taj gvk - initiating coverage

8/14/2019 TAJ GVK - Initiating Coverage

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TAJGVKHOTELSANDRESORTS

Price-Rs.145Target-Rs.225

OUTPERFORM

FinancialSummaryYear

Revenues(Rs.mn)

EBIDTA(Rs.mn)

PAT(Rs.mn)

EPS(Rs.)

P/E(x)

EV/EBIDTA(x)

FY08 2,575 1,221 705 11.3 12.9 7.7

FY09E 3,309 1,561 869 13.9 10.5 6.1

FY10E 4,025 1,931 1,083 17.3 8.4 5.0

Weinitiatecoveragewithan OutperformratingonTajGVKHotelsandResorts

(TajGVK),whichcurrentlyoperatesthreepropertiesoutofHyderabadandoneatChandigarh.Thedriversofoursanguineviewonthestockare:

StableoutlookinHyderabad,TajGVKskeycityofoperation

HyderabadaccountsforalionsshareofTajGVKsextantroominventory534roomsoutofatotalof684roomsareoutofthiscitywhichwillmakeitakeydeterminant of Taj GVKs fortunes in the medium term. We believe that thecommissioning of the new airport at Hyderabad, the establishment of a largeconventioncentrefor conferences, the emergenceof industries such as biotechand semicon as an adjunct to theinformation technology sector, with a parallelemphasisonimprovingconnectivityinfrastructure,willimpartastableundertonetoroomdemandacrossTajGVKspropertiesinthecityoverourforecastperiod.

Concernsonover-supplyareoverstated,inourview

With the rather spectacular rise inaverageroomrevenues(ARRs)witnessed inHyderabad over the past few years, every major hospitality player is making abeelinetocommenceoperationsinthecity.Indeed,inthepastfewmonths,pressreports have been awash with news of a massive build-out of room inventory,which, purportedly, will destabilise the demand-supply equation. We think theconcernsareoverstatedmostoftheseannouncementswilllikelytranslateintocapacityonlyoverthenextthreetofouryears;further,giventhehighrealestateandconstructioncoststhatprevailcurrently,wethinkroomrentswillbepeggedsignificantlyhighertoposeathreattoTajGVKscurrentdominanceofHyderabad

New roll-outs will partly reduce concentration risk; Taj GVKscaptivelandbankahugepositive

SincethecommissioningoftheChandigarhpropertythreeyearsago,therehas

not been any addition to Taj GVKs roster of properties. FY09 will see thecommissioningofitsnewpropertyatChennaifollowedbythelaunchofitsfourthpropertyatHyderabadinFY10.Further,TajGVKintendstoaddanewwingtoanexistingproperty(TajDeccan)andaddaserviceapartmentblocktoanother(TajKrishna). In both these instances, Taj GVK has captive access to a pricelessresource in an upscale area land. Though the effects of this expansion willmanifestonlyinFY11,expansionwithinanexistingpropertywithzeroexpendituretowardslandacquisitionwillsignificantlybolsterreturnratios.

Valuationandview

WeforecastsalesandEPSCAGRof25%and24%overFY08-FY10E.Thestockcurrentlytradesat10.5xFY09EEPSand8.4xFY10EEPS,whichisattractiveinthe context of our forecasted growth. Coupled with a clean balance sheet and

industry-leadingreturnmetrics(lowleverageof0.4x,RoE>30%,dividendyieldof2%),wethinkTajGVKisaqualitybrandedplayinthehospitalitysegmentgoingatcommodity-likevaluations.We initiatecoveragewithanOutperformratingandaP/E-based target price ofRs.225,an upsideof 55% fromcurrentlevels. Atourtarget,thestockwouldtrade13xFY10EEPS,a15%discounttocurrentmultiplescommanded by players such as IndianHotels, EIH and Hotel Leela.Our targetpriceisvalidatedbyourDCFvaluation,whichyieldsanobjectiveofRs.236.

Key risks to our recommendation would be an aggressive build-out by otherplayersinHyderabad,slower-than-expectedroll-outofTajGVKsnewpropertiesandasofteningofdemandtrendsinTajGVKskeymarketsofoperation.

InitiatingCoverage

Dated 6May2008

BSESENSEX 17373

NIFTY 5145

O/SShares(nosmn) 62.7

MarketCap(Rs.mn) 9,092

52weekHi-Lo Rs.205Rs.100

AverageDailyVolume(nos)

46,400

FreeFloat(%) 25.4

BSECode 532390

NSECode TAJGVK

Bloombergcode TAJGIN

Reuterscode TAJG.BO

ShareholdingPattern(%)asofMarch2008

Promoters 74.6

Institutions 10.3

Publ ic 15.1

P erfo rm ance (%) 1m 3 m 12m

TAJGVK 36.5 2.9 (15.7)

Sensex 14.8 (5.6) 26.4

-0.60

-0.20

0.20

0.60

1.00

1.40

1.80

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

Closeprice

TA J GV K S ens ex

TAJGVKvsSensex- Relativeperformance

NathBalakrishnan

[email protected]

+91.44.43440035

SriramSekhar

[email protected]

+91.44.43440040

SparkCapitalAdvisors(I)PrivateLimitedReflections,New#2,Leithcastlecenterst.

SanthomeHighRoad

Santhome,Chennai600028


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TAJGVKHOTELSInitiatingCoverage

Contents

PageNo.

BusinessOverview 3

InvestmentRationale 4

ValuationDiscussion 10

KeyRisks. 12

IndustryAnalysis 13

Financialsummary.. 15


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May08 Page3of16


BUSINESSOVERVIEW

TajGVKhasbenefited

fromstrongdemandtailwindsinHydbad

overthepastfouryears

Aggressivecapexplansontheanvil

Incorporated in 1999, Taj GVK is a venture between the GVK Group and IndianHotels, whichrunsthe Taj chainof hotels. IndianHotelsis a strategicinvestor andholdsa25.6%stakeintheventure.TheGVKGroupholdsa49%stake,withtherestheldbyinstitutionsandthepublic.

Taj GVK operates four properties currently, out of which three are in the city ofHyderabad and one in Chandigarh. The company is scheduled to commenceoperationsatitsnewpropertyinChennaiintheensuingquarter.

TajGVKisadominantplayerintheHyderabadmarket,whereitcontrolscloseto40%of the market forpremium rooms. Itsproperty at Chandigarh was the first brandedpropertytoroll-outoperationsinthecityandkickedoffinFY06.

Over the past few years, Taj GVK has been a principal beneficiary of the strongdemandtrendswitnessedintheHyderabadmarket.WiththetailwindofastrongsurgeinARRs,coupledwithincreasingoccupancylevels,thecompanyreportedasalesandearningsCAGRof30%and49%intheperiodbetweenFY03andFY08.

Source:Company,SparkResearch

Taj GVK has also embarked on an aggressive capex plan, which, apart from theChennaiproperty,envisagesopeningitsfourthpropertyatHyderabad;settingupanadditionalwingwithintheTajDeccanatHyderabad;andopeningablockofservice

apartmentsatTajKrishnainHyderabad.TajGVKalsohasplanstosetuppropertiesat Amritsar and Bangalore, plans for which are on the drawing board. Taj GVKscurrentroominventoryandcapexplansareillustratedinthetablebelow.

Hyderabad FY09E FY10E FY11E FY12E

TajKrishna 261 TajatChennai

TajDeccan 151 Rooms 215

TajBanjara 122 Capex(Rs.mn) 1,500

TotalroomsinHyderabad 534 NewHyd'badproperty

Chandigarh Rooms 190

TajChandigarh 150 Capex(Rs.mn) 800

Totalroominventory 684 Serviceapartmentblock

Rooms 50

Capex(Rs.mn) 750

NewwingatTajDeccan

Rooms 180

Capex(Rs.mn) 1,000

CapexplanofTajGVKwithlikelycommissioningtimelinesRoominventoryofTajGVKHotels

Mr G V Krishna Reddy is Taj GVKs Chairman and Ms Indira Krishna Reddy, theManagingDirector.MrSBKamathistheFinancialcontrollerandCompanySecretary.

Sales,earningsandEBIDTAmargintrends

700876

1,155

1,887

2,4292,575

95 127226

462651 705

27%

32%

38%

45%47% 47%

0

500

1,000

1,500

2,000

2,500

3,000

FY03 FY04 FY05 FY06 FY07 FY08

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Sales(Rs.mn) PAT(Rs.mn) EBIDTAmargin(RHS)


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INVESTMENTRATIONALE

Thecommissioningofthenewairportshould

provideaboostershottobusinesstravel

SEZsandtheemergenceofclusterssuchasFab

CityandGenomeValleywillaidtrafficgrowth

StableoutlookforHyderabad,TajGVKskeycityofoperation

Giventhat close to70% ofTaj GVKsroominventory will bein Hyderabad evenpost its expansion plans in FY09 and FY10, we believe that the city will play acriticalroleindeterminingthefortunesofthecompanyoverthemediumterm.Weaddress both the demand and supply side of the equation to assess the likelyimpactitwillhaveonTajGVK.Webelievethatroomdemandwillgrowannuallyinthemid-teens,evenasweassertthatsomeoftherecentconcernsonthemarkettippingoverintoastateofover-supplyareoverdone.Weaddressthedemandsideoftheequationfirstandthenexaminesupply-sidedynamics.

Severaldriversfordemandgrowthexist,inourview

ThefreneticpaceofgrowthwitnessedintheHyderabadmarket(ARRsgrewatacompoundedrateof20%betweenFY02andFY07)mightbeatoughacttorepeatintheyearstofollow;whileweexpectmarginalincreasesinroomrentsyear-on-year,wethinkgrowthindemandforroomsshouldbeinthemid-teens.

WebelievethatthecommissioningofthenewairportatShamshabadwillbethecentral driver of room demand. Hyderabad already hasa world-class conventioncentre (Hyderabad International Convention Centre), with a seating capacity of5,000.WhiletherewerebottleneckswithinfrastructureattheoldBegumpetairportonaccountofitscapacityconstraints,webelievethenewairportshouldprovideafillip to making Hyderabad a favoured MICE (Meetings, Incentives, Conferences,Exhibitions)venueinthecountry.

We identify a couple of other drivers, which we believe will provide a fillip todemand:

a) Asof Octoberlast year,close to30 special economiczones were notifiedinand around Hyderabad, of which a lions share would be accounted for theinformation technology and information technology-enabled services. In ourroadtriptoHyderabadrecently,wecontinuedtoseerobustofficedevelopmentactivity (primarily by IT companies) in the Madhapur - Manikonda belt. Webelievethisservesasagoodproxyforlikelygrowthinroomdemand.

b) Outside of the IT sector, there are other clusters emerging in Hyderabad,which,inourview,shouldoffsetanycool-offingrowthrelatedtoaslowdownintheITsector.TheseclustersincludetheFabCity,whichhasbeensetupwiththe intention to attract companies involved with semiconductor design andmanufacturing. The second is the Genome Valley, a biotechnology sector

cluster, which provides infrastructure to over a 100 biotech companiescurrently.

Driversofroom

demand

SettingupGenome

Valley,adedicated

biotechcluster

Newairportat

Shamshabadsetto

boosttraffic

Hyderabadpoised

tobecomepreferred

MICEdestination

Notificationofclose

to30SEZsinand

aroundHyderabad

DevelopmentofFab

Cityforsemicon

designandmfg


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TheproximityofTajGVKspropertiestothe

emergingbusinessdistrictisakeypositive

Theresbeenanoversupplyofnewsflow

onfreshroomadditions,butwethinkconcernssurroundingthemare

overblown

Strategiclocationofpropertiesshouldaidtrafficgrowth

AllofTajGVKspropertiesarecurrentlylocatedinthebusinessdistrictofBanjaraHills,whichisstrategicallyplacedbetweenthenewairportatShamshabadandtheemergingbusinesshubin theMadhapur-Manikonda-Gachibowlibelt.Eventhoughroadtransportationinfrastructureisyettocatchupwiththerapidpaceoftheairportdevelopment,webelievewiththecompletionoftheOuterRingRoad(ORR),andthelackofvisibilityonthedevelopmentofotherpropertiesinthevicinityofthenewairport (barring Novotel, which is scheduled to commence operations later thiscalendar)TajGVKslocationalonecanattractcustomersandmayenableittotakeshare away from some its competitors (who may be disadvantaged by lack ofproximitytotheemergingbusinessdistrict).

Asmarketleader,TajGVKshouldbenefitfromdemandstrength

Considering that Taj GVK controls almost 40% of all the premium rooms inHyderabadcurrently,wethinktheywouldbetheprincipalbeneficiaryofstrengthindemand tailwinds. As a result, we expect all properties in Hyderabad to reportoccupancylevelsofbetween75-80%overourforecastperiod.

Supply-sideconcernsoverdone,inourview

We now focus on room supply, a subject that has consumed considerablenewsprint,ifrecentpressreportageisanyindication.Muchlikewhatisseeninthecommodity sector, wherestocks tend togo into a free fall asand when capacityadditionplansareannounced,hotelstocksandspecificallyTajGVKhavebeenno different. We think the reaction is typically a knee-jerk one, as a closerexamination reveals that most of the announcements are just that, with littleevidenceonthegroundtosuggestthataroll-outisimminent.

Even if one goes by historical trends, Hyderabad has had its share of roomadditions. Since April 2003, when supply of rooms in Hyderabad (three-starcategoryandabove)was1,000tillnow,afurther1,000roomsofsupplyhascomein. But that has not deterred Taj GVKs RevPar (Revenue per available room, ametricthatcapturesbothoccupancyrateandARRs)frommovingupsignificantlyinthesameperiod,aCAGRof26%.

TrendsinRevPar

1,8722,452

3,299

4,530

5,881 6,030

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY03 FY04 FY05 FY06 FY07 FY08

RevPar(Rs.)

Source:Company,SparkResearch,HVSInternational

Roomsupply

at1000/day

Roomsupply

at1900/day


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Highlandpricesandescalatingconstruction

costsmakeshoteleconomicschallenging

fornewdevelopers

WethinktheTajisasgoodasanyglobal

hospitalitybranditmaybepittedagainstinthe

future

CurrenteconomicsfordeveloperstobechallengingSeveralmarqueenameshaveannouncedtheirintenttosetuphoteloperationsinHyderabad.TheyincludeleadingglobalnamessuchasWestin,Hyatt,HotelLeela,LeMeridienandHilton,tonameafew.Webelievethesecapacitieswillmanifestcompletelyonlyoverathree-to-four-yearperiod.OurrecentroadtriptoHyderabadalsoconfirmedournotionontheback-endednatureofsupplyadds,asacoupleofplayershavedeferredtheirlaunchtimelines.

Our workings also suggest that new capacitiesarenotgoingto come inat roomrentsthatcouldbeclassifiedasteal.Giventhesharpriseinpricesofrealestateand the escalation being witnessed in construction costs, operators will have toperforceadoptextremelyaggressivepricingtacticstogeneratedecentRoEs.

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.16,000perroomnighttogenerateRoEsof17%.

Landforafive-starproject(acres) 5 Noofrooms 300

Costperacre(Rs.mn) 250 Noofdaysinayear 365

Totallandcost(Rs.mn) 1,250 Revenueperroom(Rs.) 16,000

Noofroomson5acres 300 Occupancyrate 70%

Costperroom(Rs.mn) 10 Roomrevs(Rs.mn) 1,226

Totalcostofconstruction(Rs.mn) 3,000 Roomrevs:totalrev 70%

Totalcostofproject(Rs.mn) 4,250 Totalrev(Rs.mn) 1,752

Assumeddebt:equity 2:1 EBIDTAmargin 45%

Equity(Rs.mn) 1,417 EBIDTA 788

Debt(Rs.mn) 2,833 Depreciation 150Interestcost 283

PBT 355

PAT 234

RoE 17%

Economicsofafive-starhotel Revenueworkings

Scanning through the names that have announced plans to have a Hyderabadfootprint,highARRsmaywellbetheorderoftheday.Developerswouldindeedbelooking at stretched out payback periods in the existing environment, andcompetingwithaplayersuchasTajGVK,whoseassetshavebeenacquiredwellinthepast,wouldposeasignificantchallenge,inourview.

Whileitmaybearguedthatthechoiceofhotelisnotdictatedpurelybytrendsseeninpricingbutalsobytheservicequalityandaspirationalvaluethatahotelbrandstands for, we believe that the Taj is as exceptional a hospitality brand bothdomesticallyaswellasabroad,assomeoftheothernamesare.Therefore,wedonot believe thatthe entry of global players will lead to an erosion ofTaj GVKsmarketshare,atleastonthebrandperceptionplatform.

Expansionplanspartlyreduceconcentrationrisk

SinceFY06,therehasnotbeenanyadditiontoTajGVKsrosterofproperties.Asaresult,withthecoolingoffinARRgrowthinHyderabad,thecompanyhasreportedrathertepidearningsgrowthinFY08.WethinkthatthepropertiesatChandigarh(cameonstreaminFY06)andChennai(scheduledtoopensitsdoorsbytheendoftheensuingquarter)willpartlyreducetheriskofrevenuesoriginatingfromonlyonecity. We think the almost complete exposure to Hyderabad is also one of thereasonswhythestocktradesatalowvaluationinspiteofsolidreturnmetrics.


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ScalingupofChandigarhoperations

andnewChennaipropertypartlyaddress

concentrationrisk

ARRsandORsforpremiumhotelshave

improvedsharplyoverthepastfouryearsin

Chennai

From a complete dependence on Hyderabad till FY05, we expect properties inChennaiandChandigarhtoeachaccountfor17%ofrevenuesinFY10E.

TajGVKsrevenuemixissettochangeforthebetter

Source:Company,SparkResearchChennaitoaddanotherstringtotherevenuebow

TajGVKissettounveilitspropertyinChennaiinthecurrentquarter.Chennaihasbeenanattractivedestinationforhoteliersoverthepastfewyears,withasharprisein both occupancy levels and ARRs. With the IT and ITeS sectors being well-entrenched in the city, other industries such as automobile original equipmentmanufacturers,autocomponentplayersandconsumerelectronicscompanieshaveset up base in the city, providing a further leg-up to demand for premium hotel

rooms.

Source:CRISIL,SparkResearch;abovetrendsareforpremiumhotelsonly(5-starcategory)

ThestrengthinARRsandoccupancylevelscouldbeexplainedbynoadditionstothe premiumroomsegmentover the past threeyears (CRISIL states that supplyhas remained constant at1,541).That looks set tochange with players such as

MarriottandHotelLeelainthemidstofconstruction.Inourview,roomaddsinthecitywillbelumpyandweexpectasupplytoagainbebackended,withpropertieslikely to be operational only towards the end of FY10. We believe Taj GVKspropertylocatedintheheartofChennaisbusinessdistrictwillgarnerARRsofRs.7,000withanoccupancylevelof65%initsinitialyearofoperation.

FY10E

Hyd'bad,

66%

Chennai,

17%

Chandigarh,

17%

FY05

Hyderabad,

100%

ARRandORtrendsinChennai

53%

62%

72%78% 77%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY03 FY04 FY05 FY06 FY07

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ARR(Rs.) OR


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TajGVKsdealwiththeIPLandICLguarantees

highoccupancylevelsinanotherwiselean

seasonforbusiness

traffic

NewpropertyatHyderabadpositionsTaj

GVKacrossthe

businesshotelvaluechain

Chandigarh,anattractiveopportunityWe are positive about Taj GVKs prospects in Chandigarh, considering that itcurrentlyistheonlyestablishedhotelbrandinthecity.ThecitycontinuestoattractafairshareofbusinesstrafficgivenitsproximitytoBaddi,LudhianaandMohali.Asthe graphic below demonstrates, the Chandigarh property has made sharpimprovementsinbothARRsandORs.Giventhelackofalternativesandthefactthatadditionalsupplyisstillsometimeaway,weexpectTajGVKtodominatetheChandigarhmarketoverourforecastperiod.

We note that Taj GVK has also entered into deals with both the Indian PremierLeague and the Indian Cricket League for providing block accommodations toteamswhenmatchesareinprogress.Thearrangementwillprovideasharpfilliptooccupancy levels, which acquire significance, giventhat the firstquarter typicallytendstobealeanoneforbusinesshotels.

Source:SparkResearch,Company

FourthpropertyatHyderabadwillpositionTajGVKacrossthebusinesshotelvaluechain

Taj GVK is in the process of setting upits fourth hotelin Hyderabad(on leasedproperty), which we assume will be operational in the latter half of FY10. To be

positionedasabusinesshotelwithARRsexpectedtobeintheRs.5,000Rs.5,500band.Webelievethatwiththisproperty,TajGVKwillcontrolclosetohalfthemarketforpremiumrooms;further,thiswillcompleteTajGVKsportfolio,offeringcustomers rooms across luxury, premium and business properties. Shouldexternalitiesatalaterdateforcecustomerstodowntrade,wethinkTajGVK,withitsrangeofproperties,willstillbeabletocapturetrafficinsuchaneventuality.

Futureexpansionscaptivelandbankahugepositive

GiventhevastexpanseoverwhichtwoofTajGVKsflagshippropertiesarespreadovertheTajKrishnaisspreadover11acresandtheTajDeccanoversixacresTJP hasaccesstoa pricelessresource inanupmarketarea ofHyderabadcityspareland.Wenotethatanewdeveloperlookingtosetupapropertyinalocalityofsimilarnature will need toforkabout Rs. 1,000mn per acre.In our view,such

steeplandcostsitselfwouldactasadeterrenttoprospectivedevelopersandactasasourceofcompetitiveadvantageforTajGVK.

ARRandORtrendsatChandigarhoverthepasteightquarters

56 %62 %

72 % 71%68%

74 % 77 %82 %

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY07 FY08

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

ARR(Rs .) OR


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Atexistingproperties,TajGVKhasaccesstospareland,apricelessresourceinanupscale

area

AmritsarandBangalorearenextontheradar

ExpansionatTajDeccanandshoppingmallatTajKrishna

TajGVKisintheprocessofaddingawingtoitsexistingpropertyatTajDeccan(23rooms), which we expect will come on stream in the second half of this fiscal.Further,TajGVKisalsointheprocessofsettingupshoppingmallatitsTajKrishnaproperty, spread over an area of 15,000 square feet. The mall, expected to beoccupied by shops selling upscale brands, is assumed to be operational by thebeginningofFY10.Whileweestimatetherevenueopportunityfromthisspacetobebetween Rs. 60mn Rs. 70mn, we expect most of it to flow through to thebottomline,astherearenoassociatedcosts.

NewblockatTajDeccanandserviceapartmentsatTajKrishna

Capitalisingonthespaceavailablewithinitsexistingproperties,TajGVKwillsetupanadditionalblockwith180roomsattheTajDeccanandablockwithabout50

servicedapartmentsatTajKrishna.WeexpectthelattertocomeonstreaminthesecondhalfofFY11andtheformertobeoperationaltowardsendFY11.Giventhattheseexpansionswillrequire zeroexpenditure towards landacquisition,they willsignificantlyboostreturnratios.

ExpectnewpropertiesinAmritsarandBangalore

Evenasthecurrentexpansionplansarebeingexecuted,TajGVKhasarticulatedanintentiontoroll-outpropertiesinAmritsarandBangalore,tonameacoupleoflocations.WhileAmritsarmightbefirstofftheblock,webelieveBangaloremightbea fair time away from materialising. Expenditure likely to be incurred on thesepropertiesiscurrentlynotinourestimates.

Giventhestaggeredmannerinwhichnewpropertyroll-outshavebeenplanned,weseevisibilityonearningsgrowthbeyondourforecastperiodaswell.


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WeuseaP/E-basedmethodologytoarriveat

ourtargetpriceofRs.225andcorroborate

itwithaDCF-derivedtarget

Withindustry-leadingreturnmetrics,we

believeTajGVKshouldnottradeatadiscountgreaterthan10-15%to

large-cappeers

VALUATIONDISCUSSION

WhileaP/E-basedtargetisourpreferredmethodology,giventhesteadynatureofthehotelsbusiness,wealsousetheDCFmethodologytovalidateourP/E-basedtargetprice.

Aspeercomparison,weuseIndianHotels,EIHandHotelLeelaasbenchmarksforthepurposeofrelativevaluation.WhileitmaybearguedthatTajGVKneedstobecomparedwiththelikesofViceroyHotels,RoyalOrchidHotelsorKamatHotels,giventhesimilarityinmarketcapitalisation,werefrainfromdoingsoasconsensusestimatesforthesestocksisdifficulttocomeby.

We forecast Taj GVKs sales and EPS to log a CAGR of25% and 24%for theperiodbetweenFY08-FY10E.Onourestimates,thestocktradesat10.5xFY09E

EPSand8.4xFY10EEPS,whichwethinkiscompellinginthecontextofthegrowthweforecastinearnings.EvenasTajGVKadmittedlylacksthescaleandscopeofan Indian Hotels or an EIH, we believe that from the context of stock priceperformance, the critical drivers would be valuation and earnings growth,parametersonwhichwebelieveTajGVKscoresoveritspeers.

TajGVKslarge-cappeerstradeina bandof14-16xFY10Econsensusestimates,with RoEs in the case of all three peers under the 20% mark. As contrast, weexpectTajGVKtomaintainRoEsinexcessof30%overourforecastperiod,reportEBIDTAmarginsatcloseto50%andoperatewithadebt:equityof0.4x,which,inourview,providesitadequateheadroomtofundsubsequentgrowthopportunitiesthroughleveragingatalaterdate.

Scalemayormaynotmatter,butvaluationcertainlydoes

With solid return metrics and a dividend yield of 2% to boot, we argue that adiscountofhigherthan10-15%onthevaluationmultiplevis--vislarge-cappeerswouldbeoverdone.Consequently,weascribeatargetmultipleof13xtoourFY10EEPS estimateofRs.17.3toarriveatourprice objective ofRs.225, anupsideof55%fromcurrentlevels.InitiatecoveragewithanOutperformrating.

The table captures the relative standing of Taj GVK compared to its peers onvariousmetrics:

Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

IndianHotels 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%

TajGVK 3,309 4,025 47.2% 48.0% 23.3% 24.5% 32.2% 32.4%HotelLeela 6,116 6,662 44.0% 41.0% 23.0% 19.0% 10.0% 9.0%

Company FY09E FY10E FY09E FY10E FY09E FY10E FY09E FY10E

IndianHotels 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

TajGVK 2.7 2.3 2.9 2.4 6.1 5.0 10.5 8.4

HotelLeela 2.9 2.6 4.9 4.1 10.2 10.0 12.3 14.0

Price/sales EV/Sales EV/EBIDTA P/E

Valuationmatrix

Metricsnapshotofkeyplayers

Sales EBIDTAmargin PATmargin RoE

Source:Sparkestimates,Bloomberg,Firstcall


11/16

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OurDCFmethodologyyieldsatargetofRs.236,validatingourP/E-based

priceobjective

DCF-based valuation methodology yields a target of Rs. 236,validatingourP/E-basedtargetprice

TocorroborateourpriceobjectivearrivedthroughtheP/E-multiplemethodology,wealsovalueTajGVKonDCFbasis.ThisleadsustotargetpriceofRs.236,whichvalidatesourP/E-basedtargetprice.

Debttocapital 28% PVofcashflows(Rs.mn) 5,860

Equitytocapital 72% Cashflowinterminalyear(Rs.mn) 2,745

Exitmultiple(x) 11.6

Risk-freerate 8% Terminalvalue(Rs.mn) 31,861

Riskpremium 6% PVofterminalvalue(Rs.mn) 9,420

Beta 1.2Costofequity 15.2% Enterprisevalue(Rs.mn) 15,280

Costofdebt 11% Netdebt(asofMar09;inRs.mn) 501

Taxrate 34%

Tax-adjusteddebtcost 7.3% Equityvalue(Rs.mn) 14,779

Shareso/s(mn.) 62.7

WACC 13.0%

Terminalgrowth 4% Targetprice(Rs.) 236

DCFvaluationforTajGVK(March-09yearend)

We also outline below our key assumptions for the different properties over ourforecastperiod.

FY09E FY10E

TajKrishnaRoomsatyearend 261 261

ARR(Rs.) 9,775 10,500

OR 78% 79%

TajDeccan

Roomsatyearend 174 174

ARR(Rs.) 7,675 8,200

OR 77% 78%

TajBanjara


ARR(Rs.) 7,700 8,200

OR 78% 78%

TajChandigarh


ARR(Rs.) 7,250 7,830

OR 74% 76%

TajMountRoad


ARR(Rs.) 7,000 7,300

OR 65% 72%

NewpropertyatHyd'bad

Roomsatyearend 190

ARR(Rs.) 5,000

OR 53%

Notes:

TajMountRoadassumedtooperateonlyforninemonths

inFY09

NewHyd'badpropertyassumedtooperateonlyinsecond

halfofFY10

Keyassumptionsforvariousproperties


12/16

May08 Page12of16


NegativedevelopmentsinHyderabadcouldbe

detrimentaltoTajGVKsearnings

ShouldTajGVKemergeasafrontrunnertobuild

ahotelatMumbaiairport,itwouldpose

upsiderisk

KEYRISKSDependenceonHyderabad

ThoughTajGVKismakingeffortstoreduceitsdependenceonHyderabad,wenotethanevenpostitsexpansionplansinFY09andFY10,closeto70%ofitsentireroominventorywouldstillbelocatedinthecity.WhileTajGVKhasbenefitedfromasharpspikeinARRsoverthepastfewyears,potentiallynegativedevelopmentsinthecitythatdetertravelwouldbedetrimentaltoTajGVKsearnings.

Cool-offineconomicactivityleadingtosofteningdemandtrends

GiventhatallpropertiesofTajGVKcaterpredominantlytothebusinesstraveller,the companys prospects are largely a derivative of economic activity.While TajGVKhasbenefitedbythestrengthinIndiasbriskeconomicgrowth(ascapturedin

ourGDPnumbers),aslowdowningrowthcouldhavetheoppositeeffectandleadtoacontractionindemandforroomsatitsproperties.

Slower-than-anticipatedpaceofTajGVKsnewpropertyroll-outs

OurearningsmodelassumesthatTajGVKsstatedexpansionplanswouldcomeon stream at specified timelines. Any slippage in execution would result in ourforecastsnotbeingmetandposeadownsiderisktothestock

Proposed new capacities announced by other players come onstreamearlierthanexpected

A slew of players have announced their intent to set up hotels in Hyderabad,ostensiblywiththeideatocapitaliseonthegrowththenewairportisexpectedtobringinitswake.Whileplansonthegroundareyettotakeconcreteshapeandmostcapacityadditionsremainonlyonpaper,aneventsuchasasharpfallinrealestatepricesmayhastenplayerstoexpeditetheirlaunchplans.Asaconsequence,this could lead to a sharp spike in room availability with a potentially negativeimpactonoccupancyrates.

Unforeseeneventscouldleadtoafallintrafficandhurtoccupancy

Events such as the outbreak of the SARS epidemic or geo-political tensionsbetweenIndiaanditsneighborshasledtocountriesintheWestissuingadvisoriesthat restrain travel into the country. Though infrequent, such one-off events cancauseadislocationinearningsalbeittemporarily-andposedownsiderisktothestock.

Upsiderisks

Ahigher-than-expectedincreaseinARRsattheexistingproperties,whichwillleadtoahigherearningstrajectory

ShouldtheGVKGroup,whichishandlingthemodernizationoftheMumbaiairport,decidetodevelopahotelinthevicinityandTajGVKemergesasafrontrunner to set it up, it could be a significant sentiment positive andprovideafilliptothestock


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HyderabadhasseenasharpriseinARRsover

afive-yearperiod,whichispromptingaclutchof

newentrants

Whilestatedroomadditionplansare

aggressive,lessthanhalfthecapacity

announcedwilllikelytranslateintoroomson

thegroundoverthenextfiveyears

INDUSTRYANALYSISIn this section, we confine the analysis only to the key markets that Taj GVKoperatesinHyderabad,Chennai(whereitspropertyshouldbeoperationalbytheendofthecurrentquarter)andChandigarh.

Hyderabad

Hotels in Hyderabad have witnessed boom times over the past few years, asimbalances in supply-demand led toa ratcheting up of ARRs.Though therehasbeena dropin occupancylevelson account oftheaddition ofa couple ofhotelsthatcameonstreaminFY07,ARRscontinuetobeonanupwardtrend.ThetablebelowillustrateshowoccupancyratesandARRshavemovedinthecitybetweenFY02andFY07.

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:HVSInternational;datapertainstohotelsratedthree-starandabove

TrendsinARRsandoccupancylevelsatHyderabad

On the back of this sharp improvement in ARRs, coupled with infrastructuraldevelopments on the ground in the form of the new airport at Shamshabad, theopeningoftheHyderabadInternationalConventionCentreandtheemergenceofindustriessuchaspharmaceuticalsandbiotechinthecity,severalhoteldevelopershaveannouncedplanstosetupshopinHyderabad.

SeveralnamessuchasLeMeridien,HotelLeela,Westin,RoyalOrchidHotelsandLemonTree, toname afew,areinthe process ofestablishinga presencein the

city. However, capacity addition plans have not exactly panned according totimelines originally planned. Issues surrounding acquiring land with clear titles,obtaining requisite permissions from regulatory authorities and having to skirtaround issues pertaining to building height have been highlighted as a few keyfactorsthathaveimpededtheroll-outofroomsinthecity.

Existingplayers

TajGVK Westin

Novotel Hilton

Viceroy Hyatt

ITC HotelLeela

Manohar LeMeridien

LemonTree

Hyderabad-everythingtoplayfor

Newentrants

Source:Newsreports,SparkResearch

HVSInternational,initsstudyontheTrendsandOpportunitiesforHotelsinIndia,statesthatplannedroomcapacityadditionsatHyderabadoverthenextfiveyears(ranging from budget to luxury hotels) could well be in excess of 10,000 rooms.While the number does indeed sound staggering, HVS also adds that it expectsonly abouthalf of theseannouncedplans totranslate into rooms onthe ground.Importantly, this will likely lead to the addition of limited rooms in the luxurycategory,which,inourview,isapositivefromaTajGVKstandpoint.

Wealsobelievethatinthecaseofnewentrants,enteringastheyareatatimewhenrealestatepriceshaverisenrelentlesslyoverthepastfewyearsandwhenconstruction costs have escalated sharply, the duration over which they would

recoup their investments would only get stretched out more. We also add that itdoesindeedbecomeimperativetofocusontheshort-tomediumtermtodeterminewhich hoteliers provide visibility in terms of build-outs and commencement ofoperations,ratherthanjustbeingdrivenbynewsflow.


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WithARRsnotwitnessingthekindof

spikesseeninHydbad,occupancylevelsat

Chennaihavebeenhigh

Chennai

Unlikein Hyderabad, where ARRs grew at a compounded rate of 20% betweenFY02 and FY07, the growth of the same metric has been more sedate at 10%(however,ARRgrowthandoccupancytrendsinonlythepremiumroomsegmenthave been better, with ARRs registering a five-year CAGR of 15%) ThoughoccupancylevelshavecomeoffmarginallyinFY07asthefollowingtableshows,we believe that the rationality in pricing has ensured that hoteliers do not cedemarketsharetostandaloneservice-apartmentproviders,ashasbeenthecasewithcitieswhereroomrentssawasharpescalation.

Chennai,too,hasitsfairshareofoperatorseyeingashareofthemarket.LeadingnamesincludeHotelLeela,Marriott,ITCandLemonTree,tonamejustafew.Overthenextfiveyears,HVSforecaststhatproposedroomsaddscouldbeabout6,000outofwhichtheyexpectabout70%tomaterialise.Inourview,mostoftheseroomaddscouldbeback-ended,ascurrentlytherearejustahandfulofhotels(atleastinthe premium category) that have visibility tocommenceoperationsover thenextcoupleofyears.ChennaisattractivenessliesinfairlystabledemandgeneratedbytheITsector,withautomobilesandancillariesplayingasupportcast.

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:HVSInternational;datapertainstohotelsratedthree-starandabove

TrendsinARRsandoccupancylevelsatChennai

Chandigarh

GiventhecitysproximitytotheNCR,ithasmanagedtosnagafairshareoftrafficaway from Delhi, as mounting costs force event organizers to look at alternatevenues.Further,eventssuchas theIndianPremierLeagueandtheIndianCricketLeague have served up opportunities for hotel operators to stitch up blockaccommodationdeals.Further,withTajGVKbeingjustoneoftwopremiumhotelsinthe city, therehavealsobeenopportunities toput through aggressive hikesinroomrents.InQ4FY08,thecompanyrecordedalmosta20%jumpinARRswitha11-percentage-point improvement in occupancy levels, indicative of underlyingdemand. While players such as Radisson, JW Marriott and Sarovar Hotelshaveannouncedanintentof establishingpropertiesatChandigarh,supplycouldstillbesometimeaway.


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FINANCIALSUMMARYProfit&Loss(Rs.mn)

YearEnded31stMarch 2007 2008 2009E 2010E

NetSales 2,429 2,575 3,309 4,025

OperatingCosts 1,290 1,354 1,748 2,094

OperatingProfit/EBIDTA 1,139 1,221 1,561 1,931

OtherIncome 13 16 13 16

Depreciation/Amortization 112 124 191 221

Interest 31 29 62 81

PBT 1,009 1,084 1,321 1,644

PAT-asreported 644 705 869 1,083

PAT-afteradjustments 651 705 869 1,083

BalanceSheet(Rs.mn)


Equitycapital 125 125 125 125

Reserves&Surplus 1,734 2,199 2,771 3,484

Totaldebt 734 800 1,050 1,300

DeferredTax 81 89 89 89

TotalLiabilities 2,674 3,213 4,036 4,999

GrossFixedassets 2,581 2,751 4,252 4,952

Accl.Depreciation 644 768 959 1,180

Netfixedassets 1,937 1,983 3,293 3,772

CapitalWIP 760 1,021 500 1,000Investments 0 0 0 0

Totallong-termassets 2,697 3,004 3,793 4,772

Currentassets,loans&adv.

Inventory 31 36 46 56

Sundrydebtors 60 72 92 112

Cash 253 508 549 643

Loans&Advances 276 276 276 276

Currentliabilities&provisions 669 709 747 886

Netcurrentassets -50 182 216 200

Miscexpensesnotwrittenoff 27 27 27 27

TotalAssets 2,674 3,214 4,036 4,999

CashFlows(Rs.mn)


Cashflowsfromoperations 717 854 1061 1406

Cashflowsfrominvestments -349 -415 -967 -1184

Cashflowsfromfinancing -258 -183 -53 -128

Cashgeneratedduringtheyear 110 256 41 93

Openingcashandcashequivalents 142 253 508 549

Closingcashandcashequivalents 253 508 549 643

Ratios

Yearended31March 2007 2008 2009E 2010E

Growthratios

Sales 29% 6% 28% 22%

EBIDTA 35% 7% 28% 24%

PAT 41% 8% 23% 25%

EPS 41% 8% 23% 25%

Marginratios

EBIDTA 46.9% 47.4% 47.2% 48.0%

EBIT 42.3% 42.6% 41.4% 42.5%

PAT 26.8% 27.4% 26.3% 26.9%

Leverage&WCratios

Debttoequity 0.4 0.4 0.4 0.4

Currentratio 1.5 2.1 2.4 2.3

Inventorydays 5 5 5 5

Debtordays 9 10 10 10

Creditordays 100 105 105 105

Performance&turnoverratios

RoAA 21% 19% 20% 20%

RoACE 26% 24% 25% 25%

RoAE 37% 32% 32% 32%

Totalassetturnover 0.8 0.7 0.8 0.8

Fixedassetturnover 0.9 1.0 0.9 0.9

Valuationmetrics


Currentprice(Rs.) 145 145 145 145

Sharesoutstanding(mn) 63 63 63 63

Marketcapitalisation(Rs.mn) 9,092 9,092 9,092 9,092

Marketcap/Sales(x) 3.7 3.5 2.7 2.3

Totaldebt(Rs.mn) 734 800 1,050 1,300

Cashandcashequivalents(Rs.mn) 253 508 549 643

Enterprisevalue(Rs.mn) 9,573 9,383 9,592 9,749

EBIDTA(Rs.mn) 1,139 1,221 1,561 1,931

EV/EBIDTA(x) 8.4 7.7 6.1 5.0

EV/Sales(x) 3.9 3.6 2.9 2.4EV/room(Rs.mn) 14.0 13.7 10.4 8.8

Per-shareearnings(Rs.) 10.4 11.3 13.9 17.3

Price-earningsmultiple(x) 14.0 12.9 10.5 8.4

Dividendpershare(Rs.) 3 3 4 5

Dividendyield(%) 2.1% 2.2% 2.8% 3.5%

Roominventoryatyear-end

YearEnded31stMarch 2007 2008E 2009E 2010E

TajKrishna-Hyd'bad 261 261 261 261

TajDeccan-Hyd'bad 151 151 174 174

TajBanjara-Hyd'bad 122 122 122 122

Taj-Chandigarh 150 150 150 150

TajMountRoad-Chennai 215 215

NewpropertyatHyd'bad 190Totalrooms 684 684 922 1,112


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RatinginterpretationOUTPERFORM Greaterthan15%upsidefromcurrentpriceNEUTRAL Upsideordownsidefromt hecurrent priceiswit hin15%UNDERPERFORM Greaterthan15%downsidefromthecurrentprice

AnalystCertificationTheResearchAnalyst(s)whopreparedtheresearchreportherebycertifythattheviewsexpressedinthisresearchreportaccuratelyreflecttheanalyst(s)personalviewsabout thesubjectcompaniesand theirsecurities.TheResearch Analyst(s) alsocertifythatthe Analyst(s)havenotbeen,arenot,andwillnotbereceivingdirectorindirectcompensationforexpressingthespecificrecommendation(s)orview(s)inthisreport.

SparkDisclaimerThisdocument isprovided forassistanceonly andis notintended to be andmust notalone betaken asthe basis foran investmentdecision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should beconstruedasanadvicetobuyorsellorsolicitationtobuyorsellthesecuritiesofcompaniesreferredtointhisdocument.Eachrecipientofthisdocument should makesuchinvestigations asit deems necessary to arrive at anindependentevaluationof aninvestment inthesecurities of companies referred to in thisdocument (including themerits and risks involved), andshould consult itsown advisorstodeterminethemeritsandrisksofsuchaninvestment.Thisdocumentisbeingsuppliedtoyousolelyforyourinformationandmaynotbereproduced,redistributedorpassedon,directlyorindirectly,toanyotherpersonorpublished,copied,inwholeorinpart,foranypurpose.Thisdocumentdoesnotconstituteorformpartofanyofferforsaleorsubscriptionorincitationofanyoffertobuyorsubscribetoanysecurities.Spark CapitalAdvisors(India)PrivateLimited makes norepresentation orwarranty, expressor implied,as to theaccuracy,completenessor fairnessof theinformationandopinionscontainedin thisdocument.SparkCapitalAdvisors(India)PrivateLimited,itsaffiliates, andthe employees of Spark CapitalAdvisors (India) Private Limited andits affiliates may,from time to time, effect or haveeffectedanownaccounttransactionin,ordealasprincipaloragentinorforthesecuritiesmentionedinthisdocument.Theymayperformorseektoperforminvestmentbankingorotherservicesfor,orsolicitinvestmentbankingorotherbusinessfrom,anycompanyreferredtoin this report. This report has been prepared on the basis of information, which is already available in publicly accessible mediaordevelopedthroughtheindependentanalysisofSparkCapitalAdvisors(India)PrivateLimited.

CopyrightinthisdocumentvestsexclusivelywithSparkCapitalAdvisors(India)PrivateLimited.

taj gvk - initiating coverage

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