>TAJ GVK HOTELS (ICICI DIRECT)

Demand pick-up yet to be seen…

Taj GVK Hotels came out with lower-than-expected Q1FY10 numbers. The net sales de-grew by 18.6% YoY and 16.1% QoQ, respectively, due to the impact of the lean season apart from ongoing continued sluggishness in demand for hotel rooms. As a result, its margins continued to remain under pressure despite a reduction in operating costs. Operating margin declined 1210 bps YoY and 420 bps QoQ, respectively. The company reported a net profit of Rs 4.9 crore that de-grew 67.6% YoY and -38.1% QoQ, respectively.

Highlight of the quarter
In the last quarter, the company opened a new hotel with 215 rooms in Chennai. However, the impact of the same has not been felt during the current quarter. Its net sales declined 16.1% QoQ against our expected growth of 5.6% QoQ. The cut-down in travel budgets has impacted the overall business. The lean season (April-September) also played a key role in de-growth of the company’s revenues. Operating profit for the quarter was Rs 7.6 crore. It declined by 40.8% YoY and 25.7% QoQ, respectively. The company reported a net profit of Rs 4.9 crore that de-grew by -67.6% YoY and -38.1% QoQ respectively.

Valuations
Over a short-term perspective, we may continue to see a tedious performance due to the lean season and continued sluggishness in demand for hotel rooms. We are revising our FY10E estimates downward taking into account the current subdued performance of the company. At the CMP of Rs 108, the stock is trading at 10.1x and 8.7x its FY10E and FY11E EV/EBITDA,
respectively. We feel it is fairly valued and advise investors to book profits at this level. We continue to maintain our target price of Rs 107 and HOLD rating on the stock.

To see full report: TAJ GVK HOTELS