Just why are you not interested in ITC, Mr Oberoi?

Oberoi hotel’s choice of a ‘friendly partner’ is a curious one. But it’s surprising that minority shareholders of East India Hotels (EIH) are not grumbling a bit. Before you read further, consider this.

* EIH is floating a joint venture with Reliance Industries (RIL) to develop and run hotel properties, according to The Hindu.

* PRS Oberoi, chairman, linked Reliance Industries picking up a stake in the company to his search for a friendly-shareholder “who shared EIH’s vision and would assist the EIH promoters”, according to a report carried by The Financial Express.

[caption id=“attachment_59100” align=“alignleft” width=“380” caption=“The JV with RIL serves the interest of the Oberoi family and as PRS Oberoi himself points out, the move would assist the EIH promoters. Punit Paranjpe/Reuters”]  [/caption]

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The hospitality major has some solid numbers to speak about. For the quarter ended June 30, 2011, EIH reported revenues of Rs 246.6 crore and a profit before interest and taxes (PBIT) of Rs 26.3 crore. This translates into a PBIT of 10.6% to revenue.

“Global economies and the economic environment are volatile and the world is confronted with much uncertainty, which could impact the company’s business,” Oberoi told his shareholders in the annual general meeting held two days ago.

When asked about the company, an analyst at securities firm Edelweiss has this to say: “We like EIH’s under-leveraged balance sheet, but the slow expansion, along with other businesses like printing press and car rental services, make the margins sub-standard. We believe the company is not in a position to exploit growth in Indian hospitality industry to its fullest.”

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Cut to the fine print of ITC’s annual report: “Your company’s (ITC) hotel business, with its globally benchmarked levels of product and service excellence and customer centricity represented by its four brands, is not only well-positioned to sustain its leadership in the industry, but is poised to emerge as the largest hotel chain in the country over the next few years.”

No tall claims these. During the June 2011 quarter, ITC racked up revenues of Rs 252.2 crore and PBIT of Rs 52 crore, which works out to a PBIT margin of over 20%. ITC, which has such a consistent revenue growth and is reporting a robust profit margin, owns a 14.99% stake in EIH. Under the new takeover code, ITC can acquire up to 25% in the company without going for an open offer.

Here, Reliance Industries is eager to bring in cash to the table. Agreed! Other than its proximity to the Oberoi family, one cannot really see much of a merit in this relationship. Yes, it serves the interest of the Oberoi family and as Oberoi himself points out, the move would assist the EIH promoters. But it’s a no brainer that this is merely an ‘investment’ to help a friend, and not a ‘core business’ for RIL.

Credit rating agency ICRA predicts that as long as India is able to maintain a healthy rate of growth, demand would absorb new supplies of hotel rooms over the medium term. While the point about a weaker macro-economic environment affecting the business conditions is acceptable, the fact remains that EIH has not been able to translate high revenue growth into profitability.

For the year ended March 2011, EIH revenue grew 33%, but the net profit dived by over 100%. Its operating profit growth was 2% against a minimum 16% from other players in the industry.

ITC clearly has a goal in the hotel business and has resources to achieve the same. Against this backdrop, it is not clear why EIH is not interested in a partnership with ITC.