Tata Sons Ltd is set to increase its stake in Indian Hotels Co. Ltd (IHCL) over 18 months, from 30.3% to 37.6%. This will happen through the issue of 36 million equity shares during fiscal 2011 to the promoter group and 48 million convertible warrants. One warrant will be convertible into one equity share after 1 April 2011, but within 18 months from now.

The move, which was announced along with the September quarter results, underlines the Tata group’s intent to increase its equity stake in various companies. This hike is well-timed given that the industry is witnessing a series of takeover threats. A Taj spokesperson (Taj brand of hotel belongs to IHCL), however, said, “IHCL is raising equity to strengthen its balance sheet." The move will expand equity capital by around 10% from the present 72.4 crore. Besides, the 850 crore funds raised through the equity issuance will be used to repay debt.

Graphic: Yogesh Kumar/Mint

Meanwhile, IHCL’s net sales for the quarter grew 15% year-on-year (y-o-y) to 328.5 crore. But sales were flat on a quarter-on-quarter (q-o-q) basis, perhaps as the second quarter is typically the weakest. An unexpected negative was the q-o-q fall of 500 basis points in the operating profit margin to 11.2%, though it was 80 basis points higher on a y-o-y basis.

This was due to absorption of fixed costs on renovating the “Heritage wing" of Taj Mumbai, which re-opened in August, with no commensurate income, and the Falaknuma Palace (Hyderabad). Added to this were the promotional expenses incurred to launch the Vivanta brand. Consequently, operating profit fell on a q-o-q basis despite the flat sales trend. On a y-o-y basis, it grew 23% to 36.6 crore.

IHCL reported a net loss of 6.3 crore for the quarter, against 11.9 crore profit in the year-ago period. But adjusting for exceptional items, the firm’s loss stands at around 3 crore, versus a loss of 7.3 crore in the year-ago period.

Meanwhile, IHCL also reported better occupancy rates during the first half of the current year, at 62% compared with around 55% in the previous corresponding period. The average room rates, too, have improved by around 5% and are expected to improve further. IHCL shares fell 3.2% on the Bombay Stock Exchange to 98.70 in a falling market, reacting to the weaker-than-expected results.

But the improving business environment in the second half should see higher earnings traction.