The uninvited ride aboard Orient-Express Hotels by Indian Hotels Co. Ltd has baffled analysts. The company first quietly purchased from the market a 10% stake in the US-based operator of luxury hotels, tourist trains and cruises over the past month, and then wrote a letter to the chairman of Orient’s board seeking a meeting to discuss the possibility of an association between the two companies. “The investment creates a platform for the company to seriously explore the possibility of an alliance”, Indian Hotels said in a release. Until the contours of the alliance (if any) are known, it’s difficult to assess the impact of the company’s latest acquisition, analysts say.
But the manner in which Indian Hotels has picked up this stake gains significance because there were rumours earlier this year that Orient-Express was up for sale, with bids apparently being in the region of $3 billion. Indian Hotels has purchased its 10% stake for $211 million (Rs855 crore), valuing the company at $2.11 billion. According to The Times of London, UK-based billionaires David and Simon Reuben were considering a $3 billion bid to gain control of the company. The brothers own a stake of 5% in Orient-Express.
Indian Hotels now seems well placed in case there’s a bidding war for control of Orient-Express. Its 10% stake has been acquired at a discount to the likely price at which any acquisition may happen. And even if it loses out to another bidder, it would gain at least 42% on its investment of $211 million.
The Rs855 crore Indian Hotels has spent in acquiring the stake has entirely been financed through debt. But that seems to be a temporary arrangement. Tata Ltd, which has granted a loan of $300 million in three tranches over the past month, has stipulated that the principal must be repaid in six months. By such time, Indian Hotels should have completed its rights issue, expected to raise between Rs1,744 crore and Rs1,924 crore. Besides, it has recently sought shareholders’ approval to increase the borrowing limit from Rs2,000 crore to Rs4,000 crore.
Orient’s addition to Indian Hotels’ portfolio would enhance the latter’s international presence substantially. The company has stated that it wants to increase the share of international revenues to de-risk its business model further.
In fiscal 2006-07, international operations accounted for about 25% of the company’s revenues. In line with this strategy, the company made two acquisitions in the US, cumulatively worth $230 million. If the company gets control of Orient-Express, the share of international operations would easily exceed its domestic business. Indian Hotels could well be on its way to a being a global player, a model already embraced by Tata Tea and Tata Steel.
Received wisdom decrees that companies in the infrastructure sector progress from construction to build, operate and transfer (BOT) projects to owning real estate. At every stage of this evolution, so goes the theory, the company adds value. Unfortunately, that logic hasn’t worked for IVRCL Infrastructure & Projects Ltd. Before the listing of its real estate subsidiary, IVR Prime Urban Developers Ltd, analysts were unanimous that it would unlock value, taking the parent company’s stock to dizzying new highs. What happened, however, was precisely the opposite. Priced at Rs550 during the IPO, the IVR Prime stock now trades at around Rs370.
As a result, IVRCL Infrastructure now trades about 10% lower levels compared with the highs reached in July thanks to the unlocking story. Instead of boosting valuation, the real estate subsidiary appears to be hobbling the infrastructure company. The change in sentiment towards real estate has been the main reason, with analysts routinely saying that they “expect realty prices to correct on account of high interest rates and slower credit growth.”
But that could be changing. The BSE Realty index has moved up in the past week, and so has IVR Prime. IVR Infrastructure has obtained orders for water and power projects in Tamil Nadu worth Rs368 crore, taking its total order book to more than Rs10,000 crore or around three years’ revenues.
IVRCL has special expertise in water projects, which form the bulk of its orders in hand. It also has four BOT projects in hand and the capacity to bid for more. BOT projects have higher rates of return. Also, margins for the full year are expected to be higher than in the first quarter. The withdrawal of tax benefits for construction companies is a negative but that has already been priced in. The strength of the infrastructure story should be enough to propel the stock upwards. But at more than 20 times FY09 earnings, the stock is not cheap, but then earnings growth is expected to be higher.
With peers Nagarjuna Construction and Hindustan Construction at or above their July levels, IVRCL should play catch-up.
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