Stock Fundamentals

Indian Hotels — Rights Offer: BUY

Anand Kalyanaraman | Updated on August 03, 2014 Published on August 03, 2014

The convertible bonds are attractively priced and the company's prospects look good



Shareholders of Indian Hotels, the country’s largest hotel operator, can subscribe to its rights issue of compulsorily convertible debentures (CCDs).

The company plans to raise up to ₹1,000 crore through the issue which opens on August 4 and closes on August 20.

Good deal

For every 40 equity shares, shareholders will have the right to subscribe to nine CCDs. Each CCD will be converted into one equity share after 18 months.

Effectively, subscribers to the CCD right issue will get nine equity shares in Indian Hotels for every 40 shares they currently hold after a year-and-a-half. The issue price is ₹55 per CCD.

The CCDs would be unsecured and carry no interest until conversion after 18 months.

The rights issue is attractively priced. Even accounting for the opportunity cost (say, 12 per cent a year) of holding the unsecured CCDs for 18 months, the price per equity share on conversion works out to about ₹65 — 30 per cent lower than the stock’s market price of ₹93.



The stock’s enterprise value, at about 12 times its estimated 2015-16 operating profit, is lower than its historical average of about 15 times. Despite a 22.5 per cent increase in the equity base after the debenture conversion, there could be further upside in the stock, given that the company’s prospects may improve.

After the difficult period over the last few years, the fortunes of the hospitality industry in general and Indian Hotels, in particular, are expected to turn for the better.

On the mend

One, the expected pick-up in domestic economic growth and improvement in foreign tourist arrivals, as seen in the June quarter, should translate into higher occupancy and better room rates. The recent Budget measure of e-visa issuance at nine airports in the country should help.

Improvement in its international hotel business also bodes well. What's more, the rapid capacity expansion in the domestic hotel market is likely to subside, with many big hoteliers grappling with debt and looking to consolidate operations. Indeed, many players, including Indian Hotels, are using ‘management contracts’ to expand.

Under this model, the bigger hotels, instead of building a hotel from the ground up, re-brand and manage the property of smaller hotel players for a fee.

This asset-light strategy keeps capital expenditure in control and helps defend and grow market share at the same time.

Of the 14 new properties in Indian Hotels’ pipeline, 11 will be through the management contract route. Also, the company has been taking steps to pare down its debt burden — its consolidated debt was ₹4,252 crore as of March 2014 and debt-to-equity ratio was 1.6 times.

Last month, it sold The Blue Hotel, its property in Sydney, for about ₹180 crore.

Besides, ₹553 crore of the ₹1,000 crore raised through the rights issue will be used to repay debt this year. This, along with conversion of the debentures to equity next fiscal year, will reduce the company’s debt-to-equity considerably.

Lastly, the asset write-offs (such as that on the Orient-Express investment) that took a toll on the company’s bottomline in the last two years should be a thing of the past.

Also, Indian Hotels’ increasing presence in the budget and medium categories in the hotel chain would provide a hedge if economic conditions weaken.

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