The Hindu Business Line : Indian Hotels

Shareholders can subscribe to the equity portion of the rights offer floated by Indian Hotels, owner of the Taj Group of hotels. Indian Hotels is making unlinked offers of equity shares (one for every five held) and 6 per cent NCDs (non-convertible debentures) with a detachable warrant (one for every 10 shares held). The equity shares are being offered at Rs 70 per share, a steep 35 per cent discount to the current market price. Shareholders can take advantage of the discount and reduce their average acquisition cost. They may also consider selling a portion of their present holdings in the open market to ensure that their overall exposure to the stock does not increase.

Shareholders can refrain from subscribing to the NCD portion of the offering, as the interest rate is unattractive. The warrant can be converted at an exercise price of Rs 150, which is at a 35 per cent premium to the current market price. The window to exercise warrants conversion is limited to the month of September 2008. Given the volatile market conditions, the stock is unlikely to be re-rated substantially in the near-term. Concerns of fresh room supply coming into the market are also weighing down on hotel stock valuations currently.

Objects of the offer

Indian Hotels is mobilising close to Rs 1,450 crore through this rights offer of shares and non-convertible debentures. If all warrants are converted into equity shares, it will raise an additional Rs 900 crore. The equity base is set to expand by 20 per cent, post-offer, and by an additional 10 per cent, post-warrant conversion.

The proceeds of the offer will fund Indian Hotels’ massive capacity expansion plans. About Rs 300 crore will be invested in developing two hotels in Coimbatore and Bangalore, to come up in December 2009 and April 2009 respectively and in adding another 140 rooms to Taj Lands End in Mumbai. Another Rs 340 crore will be invested in its domestic and international subsidiaries. The investment in the overseas subsidiary is mainly going towards the $80 million renovation of “The Pierre”, the New York property acquired in 2006. The renovated property will re-open in January 2009.

About Rs 400 crore will be used to repay debt of its international subsidiaries. Another Rs 170 crore will be deployed in renovation of its properties. The balance Rs 220 crore will meet issue expenses and general corporate expenses; it is unclear what the company would do with the additional proceeds it raises from warrant conversion, if any. It is quite likely that the proceeds (Rs 900 crore upon full conversion) could be used to fund international acquisitions.

Prospects

Indian Hotels, with its dominance in the luxury and premium business travel space and pan-India presence, has been able to capitalise well on the room demand-supply mismatch and continues to enjoy high average room rates and occupancy rates. As on December 31, the company commanded an average tariff rate of Rs 12,279, a 15 per cent hike over the corresponding previous period. Occupancies remained robust at 76 per cent.

Indian Hotels continues to expand in India and internationally. Besides the ones being funded by the offer, another six properties are expected to open over the next two years. More properties are likely to be opened by its subsidiaries and associates as well. The expansion could scale revenues considerably, if the Taj Group can hold on to its market share.

Our concern stems from Indian Hotels’ heavy dependence on some of its luxury properties for revenues; all of five luxury hotels contributed 60 per cent of its revenues in the first half of FY 08. With fresh supply coming up and competition from international hotel chains intensifying, both room rates and occupancies could weaken significantly by 2010 in some of the top metros.

global acquisitions

Secondly, Indian Hotels has been extremely aggressive on the international acquisition front. The company borrowed $300 million to buy out a minority stake in Orient Express. The acquisition has cost them in more ways than one, with Orient Express repeatedly spurning their attempts to form an alliance. At the same time, the debt burden is increasing. Any savings from the prepayment of debt through the proceeds of this offer is likely to be offset by fresh debt issues.

While a global presence may boost brand visibility and scale up the business, the international strategy may exert pressure on the company’s profitability in the near-term. The properties acquired so far have boosted the contribution of international properties to 30 per cent in FY-08, but most of them are still unprofitable. There may not be substantial room for tariff hikes of such properties as such gateway cities do not face the kind of supply shortage seen in India. A higher success in establishing its presence in key emerging markets might inspire greater confidence.

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