Age Of Empire : ITC, Reliance's quest for EIH!

ITC's investment arm 'Russel Credit' recently bought 57.38 Lakh (about 1%) of EIH at Rs 73 apiece for a total of 42 Cr. raising their stake in the prestigious hotel chain to 15.98%. Russel Credit also owns 72.06% stake in ITC Hotels.

Eastern International Hotels Ltd. (EIH Ltd) is the flagship company of Oberoi group which manages and operates the world renowned Oberoi  and Trident hotels. The company has been seeing a stagnant growth for the past few years and in absence of free cash in the hands of the promoters, P.R.S.Oberoi and kins, there has been very low addition to their room count. Room count is taken as an important parameter in hotel industry to gauge the value of a hotel/chain.

The EIH chain of hotels is the third largest in India after the Indian Hotels of the Tata group and the ITC hotels of ITC Ltd.

ITC, with its diverse interests - one being the hospitality sector, has been increasing the stake in the EIH ltd. since the early 2000s. After it increased its stake to 14.98% which was just below the SEBI norm of 'Open Offer' of 15%, Oberoi group chairman Mr. P.R.S. Oberoi was alarmed of ITC's intentions. At that time, the promoters had a stake of about 46% in the company. According to then prevailing rules, if ITC would have increased its stake to 15% then they had to go for an open offer and acquire a minimum of 20% in the company. The maximum could have been 85%. ITC had the financial muscle to go for acquiring the complete stake! ITC would have got a seat in the management board after the open offer and given ITC's proven expertise in hospitality business, it would have been very much possible that board would have approved EIH's acquisition by the FMCG giant.

When your opponent is too strong for you, what do you do? Fighting a losing battle is not prudent. Calling up a mightier partner is.

Oberois called upon the richest man in India, Mukesh Ambani, to act as the White Knight to save EIH from falling into ITC's hands if ITC dared to do such an adventure. RIL, sitting on huge pile of cash and less ideas to deploy them in absence of good business opportunity, threw in some change (Rs1021 Cr for senior Ambani is not more than 'a change' with his net worth running in billions) to acquire 14.12% stake in the hotel company. ITC quickly released the statements that they are only traders in EIH and do not intend to acquire it in future. RiL said that EIH for them is an investment opportunity to diversify and they do not intend to cause issues in the management's working. Too generous both of them!
Since then, RIL has increased its stake in the company to 18.53% and after last Monday's purchase, ITC's stake stands at 15.98%. The promoters stakes are at 35.23%. It should be noted here that SEBI has changed the norms for the Open Offer from 15% to 25% i.e. other companies can buy stake in a company up to 25% without the requirement of going for an open offer. At 25%, one can go for a minimum 10% stake buy and a maximum of 75%.

Now, the real question is Are the two corporate houses (RIL & ITC) saying what they really intend? I doubt.

Reasons why I think ITC will/should acquire EIH Ltd. :

1. They are the No. 2 in the industry and need inorganic routes too to become No.1. Indian Hotels have 12000+ rooms while  ITC has 8000+ rooms. As per its plan, ITC is  looking to add 5000 rooms to its present strength.
2. EIH has huge brand value and a acquisition or merger would be beneficial for the brand of ITC hotels too.
3. Due to the current economic situations, hotel businesses are under valued. It is the right time to acquire if you have deep pockets. ITC is quite aware of this and apart from EIH, it has been increasing its stake in Hotel Leela too (~13%)
4. According to World Travel & Tourism Council (WTTC) estimates, travel and tourism demand in India will grow at 8.2% annually till 2019, the highest growth after China in the big countries league. With Cigarettes business facing the ire worldwide and FMCG business still not in black, Hotels remain one of the safe and profitable businesses for the company.

ITC hotels are not listed and hence the exact impact of the added business of EIH cannot be analyzed here. However, a rough estimate of the hotels sales (present) can be done by taking an average per night charges at Rs 6000/night and with an occupancy rate of 70% throughout the year.

Sales = Rs 6000*0.7*8000*365=Rs1226.4 Cr

At 10% profit margin, it adds around Rs 122.64 Cr to ITC's bottom line.

Indian Hotels garnered Rs 145 Cr in  FY11-12 and thus ITC and EIH put together can easily pip over it to become the most profitable hotel chain in India.

Major hotels under EIH ltd.

                                             

• The Oberois, Mumbai
• The Oberois Udaivilas, Udaipur
• The Oberoi, New Delhi
• The Oberoi, Bangalore
• The Oberoi Grand, Kolkata
• The Oberoi Vanyavilas, Ranthambhore
• Trident, Nariman Point, Mumbai
• Trident, Bandra Kurla, Mumbai

                    Financials

                    *CaptialLine.com

Years	2012	2011	2010
Equity	114.31	114.31	78.59
Networth	2405.9	2355.54	1181.54
Income	1158.49	1142.95	907.45
PBIT	209.41	240.68	189.46
PBT	155.00	85.49	88.58
PAT	122.42	64.54	57.23
EPS	1.98	1.00	1.26
Div%	55.00	45.00	60.00
D/E	0.14	0.51	0.97
Current Ratio	0.83	1.07	1.10
Interest Cover	3.85	1.55	1.88

                    Market Cap : Rs 4472.38 Cr (Sept 18,2012)

                    *Figures are in Rs Crores

Thus, EIH is a profitable business but has been stagnating. And in any case, it does not have the financial might to stand up against ITC. ITC's FY11-12 PAT was at Rs6162.37 Cr.

RIL's FY11-12 PAT stood at Rs 20040 Cr!

RIL is mostly a petroleum-based company with several other interests like retail (Reliance Fresh), Infra (Reliance Industrial Infra), Cricket (Mumbai Indians) etc. But its major concentration has been in one sector only. It had about Rs71,500 Cr free cash on its books as of the year ended March 2012. And it generates upto Rs 4500 Cr profits every quarter. Thus, when RIL bought the stakes in EIH, the media grapevine fell silent about ITC's plan to acquire EIH Ltd. challenging RIL's financial might.

But has Mr. Oberoi called upon a bigger menace than ITC itself?

Reasons why I think RIL will/should acquire EIH ltd.

• EIH could be a strong entry point for Reliance in the hotels business - a diversification opportunity.
• Reliance was brought in as the 'White Knight' in the late 1980s to save L&T from falling in the hands of Manu Chabbaria. Once Manu Chabbaria retreated, Reliance itself attempted to take over the business. It was only when the financial institutions withdrew support and the congress government at the center lost the elections that they gave up on it.
• EIH is a good business and with the hospitality sector going to give consistent results in the coming years, RIL can easily capitalize it to become one of the best in the world.

However, RIL has never been in a consumer facing business unlike ITC. Its retail stores chain is the closest it has been to its consumers and as we know, it’s a very small portfolio in their balancesheet. Thus, it is uncertain how well they could manage the brand EIH.

Another aspect of this game which is a little under wraps as of now is the decreasing stake of the main promoters, the Oberois, in the company. Oberois had more than 46% stake in the company before RIL's purchase of 14.12%. Today, they have only 35.23%. When you are under the threat of being acquired, do you increase your stake or decrease it?

EIH Ltd. is an undervalued business taking in account its future prospects and a likely controlling-stake war in the coming days/years.