ITC Hotels: Surprise on the menu

It's unclear how much ITC hotels would add to the bottomline of ITC's hotels business

The ITC Hotels scrip jumped 20 per cent on news that it could get merged with ITC Ltd. This move was expected, as it doesn't make much sense to run a hotels business under two different entities.

Moreover, in a similar case, the company had merged ITC Bhadrachalam Paperboards with it in 2001. But the timing has taken everyone by surprise.

Analysts claim that ITC's decision to consider the merger now is to avoid paying more for ITC Hotels going forward, given that the hotel industry is set to boom.

If that was the case, the merger should have been done a year back, when the company was almost in losses and the stock price was less than half its current levels.

In any case, the non-ITC holding currently has a value of just Rs 140 crore, compared with ITC's market cap of close to Rs 26,000 crore. Whatever the swap ratio is, it wouldn't impact ITC much.

It's still unclear how much ITC Hotels would add to the profit of the hotels segment of ITC Ltd. This is because ITC Hotels gets some of its revenues and profit as management fees for managing the properties owned by ITC Ltd. After the merger these revenues would obviously disappear.

Besides, ITC Hotels currently has better margins because of the high proportion of fees it gets, as this flows straight to the bottomline. The fact that it doesn't own many properties also results in lower interest and depreciation cost.

After the merger, a big chunk of the management fees would disappear and hence the margins of the combined hotels business of ITC would more or less be in line with the industry.

The rupee

The rupee has been depreciating against the dollar in recent days, but it's far from being in splendid isolation on that count. Apart from pegged currencies like the Chinese yuan and the Malaysian ringgit, most other emerging market currencies have depreciated against the dollar this fiscal. The rupee has fallen by 6 per cent, the won by 1.2 per cent, the baht by 5.4 per cent, the Taiwan dollar by 3 per cent and the Brazilian real by 4.6 per cent.

The depreciation of the emerging market currencies is a logical fall-out of the reversal of foreign portfolio flows. But why did the rupee depreciate more than most other currencies?

The answer seems to lie with the RBI which continued to buy dollars from the market in an effort to depreciate the rupee even after FII inflows came down to a trickle. That would explain the continuing build up in forex reserves long after the slowing down of FII inflows.

Now, however, the government, in an effort to contain inflation, wants the rupee to appreciate. Forex dealers say that the expectation in the market is that on days when inflows are strong, the RBI may not intervene, which could lead to an appreciation of the rupee.

As a matter of fact, the RBI has been selling dollars in the last few weeks in an effort to prevent the rupee from depreciating further, as seen from the fall in forex reserves. In short, the RBI is shifting to reverse gear on the forex front as well.

Valuations of generics players

Valuations of large Indian generic exporters on the bourses vis-a-vis their foreign counterparts have assumed importance these days, given the fact that the US Food and Drugs Administration (FDA) is now granting co-exclusivity for all generic applications made on the first day, and in view of the competition from authorised generics.

After a foreign institutional investor brokerage report pointed out the changing dynamics in the industry, the impact on pharma scrips was felt the most between June 17 and June 24, with the BSE's Healthcare index dropping 4.5 per cent compared with a Sensex fall of around 2.7 per cent.

Pharma scrips have now managed to recoup their losses in tune with the rebound in the Sensex""Ranbaxy currently trades at a P/E of 28 (trailing 12 months profit), while Dr Reddy's trades at 31.2 and 23.7 for Cipla.

The trouble is that foreign generic players are currently getting even lower valuations. Israel's Teva Pharmaceuticals, which has introduced 17 new generic products this year, has a P/E of 26 (trailing 12 months), according to www.dailystock.com.

Similarly, the US-based S&P 500 firm Mylan Laboratories trades at a P/E of merely 12.66. Other US players, too, have comparatively lower valuations: the California-based Watson Pharmaceuticals has a P/E of 15.51, while for New York-based Barr Laboratories it is 17.29. A notable exception is the Florida-based Ivax Corporation (which has recently received final approval for its abbreviated new drug application from the US FDA for fluconazole tablets, an anti-fungal medication), which trades at a multiple of 35.

Hence it appears that valuations of large Indian generic players on the bourses are still relatively over-valued vis-a-vis their foreign counterparts.

With contributions from Mobis Philipose and Amriteshwar Mathur