EIH Ltd’s proposed Rs1,300 crore rights offer could give a new twist to the tale of ownership and control of the company, one of the country’s leading luxury hotel chains.

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The promoters, the Oberoi group, hold 32.3% of the equity. ITC Ltd has 14.8% and Reliance Industries Ltd (RIL) 14.9%. The details of the rights offer are yet to be announced but speculation is rife about its outcome due to RIL coming in recently as a white knight to thwart any takeover bid by ITC.

However, if one adds the quantum to be raised to EIH’s present market capitalization of Rs4,700 crore, one sees an equity dilution of about 20%. Assuming all shareholders subscribe to the rights in the prescribed ratio, the equity shareholding pattern will, of course, remain unaltered. But there are views that suggest otherwise.

“The rights could be an opportunity for the promoters (the Oberois) to increase their stake in the firm, in which case the pricing could be at a premium to the prevailing market price," said Rashesh Shah, analyst, ICICI Securities Ltd. Of course, an increase in the promoters’ stake will be possible only if the other shareholders steer clear of the issue.

For example, in the case of Fortis Healthcare Ltd earlier this year, the rights issue was at a premium to the prevailing market price. The unsubscribed portion was finally taken by the promoter group to strengthen its stake in the company.

Will this happen in EIH, given that the large shareholders— ITC and RIL—have repeatedly said they are not interested in any hostile takeover of the hotel chain? Much depends on the extent of retail participation, which again depends on the pricing of the rights issue.

Pricing gains greater importance in the case of EIH from a retail investor’s perspective as, despite having 3,000 rooms and being the third largest hotel chain in the country after Indian Hotels Co. Ltd (IHCL) and ITC Hotels Ltd, it is currently out of investor favour. The EIH stock has underperformed the Bombay Stock Exchange’s Sensex index and its closest peer IHCL in the past year, despite the recovery in the sector.

In the September quarter, EIH’s net sales improved 28% year-on-year (y-o-y) and 7% quarter-on-quarter (q-o-q) to around Rs200 crore. Average occupancy rates (ORs) inched up by 2 percentage points to about 46% from the June quarter, significantly lower than the industry average of around 55%. And with costs increasing, the firm’s operating profit margin declined to 5.7% from 12.7% a year before and 12.3% in the June quarter.

“The primary reason for the decline is the poor ORs in the Trident BKC (38-39%) and Oberoi Nariman Point (20%) during the quarter," said a post-results report by Edelweiss Securities Ltd. EIH reported a net loss of Rs14.9 crore for the September quarter, compared with a Rs9.7 crore loss a year before.

Besides, despite expressing its intent to expand, the firm’s growth trajectory has been rather sluggish. Perhaps a part of the rights issue proceeds could provide financial muscle for its expansion plans.

EIH shares have risen by around 6% since the approval of the rights issue. But the fundamentals of the company in the near-term seem far from exciting from a retail investor’s perspective.