Indian Hotels: Spreading wings

Indian Hotels' acquisition has come at a reasonable price

Indian Hotels continues to expand its presence overseas. This time, the company has bought out a 100-room hotel in Sydney for an amount of around Rs 125 crore. The acquisition has been made at nearly three times revenues of the hotel of Rs 45 crore.

That translates into a cost per room of Rs 1.25 crore per room, which appears to be reasonable. In India, currently, the cost of setting up a hotel in a big city like Mumbai is more-or-less similar.

The hotel, which is located near the central business district, is not too large so achieving average occupancies of 65-70 per cent should not be difficult, given that Sydney is becoming an increasingly popular tourist destination. The management claims the hotel is a profitable one.

The deal is being funded entirely in cash and Indian Hotels will draw on the $150 million that it raised through an FCCB earlier this year. Incidentally, of the amount, around $107 mn has already been converted at a price of Rs 501.53 per share and the rest should be converted by the end of FY06.

At the current price of Rs 980, the stock trades at 22.7 times estimated stand-alone earnings in FY07. For FY08, the multiple is 17.5 times. The stock appears to be expensive from a near-term perspective.

However, the hotel industry in the country is seeing a huge increase in Average Room Rates (ARR) and a steady increase in occupancies.

This is due to the scarcity of hotel rooms in the wake of strong tourist inflows, which are tipped to grow at a CAGR of around 10 per cent till 2010. That should keep the hotels full. The Indian Hotels stock has outperformed the Sensex handsomely in the last six months. The stock looks attractive from a long-term perspective.

Opto Circuits

Since Opto Circuits announced its acquisition of German company Eurocor on Monday, the stock price has appreciated by almost 10 per cent to about Rs 250. Eurocor will enable Opto Circuits to enter the high-growth business of cardiac and peripheral stents, which are used in critical cardiac care.

Opto Circuits has paid almost Rs 60 crore for this company, which is expected to clock sales of Rs 21.78 crore in 2005 and Rs 54.46 crore next year, a fair valuation for a R&D-intensive business.

The market size for coronary stents was at $6 billion in 2004 and is expected to grow to $10 billion. Johnson & Johnson, Boston Scientific and Medtronic are the leading players in stents globally.

Despite regulatory approvals in 26 countries in Europe, Asia and South America, Eurocor's weak cash position has resulted in the company remaining a small player. Cash is also the reason for the sale to Opto Circuits. With Eurocor's management team continuing for the next three years, Opto Circuits can expect the research focus.

In India, Opto Circuits will start selling Eurocor's stents through its subsidiary Advanced Micronic Devices, which distributes medical products. Opto Circuits will also need to push Eurocor's products in other international markets.

A lot depends on Eurocor receiving USFDA approval in the future, as the country makes up half of global stent revenues. So far, Opto Circuits has been in the non-invasive business of medical electronic devices used in operation theatres and ICUs.

Coronary stents, on the other hand, are intrusive. After the acquisition, the company trades at a forward P/E of 21 times FY06 EPS, making it fully priced.

Recent IPOs: Good going

The Sensex is trading close to its life-time highs and this bullish sentiment has also helped most recently listed IPOs, to trade well above their offer prices.

Of course, most IPOs in recent times have also been issued toward the top end of their book building price band. The only exception being Piramyd Retail, which was priced at the lower end of the band.

A glance at the table shows that IPOs in sectors like engineering, sugar and power sectors have seen maximum appreciation and that's thanks to investor expectations of aggressive growth prospects for this sector.

However, Aurionpro Solutions and Bannari Amman Spinning are trading below their issue prices. Bullish sentiment in the market has helped IPOs getting heavily oversubscribed. 

STRONG SHOW
Company	Offer price  (in Rs)	Current premium  to issue price (%)
Triveni Engineering	48	40.21
Bombay Rayon Fashions	70	21.57
Piramyd Retail	120	2.17
Prithvi Info Solutions	270	24.44
Bannari Amman Spinning	135	-14.19
Shree Renuka Sugars	285	45.39
Aurionpro Solutions	90	-1.33
Suzlon Energy	510	83.77
AIA Engineering	315	56.03

For instance, Suzlon Energy's offering in late September was oversubscribed almost 40 times, while that of ABG Shipyard last month was oversubscribed about 55 times. Of the two recent follow-on issues, Gipco is trading at the same levels as the issue price whereas ICICI Bank's retail investors have gained 15 per cent.

Contributions from Shobhana Subramanian and Amriteshwar Mathur