Indian Hotels served hot

Indian Hotels (IHCL) has picked up a 10.01% stake in NYSE-listed Orient-Express Hotels, Trains & Cruises (OEH) through Samsara Properties, its 100% subsidiary (registered in British Virgin Islands).

The deal, value at $211.28 million (for 4.25 million shares), translates to an average price of $49 per share and is being funded by loans worth $300 million from Tata Ltd, at an annual interest rate of 6.25%.

OEH owns 49 properties (total 3,700 rooms across 25 countries), which include 39 hotels, 6 tourist trains, 2 restaurants and 2 river cruise businesses. IHCL owns 69 hotels in India and 15 outside India with a total of 10,000 rooms.

Lately, IHCL has been looking at expansion and tie-ups with companies, which are major players elsewhere in the world but have no presence in India.

This is where OEH comes into the picture. IHCL plans to forge a strategic/marketing alliance with OEH in order to expand its reach globally.

Analysts maintain that an alliance between the two is likely to raise the occupancy levels for both the companies. Financially, too, an alliance of this sort will help both the companies in terms of revenues in the form of fees, which they will receive for their marketing and other efforts.

Analysts say this deal is likely to be funded by equity (being raised from the 2 rights offers of Rs 1,924 crore announced last month). Since the loan taken by Samsara is repayable in six months, IHCL will pay off the loan immediately, thus helping keep interest outflow at minimal levels.

To give shape to the above synergies, the managements of both companies will soon discuss various issues. Based on the discussions, IHCL will decide its course of action and may increase its stake in OEH, which is slightly smaller than IHCL is terms of market capitalisation and derives around 25% of its revenues from the US.

The latter also means that any major slowdown in the US could have a bearing on OEH’s performance. OEH’s revenues for 2006 (December ending) stood at $492 million and profits at $39.76 million as compared with IHCL’s $660 million and $96 million, respectively for 2006-07.

But, if the deal falls through, IHCL may choose to dispose of (partly or fully) the 10% stake it holds. In that case, it should stand to gain assuming OEH’s price stays at or above its current value of $52.

This move is in line with IHCL’s global plans, wherein it acquired Ritz Carlton Boston in January 2007 and Campton Place Hotel in San Francisco in April.

Domestically, the industry is characterised by a huge demand-supply gap and should benefit IHCL, which is adding 6,400 rooms (640 in 2007 and 1,156 rooms in 2008) by 2010. According to Bloomberg, analysts are positive on the stock.

Puravankara primes

Puravankara Projects, the real estate player (primarily residential projects), which recently entered the capital market, has reported its first-ever performance (post listing on August 30). The company is present in southern cities like Chennai, Kochi, Hyderabad, Mysore and Coimbatore.

Revenues at Rs 120.40 crore reflect a growth of 28.5% for the quarter ended June 2007 (Q1). Operating profits were up 32% at Rs 40 crore, translating into a margin of 33.3%, up from 32.2% in the corresponding quarter the previous year.

Profit after tax at Rs 44 crore, though, was up 69%, mainly due to an increase in the share of profits from associate companies and an 18% decline in tax outgo.

Project-based income as well as rental income contributed to the topline growth, although the latter contributes a very small (under 1%) amount to revenues at present.

On the expenditure side, although the total costs have risen slower than revenue growth, some issues merit attention. The staff costs, especially on the construction and marketing side, have increased nearly five-fold during the quarter.

The company seems to be spending heavily on sales as the commission and incentive charges grew by 145% and the brokerage and referral charges increased 6 times.

This could also be an indication of the increasing competition in this space. Also, the cost of land has risen much faster than revenue growth.

Meanwhile, the stock continues to quote below its offer price of Rs 400, which is not surprising considering the issue was over-priced even after the company lowered the original price band.

The stock ended 3.93% higher at Rs 392.45 on a day when the BSE Sensex was up about 1%. The gains can also be partly attributed to the positive sentiment towards interest rate sensitive sectors like auto, realty and banking.

Going forward, the company’s development plans are 80% in the residential space and the rest in the commercial space. As the latter grows, the company’s performance can be expected to improve further considering the segment enjoys better returns.

Another advantage for Puravankara is that it commands a premium on its projects. It also holds good quality land bank with clear titles.

Currently, it has 14 million square feet of the developable area (out of a total 116 million square feet) under implementation. There’s a flipside, too — the company has a geographical concentration as 74% of the land holding is in Bangalore and many new players are entering here.

Like most other real estate players, then, the valuation driver remains the execution capability, besides macro factors like interest rates and economic growth. Considering the company’s positioning as a premium player and its decent track record, it may not be a bad bet at declines.