TAJ GVK HOTELS & RESORTS LTD.

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2 Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon Hotels Rs 212 Buy at CMP and add on declines Rs Rs 245 & Rs Quarters HDFC Scrip Code TAJGVKEQNR BSE Code NSE Code TAJGVK Bloomberg TAJG IN CMP (4-May-18) Equity Capital (Rs Cr) Face Value (Rs) 2 Eq. Shares O/S (Cr) 6.27 Market Cap (Rs Cr) 1332 Book Val (Rs) Avg.52 Wk Volume Week High Week Low Shareholding Pattern % (Mar-2018) Promoters Institutions Non Institutions Total FUNDAMENTAL ANALYST Atul Karwa atul.karwa@hdfcsec.com Taj GVK Hotels & Resorts Ltd. (TAJGVK) is a joint venture (JV) formed via a strategic alliance between the Indian Hotels Company Limited (IHCL) and the Hyderabad-based GVK Group in the year Starting out with merely a single property, TAJGVK has established its presence as an industry stalwart in less than 20 years, with six world-class properties - four 5-Star hotels in Hyderabad and one each in the cities of Chennai and Chandigarh, and another luxury hotel, namely the Taj Santacruz, under the JV (48.99%) with Green Woods Palaces & Resorts. TAJGVK has a total room base of 1,083 rooms, which it both owns and manages, and another 279 rooms under the JV which it only manages. Investment rationale: Reducing geographic concentration risk. Telangana region on its way to recovery. Turnaround in Taj Santacruz key driver for re-rating. Debt repayment to reduce financial expenses and leverage ratios. Concerns: High geographic concentration in Hyderabad. Slowdown in economic growth. Intense competition. Regulatory issues. View and valuation: TAJGVK is one of the well-known and premium hotel brands in India, backed by a strong group of promoters. The company has four properties in Hyderabad which are witnessing good growth. Additionally, it has a hotel in Chennai, which is also an attractive market with a substantial number of tourists. The company has further diversified and opened a premium hotel in Mumbai. This is likely to reduce dependence on the Hyderabad market and improve average room rates (ARR) and revenues per available room (RevPAR). It is also preparing to start work on a 5-Star hotel in Bengaluru. Further, the company is utilising its cash flows to reduce leverage. We have valued TAJGVK at an EV of Rs 1.25cr on a per room basis for the company-owned and JV rooms (Mumbai). We have arrived at a target of Rs 245, which implies a FY20 EV/EBITDA multiple of 18.0x and FY20 P/E of 38.5x. Alternatively, we have valued the company-owned rooms at an EV of Rs 1.05cr per room and JV rooms (Mumbai) at an EV of Rs 2.5cr per room (due to its premium location and pricing), and arrived at a target of Rs 266 cr, which implies an FY20 EV/EBITDA multiple of 19.4x and FY20 P/E of ~42x. Investors can BUY the stock at the CMP, and add on declines to Rs levels for sequential targets of Rs 245 and Rs 266 over three to four quarters. 1 P a g e

3 KEY HIGHLIGHTS TAJGVK has established one property in Mumbai in January 2016 and plans to open one 5-Star hotel in Bengaluru, thereby reducing concentration risk Resolution of the Telangana issue and investments flowing into Telangana are expected to boost Hyderabad s business and tourist prospects JV hotel Taj Santacruz has reported a profit of Rs 39lakh in Q3FY18 and will be a key contributor to profitability, going forward Debt repayment to reduce its finance costs and improve profitability Muscular parentage, operational support from IHCL and strong balance sheet remain key positives Financial Summary Particulars (Rs Cr) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) FY17 FY18E FY19E FY20E Operating Income EBITDA Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoCE (%) RoNW (%) Source: (Company, HDFC sec) Company overview TAJGVK is a joint venture, formed via a strategic alliance between the Indian Hotels Company Limited (IHCL) and the Hyderabad-based GVK Group in the year Both the promoters hold a 25.52% stake in the company, with some individuals from the GVK Group owning an additional 23.9%. The GVK Group is a multi-product and multi-location business conglomerate, with several integrated companies in India and abroad. IHCL is a TATA enterprise that owns the Taj Group of Hotels, and manages and operates chains of hotels across the country and overseas. Starting out with merely a single property, TAJGVK has established its presence as an industry stalwart in less than 20 years, with six world-class properties - four 5-Star hotels in Hyderabad and one each in the cities of Chennai and Chandigarh, and another luxury hotel, namely the Taj Santacruz under the JV (48.99%) with Green Woods Palaces & Resorts. TAJGVK has a total room base of 1,083 rooms which it both owns and manages, and another 279 rooms under the JV which it just manages. About 66% of the total inventory of rooms owned by the company is in Hyderabad. Taj Krishna Taj Krishna, the flagship 5-Star deluxe property of TAJGVK, with a 260 room inventory, is a magnificent structure in Banjara Hills. It reflects the E-culture of Hyderabad, a testimonial to the city s illustrious and aristocratic past. A distinguished mark of the finest quality standards, it comes as no surprise that Taj Krishna is a member of The Leading Hotels of the World'. An architectural masterpiece, this luxurious hotel boasts of a grand staircase, marble pillars, and an ornately-carved decor that reflects opulent luxury. Taj Banjara Nestled away from the busy traffic of Banjara Hills with its own private approach and overlooking the lake is Taj Banjara, unique in every respect and equally popular with Tollywood and Bollywood. Taj Banjara has 122 rooms, and offers the best of kebabs and biryani at the popular Kebab - e - bahar outdoor dining by the lake. 2 P a g e

4 Taj Deccan Taj Deccan, with 151 rooms set in six acres of lush green landscaping, offers a variety of options for every business requirement. This can range from rooms spread across various categories, to numerous banqueting facilities for 20 to 2,000 guests. Vivanta by Taj Begumpet, Hyderabad A 5-Star hotel, it commenced operations in with 181 rooms, catering to the discerning business traveller. It was well received by the city and also business travellers. Taj Chandigarh TAJGVK's growing national presence is yet another indicator of its steadfast position in the industry. Chandigarh's first-ever branded property, the Taj Chandigarh, was successfully launched in 2005, with a room inventory of 149 rooms. Taj Chandigarh celebrates the dynamic spirit of the city in its sophisticated architecture and interiors. The hotel, located in Sector 17, the city's prime business and shopping area, is a comfortable drive from both the airport and the railway station. Taj Chandigarh is the city's finest hotel, and is well suited to both business and leisure travellers. Taj Club House, Chennai In Chennai too, the Taj Club House with 220 rooms is one more proof of TAJGVK's determination to be recognised as a global synonym in the hospitality industry. The Taj Club House has all it takes to make it the ideal venue for the discerning business traveller. It has a grand 45,000 sq. ft. blue glass facade, which acts as a preview to all the hotel has to offer. Taj Santacruz, Mumbai Close to the city s domestic and international airports and just minutes from the city s new and vibrant shopping, business and dining destinations, Taj Santacruz is the perfect setting for the high-flying business traveller, whose world comprises multiple conferences, events and meetings. With décor that complements the space, the architecture reflects old Mumbai, and displays sober shares of the rich Taj heritage. Across the 279 rooms and suites, you will see the hallmark of every TAJGVK property-sophistication and worldclass luxury. Form the modular designed rooms to the ultra-modern facilities, no effort has been spared to offer the best. Thoughtful additions, such as the cushioned window seats in the rooms, give guests the option to conduct meetings or simply unwind with friends. Investment rationale Reducing geographic concentration risk TAJGVK owns six hotels, of which four are located in Hyderabad, i.e. 67% share in the room portfolio. The remaining two hotels are in Chandigarh and Chennai. Due to the Telangana issue and high concentration of properties in Hyderabad, the revenue of the company remained flattish over FY08-FY15. An increase in fixed overheads led to a sharp contraction in 3 P a g e

5 margins (i.e. down from 47% in FY08 to 20.3% in FY15). Hence, the company started expanding into other geographies to reduce its dependence on one location. It has established one property in Mumbai in Jan-16. Going by higher ARR and occupancy in Mumbai, this property could help reduce concentration risks. It also plans to establish one 5-Star hotel in Bengaluru. TAJGVK has already been allotted 7.5 acres of land in Yellahanka, Bengaluru for the hotel project. This also means that in case the economy in Hyderabad does well, it could be one of the prime beneficiaries till the time the diversification reaches a certain stage. Any favourable industry developments that arise in the IT, Biotech, and Pharma industries could boost the demand for properties in Hyderabad, Chennai and Chandigarh. Telangana region on the verge of recovery Following a slowdown in economic activity and political uncertainty in Andhra Pradesh and Telangana, the occupancy levels in the Telangana region declined from 59% in 2011 to 51% in A sharp rise in room inventory further compounded the situation. However, with the resolution of the Telangana issue, occupancy has improved from 51% in 2015 to 58% in Investments flowing into Telangana, and the development of industries and commercial places would drive the demand for hotels. This could improve the occupancy and ARR (Average Room Rent). Hyderabad is not only the administrative, financial and economic capital of the state of Telangana and Andhra Pradesh, but also the largest contributor to the state's GDP. A number of proposed infrastructure initiatives are expected to increase Hyderabad s business and tourist prospects. The Outer Ring Road, eight lane expressway, Hyderabad Metro, and the proposed Hyderabad Metro Rail Information Technology Investment Region are some initiatives that will boost the prospects of the city over the next few years. Turnaround in Taj Santacruz key driver for re-rating TAJGVK has invested Rs 110cr for a 49% stake in the JV with M/s Greenridge Hotels and Resorts LLP (Greenridge - a GVK company) - to set up a luxury hotel comprising 280 rooms near Mumbai s domestic airport under the Taj brand. The hotel commenced operation in Jan-16. The JV reported a loss of Rs 6.2cr for FY17. However, in Q3FY18, the company reported a profit of Rs 39lakh. Hence, we believe a turnaround has begun. The JV will be a key contributor to profitability, going forward. Revenue growth could be in high single-digits over FY17-FY20, while margins could improve sharply. Revenue could rise through a combination of higher occupancy and ARR. Taj Santacruz, which is a relatively new property, could gain higher occupancy (in line with other hotels in the vicinity) over the next two years. Favourable economic prospects over the next few years in the cities where TAJGVK is present could help in this. All this could lead to repayment of debt, bringing down of the debt-equity ratio and improvement in return ratios. Debt repayment to reduce financial expenses and leverage ratios The company is looking to reduce its leverage, and could repay ~Rs 30cr of debt every year over the next three years. This would reduce its finance costs and improve profitability. The debt-equity ratio stood at 0.6x at the end of H1FY18, as 4 P a g e

6 compared to 0.7x at the end of H1FY17. Return ratios that were depressed in the recent past due to the Telangana agitation, and the Taj Santacruz investment could bounce back soon. The company s muscular parentage - GVK and Indian Hotels Company (IHCL) - operational support from IHCL and a strong balance sheet remain key positives for a long-term growth opportunity. Q3FY18 results review TAJGVK reported a strong quarter, with revenues increasing by 15% YoY to Rs 82.7cr, driven by higher occupancy rates and better revenues per available room. Operating expenses were up 8.6% YoY, leading to a 413bps expansion in EBITDA margins to 30.1%. Finance costs declined by 17.2% YoY to Rs 6.1cr, as leverage has reduced. PAT increased by 152.5% YoY to Rs 9.5cr, while PAT margin expanded 624bps to 11.5% on the back of lower tax rates during Q3FY18, as compared to the corresponding period in the previous year. Particulars (Rs Cr) Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) 9MFY18 9MFY17 YoY (%) Operating Income Material consumed Employee expenses Other expenses Total expenses EBITDA Depreciation Other Income Finance cost PBT Tax expenses NA PAT EPS (Rs) EBITDA (%) 30.1% 26.0% 413 bps 22.3% 785 bps 25.5% 23.5% 201 bps PAT (%) 11.5% 5.2% 624 bps 3.7% 779 bps 6.7% 4.9% 175 bps (Source: Company, HDFC sec) Concerns High geographic concentration Nearly 2/3 rd of the room inventory of TAJGVK is located in Hyderabad. Any disruptions in the region (as seen in FY08-FY15) could significantly impact its growth and profitability. Further, Taj Krishna, Taj Deccan, and Taj Banjara are within a distance of 2 kms from each other. 5 P a g e

7 Slowdown in economic growth Since the demand for hotels is affected by domestic and global economic growth, a recession in either categories could lead to a downturn in the industry, and affect the company s prospects. Intense competition With the number of tourists increasing in the country and expectations of strong growth, competitors are adding capacity which may result in excess room inventory, and impact realisations. Regulatory issues Any tax changes at the local, state or central level and/or restrictions about food/drink consumption could adversely impact spending in hotels. Industry overview On an overall market level, occupancies recently crossed the 65% threshold after a gap of eight years. However, this has yet to have an impact on ARR, which is expected to happen soon. The supply-demand gap is narrowing in cities such as New Delhi, Jaipur, and Chennai. Each city/area has its own demand drivers, like the IT industry for Bengaluru and Hyderabad, the financial sector for Mumbai, heritage tourism for Agra and Jaipur, and medical tourism in all metros. In hotels, in addition to its pricing power, the brand acts as a symbol for the expected quality of service, complementing the standardised star rating each property is assigned. Operating Parameters For The Hotel Industry In India (Source: HVS 2017, HDFC Sec research) 6 P a g e

8 According to IBEF, the Travel & Tourism sector is likely to witness a 6.7% CAGR over CY18-27E to US$ 424.5bn, resulting in 10% of GDP in 2027E. The per capita income witnessed 4% CAGR over FY10-17, and is expected to register 9% CAGR over FY17-19E, according to a IBEF report. Higher disposable income could boost the Travel & Tourism industry, owing to its discretionary nature. The Passenger Load Factor for airline companies has increased significantly from ~69% in CY08 to ~84% in CY17, indicating a higher level of commutation through airlines. This has its impact on hotel demand and occupancy. The introduction of GST, though initially resisted by hotels, is in fact now considered favourable, owing to the availability of input credit. Challenges like availability/cost of land, regulatory approvals, funding of debt and equity, and competition from entrenched players determine supply additions. Increasing foreign tourist arrivals In CY2017, foreign tourist arrivals (FTA) in India increased by ~15% and stood at 10.2mn. According to IBEF data, FTAs are expected to increase at a CAGR of 5-6% over the next decade to reach 17.3mn. During 2017, India earned foreign exchange of US$ 277bn from tourism, up ~20% over FY16. The Government of India is working to achieve a 1% share in the world's international tourist arrivals by 2020, 2% share by 2025, and double foreign exchange earnings as well. Foreign Tourist Arrivals And Foreign Exchange Earnings (Source: IBEF, HDFC sec) Government initiatives to promote inbound tourism The Government of India has been taking various measures to promote domestic as well as foreign tourism in India: In Budget , the Government allotted Rs 1,250cr (US$ mn) for Integrated development of tourist circuits under the Swadesh Darshan, Pilgrimage Rejuvenation and Spiritual Augmentation Drive (PRASAD). 7 P a g e

9 Based on specific themes, the Government has identified 13 circuits which include the Krishna Circuit, Buddhist Circuit, Himalayan Circuit, North East Circuit and Coastal Circuit. Campaigns such as Incredible India and Athithi Devo Bhava were launched to harness the tourism industry s potential. Tajmahotsav: The 10-day celebration provides a platform to experience India s arts, craft, culture, cuisine, dance and music. Since Apr-17, the E-tourist visa facility has been made available to citizens of 161 countries. Under Project Mausam, the Government has proposed to establish cross-cultural linkages and revive historic maritime cultural and economic ties with 39 Indian Ocean countries. An investment-linked deduction under Section 35 AD of the Income Tax Act is in place for establishing new hotels in the 2-star category and above across India, thus permitting a 100% deduction in respect of the whole or any expenditure of a capital nature. View and valuation TAJGVK is one of the well-known and premium hotel brands in India, backed by a strong group of promoters. The company has four properties in Hyderabad which are witnessing good growth. Additionally, it has a hotel in Chennai, which is also an attractive market. The company has further diversified and opened a premium hotel in Mumbai, which is likely to reduce dependence on the Hyderabad market, and improve average room rates (ARR) and revenues per available room (RevPAR). It is also preparing to start work on a 5-Star hotel in Bengaluru. Further, the company is utilising its cash flows to reduce its leverage. We have valued the company at a EV of Rs 1.25cr per room basis for owned and JV rooms (Mumbai), and arrived at a target of Rs 245, which implies an FY20 EV/EBITDA multiple of 18.0x and FY20 P/E of 38.5x. Alternatively, we have valued the owned rooms at a EV of Rs 1.05cr per room and JV rooms (Mumbai) at EV of Rs 2.5cr per room (due to its premium location and pricing), and arrived at a target of Rs 266, which implies an FY20 EV/EBITDA multiple of 19.4x and FY20 P/E of ~42x. Investors can BUY the stock at the CMP, and add on declines to Rs levels for sequential targets of Rs 245 and Rs 266 over three to four quarters. Peer Comparison (FY20E) Company CMP Mcap Sales PAT No of Net debt EV/EBITDA EV/Room P/E (Rs) (Rs Cr) (Rs Cr) (Rs Cr) rooms* (Rs Cr) (x) (x) (x) EIH Associated Taj GVK Oriental Royal Orchid * includes managed rooms; CMP as on 4-May-18 Source: HDFC sec, Street estimates 8 P a g e

10 Financial Statements Income Statement Cash Flow Statement (Rs cr) FY16 FY17 FY18E FY19E FY20E (Rs cr) FY16 FY17 FY18E FY19E FY20E Income from operations Profit Before Tax Cost of materials consumed Depreciation Employee Cost Others Other expenses Change in working capital Total expenses Tax expenses EBITDA CF from Operating activities Depreciation Net Capex Other Income Other investing activities EBIT CF from Investing activities Finance Cost Proceeds from Eq Cap Profit Before Tax Borrowings / (Repayments) Tax Expenses Dividends paid Profit After Tax Interest paid Adj. PAT CF from Financing activities EPS Net Cash Flow Balance Sheet Financial Ratios (Rs cr) FY16 FY17 FY18E FY19E FY20E Particulars FY16 FY17 FY18E FY19E FY20E EQUITY AND LIABILITIES EPS (Rs) Share Capital Cash EPS (Rs) Reserves and Surplus BVPS (Rs) Shareholders' Funds Long Term borrowings PE (x) Deferred Tax Liabilities (Net) P/BV (x) Other Long Term Liabilities Mcap/Sales (x) Long Term Provisions EV/EBITDA Non-current Liabilities Short Term Borrowings EBITDAM (%) Trade Payables EBITM (%) Other Current Liabilities PATM (%) Short Term Provisions Current. Liabilities ROCE (%) TOTAL RONW (%) P a g e

11 ASSETS Current Ratio (x) Net Block Quick Ratio (x) Capital work-in-progress Debt-Equity (x) Non current Investments Long-Term Loans and Advances Debtor days Other Non-current Assets Inventory days Non-current Assets Creditor days Current Investments Inventories Trade Receivables Cash and Bank Balances Short-Term Loans and Advances Other Current Assets Current Assets TOTAL year Price chart (Source: Company, HDFC sec) 10 P a g e

12 Fundamental Research Analyst: Atul Karwa HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai Phone: (022) Fax: (022) Website: hdfcsecretailresearch@hdfcsec.com. Compliance Officer: Binkle R. Oza complianceofficer@hdfcsec.com Phone: (022) Disclosure: I, (Atul Karwa, MMS), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. 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