Indian Hotels' rights issue: not enough room to make money

The amount that the Rs 2,506 crore Indian Hotels will raise through its rights issue has gone up sharply to Rs 2,290 crore from about Rs 1900 planned in August 2007. That's an increase of over 20 per cent.

Besides, instead of an Non-Convertible Debenture(NCD) with a coupon of 4 per cent, to be converted into one share at Rs 150-180, shareholders will now get an NCD with a face value, of Rs 100, and a detachable warrant attached.

The warrant will be converted into one share at Rs 150 in September 2008. The ratio of one NCD for every ten shares held remains the same and the tenor is three years.

The equity portion of the issue remains unchanged with shares being offered at Rs 70, a premium of Rs 69, in the ratio of 1:5. India's biggest hotel chain operator, currently trades at a price of Rs 114, so the rights issue is priced at a discount of about 38 per cent.

However, the ratio of 1:5 is not terribly exciting and brings down the average cost of shares to about Rs 107, leaving a discount of 6 per cent, which is not small, but not tempting enough either, given the state of the market.

As for the NCD, any bank will offer more than 6 per cent for a three year fixed deposit and what's more the money can be freed up in an emergency. And since the Indian Hotels stock is available at Rs 114, why would anyone want a warrant at Rs 150?

The dilution in the equity capital, because of the rights issue, will be extremely high at 30 per cent. Indian Hotels grew its earnings per share(EPS) at 67 per cent and 44 per cent in FY06 and FY07 respectively.

However, the EPS growth is expected to slow down significantly to about 11-12 per cent in FY08 and could fall in FY 09 post the dilution. Revenues in FY08 should touch Rs 3150 crore and are expected to grow by about 14 per cent to Rs 3,580 crore in FY09.