Price - Rs.

145
TAJ GVK HOTELS AND RESORTS Target - Rs. 225
OUTPERFORM

We initiate coverage with an Outperform rating on Taj GVK Hotels and Resorts
(Taj GVK), which currently operates three properties out of Hyderabad and one at
Chandigarh. The drivers of our sanguine view on the stock are:
Stable outlook in Hyderabad, Taj GVK’s key city of operation
Hyderabad accounts for a lion’s share of Taj GVK’s extant room inventory – 534
rooms out of a total of 684 rooms are out of this city – which will make it a key Initiating Coverage
determinant of Taj GVK’s fortunes in the medium term. We believe that the
Dated 6 May 2008
commissioning of the new airport at Hyderabad, the establishment of a large
convention centre for conferences, the emergence of industries such as biotech
and semicon as an adjunct to the information technology sector, with a parallel BSE SENSEX 17373
emphasis on improving connectivity infrastructure, will impart a stable undertone to NIFTY 5145
room demand across Taj GVK’s properties in the city over our forecast period.
O/S Shares (nos mn) 62.7
Concerns on over-supply are overstated, in our view
Market Cap (Rs. mn) 9,092
With the rather spectacular rise in average room revenues (ARRs) witnessed in 52 week Hi-Lo Rs. 205 – Rs. 100
Hyderabad over the past few years, every major hospitality player is making a Average Daily 46,400
beeline to commence operations in the city. Indeed, in the past few months, press Volume (nos)
reports have been awash with news of a massive build-out of room inventory, Free Float (%) 25.4
which, purportedly, will destabilise the demand-supply equation. We think the BSE Code 532390
concerns are overstated – most of these announcements will likely translate into NSE Code TAJGVK
capacity only over the next three to four years; further, given the high real estate
Bloomberg code TAJG IN
and construction costs that prevail currently, we think room rents will be pegged
Reuters code TAJG.BO
significantly higher to pose a threat to Taj GVK’s current dominance of Hyderabad
New roll-outs will partly reduce concentration risk; Taj GVK’s Shareholding Pattern (%) as of March 2008
captive land bank a huge positive Promoters 74.6

Since the commissioning of the Chandigarh property three years ago, there has Institutions 10.3
not been any addition to Taj GVK’s roster of properties. FY09 will see the Public 15.1
commissioning of its new property at Chennai followed by the launch of its fourth
property at Hyderabad in FY10. Further, Taj GVK intends to add a new wing to an TAJ GVK vs Sensex - Relative performance
existing property (Taj Deccan) and add a service apartment block to another (Taj 1.80

Krishna). In both these instances, Taj GVK has captive access to a priceless 1.40

resource in an upscale area – land. Though the effects of this expansion will
Close price

1.00

manifest only in FY11, expansion within an existing property with zero expenditure 0.60

towards land acquisition will significantly bolster return ratios. 0.20

-0.20
Valuation and view -0.60
Mar-08
Jul-07

Aug-07

Nov-07

Dec-07
Oct-07

Apr-08
Jun-07

Jan-08
May-07

Feb-08
Sep-07

We forecast sales and EPS CAGR of 25% and 24% over FY08-FY10E. The stock
currently trades at 10.5x FY09E EPS and 8.4x FY10E EPS, which is attractive in
the context of our forecasted growth. Coupled with a clean balance sheet and TAJ GVK Sensex

industry-leading return metrics (low leverage of 0.4x, RoE>30%, dividend yield of P e rf o rm a nc e ( %) 1m 3m 12 m

2%), we think Taj GVK is a quality branded play in the hospitality segment going at TA J GVK 36.5 2.9 (15.7)

commodity-like valuations. We initiate coverage with an Outperform rating and a Sensex 14.8 (5.6) 26.4

P/E-based target price of Rs. 225, an upside of 55% from current levels. At our
target, the stock would trade 13x FY10E EPS, a 15% discount to current multiples
Nath Balakrishnan
commanded by players such as Indian Hotels, EIH and Hotel Leela. Our target
nath@sparkapital.in
price is validated by our DCF valuation, which yields an objective of Rs. 236.
+91.44.43440035
Key risks to our recommendation would be an aggressive build-out by other
players in Hyderabad, slower-than-expected roll-out of Taj GVK’s new properties Sriram Sekhar
and a softening of demand trends in Taj GVK’s key markets of operation.
sriram@sparkcapital.in
Financial Summary +91.44.43440040

Revenues EBIDTA PAT EPS P/E EV/EBIDTA Spark Capital Advisors (I) Private Limited
Year
(Rs. mn) (Rs. mn) (Rs. mn) (Rs.) (x) (x)
‘Reflections’, New #2, Leith castle center st.
FY08 2,575 1,221 705 11.3 12.9 7.7 Santhome High Road
FY09E 3,309 1,561 869 13.9 10.5 6.1 Santhome, Chennai – 600 028
FY10E 4,025 1,931 1,083 17.3 8.4 5.0

Spark Research is available on Bloomberg <SPAK> GO and Reuters Knowledge Page 1 of 16

 TAJ GVK HOTELS
Initiating Coverage

Contents
Page No.

Business Overview ………………………………………………………………………………………………… 3

Investment Rationale ………………………………………………………………………………………………… 4

Valuation Discussion ……………………………………………………………………………………………… 10

Key Risks……………………………………………………………………………………………………………. 12

Industry Analysis……………………………………………………………………………………………… 13

Financial summary ………………………………….…………………………….……………………………… 15

May 08 Page 2 of 16
 TAJ GVK HOTELS
Initiating Coverage

BUSINESS OVERVIEW
Incorporated in 1999, Taj GVK is a venture between the GVK Group and Indian
Hotels, which runs the Taj chain of hotels. Indian Hotels is a strategic investor and
holds a 25.6% stake in the venture. The GVK Group holds a 49% stake, with the rest
held by institutions and the public.
Taj GVK operates four properties currently, out of which three are in the city of
Hyderabad and one in Chandigarh. The company is scheduled to commence
operations at its new property in Chennai in the ensuing quarter.
Taj GVK is a dominant player in the Hyderabad market, where it controls close to 40%
of the market for premium rooms. Its property at Chandigarh was the first branded
property to roll-out operations in the city and kicked off in FY06.
Taj GVK has benefited
from strong demand Over the past few years, Taj GVK has been a principal beneficiary of the strong
tailwinds in Hyd’bad demand trends witnessed in the Hyderabad market. With the tailwind of a strong surge
over the past four years in ARRs, coupled with increasing occupancy levels, the company reported a sales and
earnings CAGR of 30 % and 49% in the period between FY03 and FY08.

Sales, earnings and EBIDTA margin trends 47%

3,000 47% 50%
45%
2,575 45%
2,429
2,500 38%
40%
32% 35%
2,000 1,887
27% 30%

1,500 25%
1,155
20%
1,000 876
700 705 15%
651
462 10%
500
226
95 127 5%

0 0%
FY03 FY04 FY05 FY06 FY07 FY08

Sales (Rs. mn) PAT (Rs. mn) EBIDTA margin (RHS)

Source: Company, Spark Research

Taj GVK has also embarked on an aggressive capex plan, which, apart from the
Aggressive capex plans Chennai property, envisages opening its fourth property at Hyderabad; setting up an
on the anvil additional wing within the Taj Deccan at Hyderabad; and opening a block of service
apartments at Taj Krishna in Hyderabad. Taj GVK also has plans to set up properties
at Amritsar and Bangalore, plans for which are on the drawing board. Taj GVK’s
current room inventory and capex plans are illustrated in the table below.
Room inventory of Taj GVK Hotels Capex plan of Taj GVK with likely commissioning timelines
Hyderabad FY09E FY10E FY11E FY12E
Taj Krishna 261 Taj at Chennai
Taj Deccan 151 Rooms 215
Taj Banjara 122 Capex (Rs.mn) 1,500
Total rooms in Hyderabad 534 New Hyd'bad property
Chandigarh Rooms 190
Taj Chandigarh 150 Capex (Rs.mn) 800
Total room inventory 684 Service apartment block
Rooms 50
Capex (Rs.mn) 750
New wing at Taj Deccan
Rooms 180
Capex (Rs.mn) 1,000

Mr G V Krishna Reddy is Taj GVK’s Chairman and Ms Indira Krishna Reddy, the
Managing Director. Mr S B Kamath is the Financial controller and Company Secretary.

May 08 Page 3 of 16
 TAJ GVK HOTELS
Initiating Coverage

INVESTMENT RATIONALE
Stable outlook for Hyderabad, Taj GVK’s key city of operation
Given that close to 70% of Taj GVK’s room inventory will be in Hyderabad even
post its expansion plans in FY09 and FY10, we believe that the city will play a
critical role in determining the fortunes of the company over the medium term. We
address both the demand and supply side of the equation to assess the likely
impact it will have on Taj GVK. We believe that room demand will grow annually in
the mid-teens, even as we assert that some of the recent concerns on the market
tipping over into a state of over-supply are overdone. We address the demand side
of the equation first and then examine supply-side dynamics.
Several drivers for demand growth exist, in our view
The commissioning of
the new airport should The frenetic pace of growth witnessed in the Hyderabad market (ARRs grew at a
provide a booster shot to compounded rate of 20% between FY02 and FY07) might be a tough act to repeat
business travel in the years to follow; while we expect marginal increases in room rents year-on-
year, we think growth in demand for rooms should be in the mid-teens.
We believe that the commissioning of the new airport at Shamshabad will be the
central driver of room demand. Hyderabad already has a world-class convention
centre (Hyderabad International Convention Centre), with a seating capacity of
5,000. While there were bottlenecks with infrastructure at the old Begumpet airport
on account of its capacity constraints, we believe the new airport should provide a
fillip to making Hyderabad a favoured MICE (Meetings, Incentives, Conferences,
Exhibitions) venue in the country.
We identify a couple of other drivers, which we believe will provide a fillip to
demand:

SEZs and the emergence a)
of clusters such as Fab
City and Genome Valley
will aid traffic growth
b)
As of October last year, close to 30 special economic zones were notified in
and around Hyderabad, of which a lion’s share would be accounted for the
information technology and information technology-enabled services. In our
roadtrip to Hyderabad recently, we continued to see robust office development
activity (primarily by IT companies) in the Madhapur - Manikonda belt. We
believe this serves as a good proxy for likely growth in room demand.
Outside of the IT sector, there are other clusters emerging in Hyderabad,
which, in our view, should offset any cool-off in growth related to a slowdown in
the IT sector. These clusters include the Fab City, which has been set up with
the intention to attract companies involved with semiconductor design and
manufacturing. The second is the Genome Valley, a biotechnology sector
cluster, which provides infrastructure to over a 100 biotech companies
currently.

Drivers of room
demand

New airport at Hyderabad poised Notification of close Development of Fab Setting up Genome
Shamshabad set to to become preferred to 30 SEZs in and City for semicon Valley, a dedicated
boost traffic MICE destination around Hyderabad design and mfg biotech cluster

May 08 Page 4 of 16
 TAJ GVK HOTELS
Initiating Coverage

Strategic location of properties should aid traffic growth

The proximity of Taj All of Taj GVK’s properties are currently located in the business district of Banjara
GVK’s properties to the Hills, which is strategically placed between the new airport at Shamshabad and the
emerging business emerging business hub in the Madhapur-Manikonda-Gachibowli belt. Even though
district is a key positive road transportation infrastructure is yet to catch up with the rapid pace of the airport
development, we believe with the completion of the Outer Ring Road (ORR), and
the lack of visibility on the development of other properties in the vicinity of the new
airport (barring Novotel, which is scheduled to commence operations later this
calendar) Taj GVK’s location alone can attract customers and may enable it to take
share away from some its competitors (who may be disadvantaged by lack of
proximity to the emerging business district).
As market leader, Taj GVK should benefit from demand strength
Considering that Taj GVK controls almost 40% of all the premium rooms in
Hyderabad currently, we think they would be the principal beneficiary of strength in
demand tailwinds. As a result, we expect all properties in Hyderabad to report
occupancy levels of between 75-80% over our forecast period.
Supply-side concerns overdone, in our view
There’s been an
oversupply of newsflow We now focus on room supply, a subject that has consumed considerable
on fresh room additions, newsprint, if recent press reportage is any indication. Much like what is seen in the
but we think concerns commodity sector, where stocks tend to go into a free fall as and when capacity
surrounding them are addition plans are announced, hotel stocks – and specifically Taj GVK – have been
no different. We think the reaction is typically a knee-jerk one, as a closer
overblown
examination reveals that most of the announcements are just that, with little
evidence on the ground to suggest that a roll-out is imminent.
Even if one goes by historical trends, Hyderabad has had its share of room
additions. Since April 2003, when supply of rooms in Hyderabad (three-star
category and above) was 1,000 till now, a further 1,000 rooms of supply has come
in. But that has not deterred Taj GVK’s RevPar (Revenue per available room, a
metric that captures both occupancy rate and ARRs) from moving up significantly in
the same period, a CAGR of 26%.

Trends in RevPar

7,000
5,881 6,030
6,000

5,000 4,530

4,000 3,299
3,000 2,452
1,872
2,000

1,000

0
FY03 FY04 FY05 FY06 FY07 FY08

Room supply RevPar (Rs.) Room supply

at 1000/day at 1900/day

Source: Company, Spark Research, HVS International

May 08 Page 5 of 16
 TAJ GVK HOTELS
Initiating Coverage

High land prices and Current economics for developers to be challenging

escalating construction
Several marquee names have announced their intent to set up hotel operations in
costs makes hotel Hyderabad. They include leading global names such as Westin, Hyatt, Hotel Leela,
economics challenging Le Meridien and Hilton, to name a few. We believe these capacities will manifest
for new developers completely only over a three-to-four-year period. Our recent roadtrip to Hyderabad
also confirmed our notion on the back-ended nature of supply adds, as a couple of
players have deferred their launch timelines.
Our workings also suggest that new capacities are not going to come in at room
rents that could be classified a steal. Given the sharp rise in prices of real estate
and the escalation being witnessed in construction costs, operators will have to
perforce adopt extremely aggressive pricing tactics to generate decent RoEs.
For a five-star project, at current prices in Hyderabad and assuming occupancy
rates of 70%, we believe upcoming hotels will have to price themselves at Rs.
16,000 per room night to generate RoEs of 17%.
Economics of a five-star hotel Revenue workings
Land for a five-star project (acres) 5 No of rooms 300
Cost per acre (Rs. mn) 250 No of days in a year 365
Total land cost (Rs. mn) 1,250 Revenue per room (Rs.) 16,000
No of rooms on 5 acres 300 Occupancy rate 70%
Cost per room (Rs. mn) 10 Room revs (Rs. mn) 1,226
Total cost of construction (Rs. mn) 3,000 Room revs:total rev 70%
Total cost of project (Rs. mn) 4,250 Total rev (Rs. mn) 1,752
Assumed debt:equity 2:1 EBIDTA margin 45%
Equity (Rs.mn) 1,417 EBIDTA 788
Debt (Rs. mn) 2,833 Depreciation 150
Interest cost 283
PBT 355
PAT 234
RoE 17%

Scanning through the names that have announced plans to have a Hyderabad
We think the Taj is as footprint, high ARRs may well be the order of the day. Developers would indeed be
good as any global looking at stretched out payback periods in the existing environment, and
hospitality brand it may competing with a player such as Taj GVK, whose assets have been acquired well in
be pitted against in the the past, would pose a significant challenge, in our view.
future While it may be argued that the choice of hotel is not dictated purely by trends seen
in pricing but also by the service quality and aspirational value that a hotel brand
stands for, we believe that the Taj is as exceptional a hospitality brand both
domestically as well as abroad, as some of the other names are. Therefore, we do
not believe that the entry of global players will lead to an erosion of Taj GVK’s
marketshare, at least on the brand perception platform.
Expansion plans partly reduce concentration risk
Since FY06, there has not been any addition to Taj GVK’s roster of properties. As a
result, with the cooling off in ARR growth in Hyderabad, the company has reported
rather tepid earnings growth in FY08. We think that the properties at Chandigarh
(came on stream in FY06) and Chennai (scheduled to opens its doors by the end of
the ensuing quarter) will partly reduce the risk of revenues originating from only one
city. We think the almost complete exposure to Hyderabad is also one of the
reasons why the stock trades at a low valuation in spite of solid return metrics.

May 08 Page 6 of 16
 TAJ GVK HOTELS
Initiating Coverage

Scaling up of From a complete dependence on Hyderabad till FY05, we expect properties in

Chandigarh operations Chennai and Chandigarh to each account for 17% of revenues in FY10E.
and new Chennai
property partly address
concentration risk Taj GVK’s revenue mix is set to change for the better
FY05 Chennai, FY10E
17%

Chandigarh,
17%

Hyd'bad,
66%

Hyderabad,
100%

Source: Company, Spark Research

Chennai to add another string to the revenue bow

ARRs and ORs for
Taj GVK is set to unveil its property in Chennai in the current quarter. Chennai has
premium hotels have
been an attractive destination for hoteliers over the past few years, with a sharp rise
improved sharply over
in both occupancy levels and ARRs. With the IT and ITeS sectors being well-
the past four years in entrenched in the city, other industries such as automobile original equipment
Chennai manufacturers, auto component players and consumer electronics companies have
set up base in the city, providing a further leg-up to demand for premium hotel
rooms.

ARR and OR trends in Chennai

8,000 90%
78% 77%
7,000 72% 80%
62% 70%
6,000
53% 60%
5,000
50%
4,000
40%
3,000
30%
2,000
20%
1,000 10%

0 0%
FY03 FY04 FY05 FY06 FY07

ARR (Rs.) OR

Source: CRISIL, Spark Research; above trends are for premium hotels only (5-star category)

The strength in ARRs and occupancy levels could be explained by no additions to

the premium room segment over the past three years (CRISIL states that supply
has remained constant at 1,541). That looks set to change with players such as
Marriott and Hotel Leela in the midst of construction. In our view, room adds in the
city will be lumpy and we expect a supply to again be back ended, with properties
likely to be operational only towards the end of FY10. We believe Taj GVK’s
property located in the heart of Chennai’s business district will garner ARRs of Rs.
7,000 with an occupancy level of 65% in its initial year of operation.

May 08 Page 7 of 16
 TAJ GVK HOTELS
Initiating Coverage

Chandigarh, an attractive opportunity

We are positive about Taj GVK’s prospects in Chandigarh, considering that it
currently is the only established hotel brand in the city. The city continues to attract
a fair share of business traffic given its proximity to Baddi, Ludhiana and Mohali. As
the graphic below demonstrates, the Chandigarh property has made sharp
improvements in both ARRs and ORs. Given the lack of alternatives and the fact
that additional supply is still some time away, we expect Taj GVK to dominate the
Chandigarh market over our forecast period.
Taj GVK’s deal with the
IPL and ICL guarantees We note that Taj GVK has also entered into deals with both the Indian Premier
high occupancy levels in League and the Indian Cricket League for providing block accommodations to
an otherwise lean teams when matches are in progress. The arrangement will provide a sharp fillip to
season for business occupancy levels, which acquire significance, given that the first quarter typically
traffic tends to be a lean one for business hotels.

ARR and OR trends at Cha ndigarh over the past eight quarters

9,000 82% 90%

74% 77%
8,000 72% 71% 80%
68%
7,000 62% 70%
56%
6,000 60%
5,000 50%
4,000 40%
3,000 30%
2,000 20%
1,000 10%
0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY07 FY08

ARR (Rs .) OR

Source: Spark Research, Company

Fourth property at Hyderabad will position Taj GVK across the business hotel
New property at value chain
Hyderabad positions Taj Taj GVK is in the process of setting up its fourth hotel in Hyderabad (on leased
GVK across the property), which we assume will be operational in the latter half of FY10. To be
business hotel value positioned as a business hotel with ARRs expected to be in the Rs. 5,000 – Rs.
chain 5,500 band. We believe that with this property, Taj GVK will control close to half the
market for premium rooms; further, this will complete Taj GVK’s portfolio, offering
customers rooms across luxury, premium and business properties. Should
externalities at a later date force customers to downtrade, we think Taj GVK, with its
range of properties, will still be able to capture traffic in such an eventuality.
Future expansions – captive land bank a huge positive
Given the vast expanse over which two of Taj GVK’s flagship properties are spread
over – the Taj Krishna is spread over 11 acres and the Taj Deccan over six acres –
TJP has access to a priceless resource in an upmarket area of Hyderabad city –
spare land. We note that a new developer looking to set up a property in a locality
of similar nature will need to fork about Rs. 1,000mn per acre. In our view, such
steep land costs itself would act as a deterrent to prospective developers and act as
a source of competitive advantage for Taj GVK.

May 08 Page 8 of 16
 TAJ GVK HOTELS
Initiating Coverage

Expansion at Taj Deccan and shopping mall at Taj Krishna

Taj GVK is in the process of adding a wing to its existing property at Taj Deccan (23
rooms), which we expect will come on stream in the second half of this fiscal.
At existing properties, Further, Taj GVK is also in the process of setting up shopping mall at its Taj Krishna
Taj GVK has access to property, spread over an area of 15,000 square feet. The mall, expected to be
spare land, a priceless occupied by shops selling upscale brands, is assumed to be operational by the
resource in an upscale beginning of FY10. While we estimate the revenue opportunity from this space to be
area between Rs. 60mn – Rs. 70mn, we expect most of it to flow through to the
bottomline, as there are no associated costs.
New block at Taj Deccan and service apartments at Taj Krishna
Capitalising on the space available within its existing properties, Taj GVK will set up
an additional block with 180 rooms at the Taj Deccan and a block with about 50
serviced apartments at Taj Krishna. We expect the latter to come on stream in the
second half of FY11 and the former to be operational towards end FY11. Given that
these expansions will require zero expenditure towards land acquisition, they will
significantly boost return ratios.
Expect new properties in Amritsar and Bangalore
Even as the current expansion plans are being executed, Taj GVK has articulated
an intention to roll-out properties in Amritsar and Bangalore, to name a couple of
Amritsar and Bangalore locations. While Amritsar might be first off the block, we believe Bangalore might be
are next on the radar a fair time away from materialising. Expenditure likely to be incurred on these
properties is currently not in our estimates.
Given the staggered manner in which new property roll-outs have been planned, we
see visibility on earnings growth beyond our forecast period as well.

May 08 Page 9 of 16
 TAJ GVK HOTELS
Initiating Coverage

VALUATION DISCUSSION
While a P/E-based target is our preferred methodology, given the steady nature of
the hotels business, we also use the DCF methodology to validate our P/E- based
target price.
As peer comparison, we use Indian Hotels, EIH and Hotel Leela as benchmarks for
We use a P/E-based
the purpose of relative valuation. While it may be argued that Taj GVK needs to be
methodology to arrive at
compared with the likes of Viceroy Hotels, Royal Orchid Hotels or Kamat Hotels,
our target price of
given the similarity in market capitalisation, we refrain from doing so as consensus
Rs. 225 and corroborate estimates for these stocks is difficult to come by.
it with a DCF-derived
target We forecast Taj GVK’s sales and EPS to log a CAGR of 25% and 24% for the
period between FY08-FY10E. On our estimates, the stock trades at 10.5x FY09E
EPS and 8.4x FY10E EPS, which we think is compelling in the context of the growth
we forecast in earnings. Even as Taj GVK admittedly lacks the scale and scope of
an Indian Hotels or an EIH, we believe that from the context of stock price
performance, the critical drivers would be valuation and earnings growth,
parameters on which we believe Taj GVK scores over its peers.
Taj GVK’s large-cap peers trade in a band of 14-16x FY10E consensus estimates,
with RoEs in the case of all three peers under the 20% mark. As contrast, we
expect Taj GVK to maintain RoEs in excess of 30% over our forecast period, report
EBIDTA margins at close to 50% and operate with a debt:equity of 0.4x, which, in
our view, provides it adequate headroom to fund subsequent growth opportunities
through leveraging at a later date.
Scale may or may not matter, but valuation certainly does
With solid return metrics and a dividend yield of 2% to boot, we argue that a
discount of higher than 10-15% on the valuation multiple vis-à-vis large-cap peers
would be overdone. Consequently, we ascribe a target multiple of 13x to our FY10E
EPS estimate of Rs. 17.3 to arrive at our price objective of Rs. 225, an upside of
With industry-leading 55% from current levels. Initiate coverage with an Outperform rating.
return metrics, we
believe Taj GVK should The table captures the relative standing of Taj GVK compared to its peers on
not trade at a discount various metrics:
greater than 10-15% to Metric snapshot of key players
large-cap peers Sales EBIDTA margin PAT margin RoE
Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E
Indian Hotels 36,406 40,181 27.4% 32.7% 17.1% 16.9% 14.5% 14.1%
EIH 13,979 16,739 32.0% 34.0% 22.0% 25.0% 16.0% 16.0%
Taj GVK 3,309 4,025 47.2% 48.0% 23.3% 24.5% 32.2% 32.4%
Hotel Leela 6,116 6,662 44.0% 41.0% 23.0% 19.0% 10.0% 9.0%

Valuation matrix
Price/sales EV/Sales EV/EBIDTA P/E
Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E
Indian Hotels 2.1 2.1 2.6 2.6 10 8.3 14.5 14
EIH 4.4 3.7 5 4.1 15.4 12.1 20.5 16
Taj GVK 2.7 2.3 2.9 2.4 6.1 5.0 10.5 8.4
Hotel Leela 2.9 2.6 4.9 4.1 10.2 10.0 12.3 14.0
Source: Spark estimates, Bloomberg, Firstcall

May 08 Page 10 of 16
 TAJ GVK HOTELS
Initiating Coverage

DCF-based valuation methodology yields a target of Rs. 236,

validating our P/E-based target price
To corroborate our price objective arrived through the P/E-multiple methodology, we
also value Taj GVK on DCF basis. This leads us to target price of Rs. 236, which
Our DCF methodology validates our P/E-based target price.
yields a target of Rs. 236,
validating our P/E-based DCF valuation for Taj GVK (March-09 year end)
price objective Debt to capital 28% PV of cash flows (Rs. mn) 5,860
Equity to capital 72% Cash flow in terminal year (Rs. mn) 2,745
Exit multiple (x) 11.6
Risk-free rate 8% Terminal value (Rs. mn) 31,861
Risk premium 6% PV of terminal value (Rs. mn) 9,420
Beta 1.2
Cost of equity 15.2% Enterprise value (Rs. mn) 15,280
Cost of debt 11% Net debt (as of Mar 09; in Rs. mn) 501
Tax rate 34%
Tax-adjusted debt cost 7.3% Equity value (Rs. mn) 14,779
Shares o/s (mn.) 62.7
WACC 13.0%
Terminal growth 4% Target price (Rs.) 236
We also outline below our key assumptions for the different properties over our
forecast period.
Key assumptions for various properties
FY09E FY10E
Taj Krishna
Rooms at year end 261 261
ARR (Rs.) 9,775 10,500
OR 78% 79%

Taj Deccan
Rooms at year end 174 174
ARR (Rs.) 7,675 8,200
OR 77% 78%

Taj Banjara
Rooms at year end 122 122
ARR (Rs.) 7,700 8,200
OR 78% 78%

Taj Chandigarh
Rooms at year end 150 150
ARR (Rs.) 7,250 7,830
OR 74% 76%

Taj Mount Road

Rooms at year end 215 215
ARR (Rs.) 7,000 7,300
OR 65% 72%

New property at Hyd'bad

Rooms at year end 190
ARR (Rs.) 5,000
OR 53%
Notes:
Taj Mount Road assumed to operate only for nine months
in FY09
New Hyd'bad property assumed to operate only in second
half of FY10

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KEY RISKS
Dependence on Hyderabad
Though Taj GVK is making efforts to reduce its dependence on Hyderabad, we note
Negative developments than even post its expansion plans in FY09 and FY10, close to 70% of its entire
in Hyderabad could be room inventory would still be located in the city. While Taj GVK has benefited from a
detrimental to Taj GVK’s sharp spike in ARRs over the past few years, potentially negative developments in
earnings the city that deter travel would be detrimental to Taj GVK’s earnings.
Cool-off in economic activity leading to softening demand trends
Given that all properties of Taj GVK cater predominantly to the business traveller,
the company’s prospects are largely a derivative of economic activity. While Taj
GVK has benefited by the strength in India’s brisk economic growth (as captured in
our GDP numbers), a slowdown in growth could have the opposite effect and lead
to a contraction in demand for rooms at its properties.
Slower-than-anticipated pace of Taj GVK’s new property roll-outs
Our earnings model assumes that Taj GVK’s stated expansion plans would come
on stream at specified timelines. Any slippage in execution would result in our
forecasts not being met and pose a downside risk to the stock
Proposed new capacities announced by other players come on
stream earlier than expected
A slew of players have announced their intent to set up hotels in Hyderabad,
ostensibly with the idea to capitalise on the growth the new airport is expected to
bring in its wake. While plans on the ground are yet to take concrete shape and
most capacity additions remain only on paper, an event such as a sharp fall in real
estate prices may hasten players to expedite their launch plans. As a consequence,
this could lead to a sharp spike in room availability with a potentially negative
impact on occupancy rates.
Unforeseen events could lead to a fall in traffic and hurt occupancy
Events such as the outbreak of the SARS epidemic or geo-political tensions
between India and its neighbors has led to countries in the West issuing advisories
that restrain travel into the country. Though infrequent, such one-off events can
cause a dislocation in earnings – albeit temporarily - and pose downside risk to the
stock.
Upside risks
• A higher-than-expected increase in ARRs at the existing properties, which
Should Taj GVK emerge
will lead to a higher earnings trajectory
as a frontrunner to build
a hotel at Mumbai • Should the GVK Group, which is handling the modernization of the Mumbai
airport, it would pose airport, decide to develop a hotel in the vicinity and Taj GVK emerges as a
upside risk frontrunner to set it up, it could be a significant sentiment positive and
provide a fillip to the stock

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INDUSTRY ANALYSIS
In this section, we confine the analysis only to the key markets that Taj GVK
operates in – Hyderabad, Chennai (where its property should be operational by the
end of the current quarter) and Chandigarh.
Hyderabad
Hotels in Hyderabad have witnessed boom times over the past few years, as
Hyderabad has seen a imbalances in supply-demand led to a ratcheting up of ARRs. Though there has
sharp rise in ARRs over been a drop in occupancy levels on account of the addition of a couple of hotels
a five-year period, which that came on stream in FY07, ARRs continue to be on an upward trend. The table
is prompting a clutch of below illustrates how occupancy rates and ARRs have moved in the city between
new entrants FY02 and FY07.
Trends in ARRs and occupancy levels at Hyderabad
FY02 FY03 FY04 FY05 FY06 FY07 CAGR
OR 68% 69% 76% 79% 82% 74%
ARR (Rs.) 2,414 2,541 2,774 3,772 4,870 6,091 20%
Source: HVS International; data pertains to hotels rated three-star and above

On the back of this sharp improvement in ARRs, coupled with infrastructural

developments on the ground in the form of the new airport at Shamshabad, the
opening of the Hyderabad International Convention Centre and the emergence of
industries such as pharmaceuticals and biotech in the city, several hotel developers
have announced plans to set up shop in Hyderabad.
Several names such as Le Meridien, Hotel Leela, Westin, Royal Orchid Hotels and
Lemon Tree, to name a few, are in the process of establishing a presence in the
city. However, capacity addition plans have not exactly panned according to
timelines originally planned. Issues surrounding acquiring land with clear titles,
obtaining requisite permissions from regulatory authorities and having to skirt
around issues pertaining to building height have been highlighted as a few key
factors that have impeded the roll-out of rooms in the city.
Hyderabad - everything to play for
Existing players New entrants
Taj GVK Westin
Novotel Hilton
Viceroy Hyatt
ITC Hotel Leela
Manohar Le Meridien
Lemon Tree
Source: News reports, Spark Research

HVS International, in its study on the Trends and Opportunities for Hotels in India,
states that planned room capacity additions at Hyderabad over the next five years
While stated room (ranging from budget to luxury hotels) could well be in excess of 10,000 rooms.
addition plans are While the number does indeed sound staggering, HVS also adds that it expects
aggressive, less than only about half of these announced plans to translate into rooms on the ground.
half the capacity Importantly, this will likely lead to the addition of limited rooms in the luxury
announced will likely category, which, in our view, is a positive from a Taj GVK standpoint.
translate into rooms on
We also believe that in the case of new entrants, entering as they are at a time
the ground over the next
when real estate prices have risen relentlessly over the past few years and when
five years
construction costs have escalated sharply, the duration over which they would
recoup their investments would only get stretched out more. We also add that it
does indeed become imperative to focus on the short- to medium term to determine
which hoteliers provide visibility in terms of build-outs and commencement of
operations, rather than just being driven by news flow.

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 TAJ GVK HOTELS
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Chennai
Unlike in Hyderabad, where ARRs grew at a compounded rate of 20% between
FY02 and FY07, the growth of the same metric has been more sedate at 10%
(however, ARR growth and occupancy trends in only the premium room segment
have been better, with ARRs registering a five-year CAGR of 15%) Though
With ARRs not occupancy levels have come off marginally in FY07 as the following table shows,
witnessing the kind of we believe that the rationality in pricing has ensured that hoteliers do not cede
spikes seen in Hyd’bad, marketshare to standalone service-apartment providers, as has been the case with
occupancy levels at cities where room rents saw a sharp escalation.
Chennai have been high Chennai, too, has its fair share of operators eyeing a share of the market. Leading
names include Hotel Leela, Marriott, ITC and Lemon Tree, to name just a few. Over
the next five years, HVS forecasts that proposed rooms adds could be about 6,000
out of which they expect about 70% to materialise. In our view, most of these room
adds could be back-ended, as currently there are just a handful of hotels (at least in
the premium category) that have visibility to commence operations over the next
couple of years. Chennai’s attractiveness lies in fairly stable demand generated by
the IT sector, with automobiles and ancillaries playing a support cast.
Trends in ARRs and occupancy levels at Chennai
FY02 FY03 FY04 FY05 FY06 FY07 CAGR
OR 57% 58% 67% 73% 78% 75%
ARR (Rs.) 3,535 3,324 3,323 3,714 4,357 5,610 10%
Source: HVS International; data pertains to hotels rated three-star and above

Chandigarh
Given the city’s proximity to the NCR, it has managed to snag a fair share of traffic
away from Delhi, as mounting costs force event organizers to look at alternate
venues. Further, events such as the Indian Premier League and the Indian Cricket
League have served up opportunities for hotel operators to stitch up block
accommodation deals. Further, with Taj GVK being just one of two premium hotels
in the city, there have also been opportunities to put through aggressive hikes in
room rents. In Q4FY08, the company recorded almost a 20% jump in ARRs with a
11-percentage-point improvement in occupancy levels, indicative of underlying
demand. While players such as Radisson, JW Marriott and Sarovar Hotels have
announced an intent of establishing properties at Chandigarh, supply could still be
some time away.

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FINANCIAL SUMMARY
Ratios
Profit & Loss (Rs. mn)
Year ended 31 March 2007 2008 2009E 2010E
Year Ended 31st March 2007 2008 2009E 2010E
Growth ratios
Net Sales 2,429 2,575 3,309 4,025
Sales 29% 6% 28% 22%
Operating Costs 1,290 1,354 1,748 2,094
EBIDTA 35% 7% 28% 24%
Operating Profit/ EBIDTA 1,139 1,221 1,561 1,931 PAT 41% 8% 23% 25%
Other Income 13 16 13 16 EPS 41% 8% 23% 25%
Depreciation/Amortization 112 124 191 221
Interest 31 29 62 81 Margin ratios
PBT 1,009 1,084 1,321 1,644 EBIDTA 46.9% 47.4% 47.2% 48.0%
PAT - as reported 644 705 869 1,083 EBIT 42.3% 42.6% 41.4% 42.5%
PAT - after adjustments 651 705 869 1,083 PAT 26.8% 27.4% 26.3% 26.9%

Leverage & WC ratios

Balance Sheet (Rs. mn) Debt to equity 0.4 0.4 0.4 0.4
Year Ended 31st March 2007 2008 2009E 2010E Current ratio 1.5 2.1 2.4 2.3
Equity capital 125 125 125 125
Reserves & Surplus 1,734 2,199 2,771 3,484 Inventory days 5 5 5 5
Total debt 734 800 1,050 1,300 Debtor days 9 10 10 10
Deferred Tax 81 89 89 89 Creditor days 100 105 105 105

Total Liabilities 2,674 3,213 4,036 4,999 Performance & turnover ratios
RoAA 21% 19% 20% 20%
Gross Fixed assets 2,581 2,751 4,252 4,952 RoACE 26% 24% 25% 25%
Accl. Depreciation 644 768 959 1,180 RoAE 37% 32% 32% 32%
Net fixed assets 1,937 1,983 3,293 3,772
Capital WIP 760 1,021 500 1,000 Total asset turnover 0.8 0.7 0.8 0.8
Investments 0 0 0 0 Fixed asset turnover 0.9 1.0 0.9 0.9
Total long-term assets 2,697 3,004 3,793 4,772

Current assets, loans & adv. Valuation metrics

Inventory 31 36 46 56 Year Ended 31st March 2007 2008 2009E 2010E
Sundry debtors 60 72 92 112 Current price (Rs.) 145 145 145 145
Cash 253 508 549 643 Shares outstanding (mn) 63 63 63 63
Loans & Advances 276 276 276 276 Market capitalisation (Rs. mn) 9,092 9,092 9,092 9,092
Current liabilities & provisions 669 709 747 886 Market cap/Sales (x) 3.7 3.5 2.7 2.3
Net current assets -50 182 216 200 Total debt (Rs. mn) 734 800 1,050 1,300
Cash and cash equivalents (Rs. mn) 253 508 549 643
Enterprise value (Rs. mn) 9,573 9,383 9,592 9,749
Misc expenses not written off 27 27 27 27
EBIDTA (Rs. mn) 1,139 1,221 1,561 1,931
EV/EBIDTA (x) 8.4 7.7 6.1 5.0
Total Assets 2,674 3,214 4,036 4,999
EV/Sales (x) 3.9 3.6 2.9 2.4
EV/room (Rs.mn) 14.0 13.7 10.4 8.8
Per-share earnings (Rs.) 10.4 11.3 13.9 17.3
Cash Flows (Rs. mn) Price-earnings multiple (x) 14.0 12.9 10.5 8.4
Year Ended 31st March 2007 2008 2009E 2010E Dividend per share (Rs.) 3 3 4 5
Cash flows from operations 717 854 1061 1406 Dividend yield (%) 2.1% 2.2% 2.8% 3.5%
Cash flows from investments -349 -415 -967 -1184
Cash flows from financing -258 -183 -53 -128 Room inventory at year-end
Cash generated during the year 110 256 41 93 Year Ended 31st March 2007 2008E 2009E 2010E
Opening cash and cash equivalents 142 253 508 549 Taj Krishna-Hyd'bad 261 261 261 261
Closing cash and cash equivalents 253 508 549 643 Taj Deccan-Hyd'bad 151 151 174 174
Taj Banjara-Hyd'bad 122 122 122 122
Taj-Chandigarh 150 150 150 150
Taj Mount Road-Chennai 215 215
New property at Hyd'bad 190
Total rooms 684 684 922 1,112

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Rating interpretation
OUTPERFORM Greater than 15% upside from current price
NEUTRAL Upside or downside from the current price is within 15%
UNDERPERFORM Greater than 15% downside from the current price

Analyst Certification
The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect
the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s)
have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in
this report.

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This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment
decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be
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