The 14.12 per cent equity sale by the promoters of EIH to Reliance Industries (RIL) has not gone down too well with shareholders of the two companies. After spurting 11 per cent on Monday, the EIH stock tanked by seven per cent, as chances of a bidding war thinned. Part of the decline could also be attributed to the stock’s nearly 20 per cent rise since end-July due to speculation of a bid by ITC.
The RIL stock, too, saw selling pressure and closed three per cent down at Rs 918.85 (after recording a new 52-week low), as investors gave a thumbs-down to the company’s second unrelated sector investment after its recent foray into broadband (telecom).
Analysts also believe the 36 per cent premium paid by RIL for a 14 per cent stake, which pegs EIH’s enterprise per room valuation at just under Rs 3 crore, is on the higher side.
| IMPROVING METRICS | ||
| In Rs crore | FY10 | FY11E |
| Occupancy (%) | 53 | 67 |
| ARR (Rs ) | 10,000 | 11,000 |
| Revenue/room (Rs ) | 5,300 | 7,370 |
| Net Sales | 1,038 | 1,318 |
| Ebidta | 293 | 367 |
| Ebidta margin (%) | 28.2 | 27.8 |
| Net profit | 66 | 160 |
| P/E (x) FY12E | – | 27 |
| E: Estimates Source: Company, Elara Securities | ||
Stalling ITC
While ITC, which has 14.98 per cent stake in EIH, has repeatedly said it would not launch a hostile takeover, analysts believe it was a matter of time before ITC would have looked at gaining control.
They say the succession plan at EIH (splitting the 46 per cent promoter stake among two sons of P R S Oberoi) would have been the opportune moment to launch an open offer. The current arrangement gives the management both a control of the company as well as strategic support if it goes down to a bidding war.
Analysts say the EIH promoters could now use the money to either buy properties or un-encumber pledged EIH shares.
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While financing is an issue in this capital-intensive business, the sector itself is humming a healthy tune on the back of a pick-up in occupancies.
Operational improvement
With foreign tourist arrivals and a jump in domestic tourists, and a low base, analysts believe occupancies will jump from 53 per cent in FY10 to about 67 per cent in FY11 for EIH. On the back of this and a 10-15 per cent rise in room rates from September, average room rents (ARRs) for the current financial year should jump by about 10 per cent to Rs 11,000. Analysts say the company may not have any major capex, as a majority of its investments in various properties to the tune of Rs 900 crore have already been made over FY07-FY10. The group seeks to increase its rooms from about 3,300 to about 4,000 by the end of FY12.
Outlook
At Rs 140, the stock is priced in to reflect the bright growth prospects for the company. Mumbai, however, continues to account for more than 60 per cent of its room inventory and a slowing of this market could impact revenues significantly. Other than that, the stock could see increased activity should ITC enter the fray or if EIH announces plans for its large land bank.