Hilton hoist

BS Compass

The East India Hotels (EIH) and EIH Associated Hotels scrips got an unexpected boost from the group's tie-up with Hilton International. The EIH scrip is up around 5.25 per cent since the deal was announced while the EIH Associated scrip has jumped 43.2 per cent.

For perspective, most of the Oberoi group of hotels come under EIH while 'The Trident' in Chennai and 'Rajvilas' in Jaipur come under EIH Associated. Now, the strategic alliance that has been announced between the Oberoi and Hilton group covers only the 'Trident' hotels which will be renamed under the 'Trident Hilton' brand.

Evidently, EIH Associated would be earning a big chunk of its revenues from 'The Trident' in Chennai. In the case of EIH, the Trident chain of hotels would account for a relatively smaller proportion of revenues, since only six of the total 15 hotels in its books are Trident hotels.

But it goes without saying that overall, the deal is a major positive since Hilton would be responsible for international marketing, promotion and reservations through its well-established network overseas.

That this comes at a time when the Indian hotel industry is set to see an improvement in fortunes on the back of a pick up in the economy and business confidence will give further comfort to investors.

Tourist inflow and occupancy rates have picked up, and companies like Indian Hotels have already benefited from this. In the June quarter, sales of Indian Hotels rose over 15 per cent.

In comparison, EIH's sales grew 7 per cent while that of EIH Associated fell 12 per cent. If the trend of increasing tourist inflow continues, it won't be long before even EIH's growth rates pick up.

Meanwhile, the group would do well to trim costs which are much higher compared to its peers.

In FY03, EIH spent 30.4 per cent of its sales on employee costs, compared with 23 per cent for Indian Hotels. Also, the company spent 12.6 per cent of sales on power and fuel, compared with 10.4 per cent for Indian Hotels. Both the EIH group companies were in losses last quarter.

While an increase in revenues could correct that given the high operating leverage of the industry, it's still imperative that EIH gets its cost structure right in order to tide over tough times.

Cipla and Ranbaxy

Cipla and Ranbaxy have been slapped with High Court notices for pricing some of its products higher than the limit prescribed by the DPCO. But this is not a new phenomenon.

The same issue has been under contention for the last couple of years though it's only now that the High Court has issued a notice to the companies. The price recovery is on seven bulk drugs comprising Ciprofloxacin and Salbutamol.

While Ciprofloxacin is a significant contributor to Ranbaxy's revenues in the domestic market, Salbutamol (Asthalin inhalers) is the mainstay for Cipla.

Further, the recovery is for the period till June 2000. Therefore, there could be a demand for further recoveries till the present date. However, analysts say that the companies have been pricing the products below the DPCO price and, hence, any further recoveries are likely to be minimal.

Cipla's balance sheet already recognises the possibility of a liability as a result of the notices. Under contingent liabilities, the balance sheet recognises the claim by the government of Rs 207 crore on account of overcharging whereas Ranbaxy's balance sheet for the year includes only Rs 24 crore as claims not being acknowledged as debt.

The pertinent question is whether the recovery amount is of significance relative to the cash flow of the two companies. In the financial year ended December 2002, Ranbaxy generated cash of Rs 435 crore from operations while Cipla had free cash flow of Rs 116 crore.

The companies have to pay 50 per cent of the amount in the next four weeks - which works out to Rs 100 crore for Cipla and Rs 25 crore for Ranbaxy. Needless to say, Cipla's financials would be impacted more as a result of this.

Interestingly, the expectation of such a notice appears to have been discounted by the market. Both stocks were relatively stable in Friday's trading session_while Cipla's stock was down by 0.93 per cent, Ranbaxy's was up by 0.6 per cent.

With contributions from Mobis Philipose and Sameer Ranade