the possibility of entering the mid-market segment through tie-ups with IHCL's Ginger. We believe this strategy will prove beneficial in the long run, as it would reduce over-exposure to the Hyderabad market. Asset-light strategy to keep the balance sheet healthy: TajGVK is adding 189 rooms at its Begumpet property, using an asset-light strategy. This would require a lower capital outlay as compared to a greenfield expansion, and we expect the company's debt-equity ratio to be at a comfortable level of 0.2x in FY2013E, which provides TajGVK with adequate room to plan further expansions, without hampering its balance sheet quality.

Outlook and valuation

We maintain our positive outlook on the entire hotel industry, as increasing FTAs and economic growth will lead to a further increase in demand for hotel rooms. TajGVK is expected to benefit from the addition of its 189-room property in Begumpet, which will take its owned rooms to 1,086 from 897 currently. The stock is currently trading at attractive valuations of 11.5x and 9.1x its FY2012E and FY2013E EPS, respectively. We have valued the stock at 12x its FY2013E earnings. We maintain our Buy view on the stock with a revised target price of `121.

Exhibit 5: Key assumptions

Y/E March No. of rooms (owned) OR (%) ARR (`) FY2008 682 77 7,568 FY2009 897 68 7,937 FY2010 897 58 6,492 FY2011 897 66 6,302 FY2012E FY2013E 1086 64 6,348 1086 67 6,638

Source: Company, Angel Research

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TajGVK | 2QFY2012 Result Update

Exhibit 6: One-year forward P/E band

350.0 300.0
Share Price (`)

250.0 200.0 150.0 100.0 50.0 0.0 Oct-05 Oct-06 Price Oct-07 9x Oct-08 12x Oct-09 Oct-10 Oct-11 15x 18x 21x

Source: Company, Bloomberg, Angel Research

November 4, 2011

TajGVK | 2QFY2012 Result Update

Profit and loss statement

Y/E March (` cr) Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Income/(Exp.) PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY09 237 237 (7.8) 137 20 29 37 51 101 (16.7) 42.4 14 87 (20.4) 36.7 7 1 1 82 (24.6) (1) 81 29 35.6 52 53 (25.1) 22.2 8.4 8.4 (25.1) FY10 228 228 (3.9) 143 21 38 35 48 86 (15.0) 37.6 20 66 (24.1) 29.0 12 1 2 55 (32.8) (0) 55 19 34.0 36 36 (31.3) 15.9 5.8 5.8 (31.3) FY11 259 259 13.6 163 25 40 47 51 96 12.3 37.1 21 76 14.5 29.2 11 1 2 66 19.7 66 22 34.1 43 43 19.5 16.7 6.9 6.9 19.5 FY12E 310 310 19.6 200 30 46 65 59 110 14.3 35.5 24 86 13.3 27.6 12 1 2 75 14.6 75 26 34.0 50 50 14.7 16.0 7.9 7.9 14.7 FY13E 360 360 16.0 229 35 53 75 66 131 18.6 36.3 29 102 18.6 28.3 7 1 1 96 27.2 96 33 34.0 63 63 27.2 17.6 10.1 10.1 27.2

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TajGVK | 2QFY2012 Result Update

Balance sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 463 89 374 69 33 2 20 11 55 (23) 2 422 483 107 375 84 0 36 3 22 11 63 (27) 2 434 492 128 364 124 0 46 5 26 14 54 (8) 1 482 667 152 514 20 0 53 6 29 18 78 (25) 1 510 707 181 525 20 0 54 5 29 21 89 (35) 1 512 13 258 271 139 12 422 13 280 293 125 16 434 13 309 321 141 19 482 13 347 360 131 19 510 13 399 412 81 19 512 FY09 FY10 FY11E FY12E FY13E

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TajGVK | 2QFY2012 Result Update

Cash flow statement

Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc)./ Dec in Fixed Assets (Inc)./ Dec in Investments (Inc)/ Dec in loans and advances Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY09 81 14 (2) 1 29 63 (389) 10 1 (378) 65 (13) 254 306 (9) 11 2 FY10 55 20 (0) 1 19 54 (155) (0) (2) 1 (156) (14) (13) 129 102 1 2 3 FY11E 66 21 (3) 1 22 59 (218) (5) 1 (221) 16 (6) 155 164 2 3 5 FY12E 75 24 (3) 1 26 69 (294) (2) 1 (295) (10) (10) 247 227 1 5 6 FY13E 96 29 (3) 1 33 88 (51) 1 (50) (50) (10) 20 (40) (2) 6 5

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TajGVK | 2QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Room (Rs cr.) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.5 1.4 13.1 0.4 1.4 5.4 0.4 1.4 6.7 0.3 1.1 7.3 0.2 0.6 13.9 0.6 6 9 164 (41) 0.5 7 11 152 (44) 0.5 6 12 131 (30) 0.5 6 13 121 (26) 0.5 7 13 133 (36) 23.6 24.8 20.9 15.4 19.1 12.9 16.5 21.5 14.1 17.3 17.7 14.6 19.9 20.8 16.4 36.7 64.4 0.6 13.3 4.0 0.4 17.0 29.0 66.0 0.5 10.0 6.1 0.5 11.9 29.2 65.9 0.5 10.4 5.6 0.4 12.4 27.6 66.0 0.6 11.1 5.7 0.4 13.1 28.3 66.0 0.7 13.1 4.5 0.3 15.3 8.4 8.4 10.6 2.0 43.2 5.8 5.8 8.9 2.0 46.7 6.9 6.9 10.2 1.0 51.3 7.9 7.9 11.8 1.6 57.4 10.1 10.1 14.7 1.6 65.7 10.8 8.6 2.1 2.2 0.8 3.0 7.0 1.7 15.8 10.2 2.0 2.2 0.8 3.0 8.1 1.6 13.2 9.0 1.8 1.1 0.8 2.7 7.4 1.5 11.5 7.7 1.6 1.8 0.6 2.2 6.3 1.4 9.1 6.2 1.4 1.8 0.6 1.8 5.0 1.3 FY09 FY10 FY11E FY12E FY13E

November 4, 2011

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TajGVK | 2QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

TajGVK No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 4, 2011

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