Indian Hotels has sought shareholder permission to issue 3.6 crore shares and 4.8 crore warrants, convertible into equity shares, to its promoters. This will be through a preferential allotment process and the price will be decided as per the Sebi (Issue of Capital and Disclosure Requirements) Regulations, 2009.
The Tata group’s stake in Indian Hotels is 30.3% at present, which will go up to 33.6% after the equity shares are allotted and to 37.5%, assuming all warrants are converted. The Tata group has been steadily increasing its stake in many of its large listed corporates, over the year, which gives it greater control and acts as a deterrent to any hostile takeover threats. Hotel stocks have been in the limelight, especially after Reliance Industries acquired a stake in the Oberoi group’s EIH Ltd, effectively thwarting any hopes ITC may have had of cementing its hold over the company. ITC already had a minor stake in EIH, apart from a few other hotels.
Indian Hotels has said in its postal ballot form, that the company has been expanding its footprint through overseas acquisition, in addition to adding new hotels in India. These acquisitions and projects have been funded through internal accruals, rights issue of equity shares and debt. Since it has ongoing projects, which require capital, and intends to continue its growth plans, it wants to raise more resources, lower debt and also strengthen its balance sheet. It believes that a preferential allotment of shares would be the most cost effective way of raising funds, as it will be at market related prices. It would be a quicker form of raising capital too.
Indian Hotels’ six-month average and two-week average share price works out to about Rs 100. Thus, the company will raise about Rs 360 crore through the equity allotment and the warrants will yield 25% as margin money, or Rs 120 crore, with the remaining Rs 360 crore flowing in, when the promoters convert the warrants.
The company could do with some debt lowering. In the first half ended September 2010, its profit before interest was Rs 61 crore and its net interest outgo itself was Rs 64 crore. It had debt of Rs 2363 crore as of September 30 and its debt to equity ratio (debt divided by net worth) was 0.9:1. Compared to a year ago, its debt is down by about Rs 300 crore. The company has been taking steps to mitigate the impact of its debt burden, by refinancing debt, retiring overseas dollar denominated debt, and shifting to longer maturity debt.
The inflows from the preferential allotment will help Indian Hotels further bring down its interest burden. The Rs 480 crore addition to its net worth will lower it debt to equity ratio, notionally speaking as of September 30, to 0.7:1. Once the warrants are converted this will come down further. Eventually, as its existing hotels perform better, and its new hotels and management contracts add to revenues and profits, it should be in a position to improve its profitability. It will generate better cash flows, and be able to service debt without affecting profits drastically. Its equity capital will increase by about 12% which will lead to an equivalent dilution in its earnings per share.