Emkay Research is bearish on TAJ GVK Hotels & Resorts and has recommended a sell rating on the stock with a 12-month target price of Rs 157.

Taj GVK Hotels & Resorts (THRL) is a joint venture between Indian Hotels Co. Ltd and the Hyderabad based GVK Group. Indian Hotels, which manages the Taj group of Hotels owns 25.5% and the GVK Group owns 49.1% in the company. GVK is a Hyderabad based group with interest in varied sectors such as Hospitality, Infrastructure – power plants, roads and airports, Chemicals and Services. Indian Hotels is a distinguished player in the hospitality industry with operations spread across India and is expanding operations globally.

THRL is a dominant player in the hospitality sector and market leader in Hyderabad with 4 properties under its umbrella of which 3 are in Hyderabad and one in Chandigarh. The company has a total room inventory of 684 rooms with 534 rooms in Hyderabad and 150 rooms in Chandigarh. The company is strengthening its position in Southern India with one property each coming up in Chennai & Hyderabad and expansion planned in 2 properties in Hyderabad.

Emkay initiated coverage on THRL with a Sell recommendation with a 12-month price target of Rs 157, which is based on DCF valuation. At the target price of Rs 157 the stock shall trade at a P/E multiple of 15xFY08E earnings. Target multiple is at a 20% discount to the sector average of 19x. They attribute the discount to:

1) High dependence on the Hyderabad market (84% of FY07E revenues), where growth is peaking;

2) Hyderabad market to see further room addition over next 3 years which is expected to affect Occupancy Rate (OR’s) & Average Room Rate (ARR’s); and

3) Subdued earnings CAGR of 15% for FY07-09E vis-à vis an industry average of 26%.

Valuation & View:

Emkay initiate coverage on THRL with a Sell recommendation with a 12-month price target of Rs 157, which is based on DCF valuation. At the target price of Rs 157 the stock shall trade at a P/E multiple of 15x FY08E earnings. Target multiple is at a 20% discount to the sector average of 19x.