Hitting the high road
This 14 year old hospitality company owned by the Baljee family, and headed by the great helmsman, Chander Baljee, appears to be shifting into overdrive, judging by its stated intentions. As on the date of the directors' report the company boasted a room inventory of 1,104 through its 13 hotels across 7 major cities in India, and now plans to revv it up by another 1,000 rooms in the next one year. The starry eyed plan is to reach the size of 4,000 rooms by 2015. Quite obviously the management intends to take on the big boys of the industry. The room strength that it commands comes in several different categories - through owned hotels, through management contracts, through its subsidiaries, and through joint ventures. In this manner it is examining the entire spectrum of possibilities.
Boosting the family stake
Getting there also infers having to put together a high wire financial action plan, as hotels are capex intensive, with a long gestation period to boot, and they take time to generate positive cash flows. There is always a severe mismatch between the gross fixed asset base, and the revenues that a hotel can rustle up at the end of the year. What adds to the grind is that the Debt/Equity ratios of hospitality ventures are invariably skewed towards debt - both term loans, and for working capital. Whether in anticipation of this eventuality of otherwise, the family is anteing up its stake in the company. The annexures to the annual report deals with the proposed preferential allotment of equity to some members of the Baljee family, which will in effect raise their stake in the voting capital to 29% post issue from 25% pre-issue of capital. There appears to be an anomaly here in the holding of the promoter family in the paid up equity capital. One schedule state that Chander Baljee owns 47.6% of the equity, while the combined holding of the promoters is given as 69.5%. That would imply that the other members of the family jointly control 21.9%. But the notice accompanying the agenda for the Annual General Meeting states that the other family members hold 25% of the equity. In effect the promoter holding pre issue of preferential equity should be 72.6% and not 69.5%. And in which event, what would be holding of the promoter family post issue of equity?
What exactly is the purpose of ramping up the family holding at this juncture is at yet unclear. If the company is really intent on expanding capacity in the manner in which it has stated in the latest annual report, then it will have to issue a lot of additional equity to meet very prudent debt equity norms, and it is a moot point whether the family will be able to chip in with their share of the additional moolah. As it is the company has omitted dividend payment for the latest completed accounting year, citing the need to conserve company funds for future capital infusion needs. Or this proposed hike in management holding at this juncture, may well be a precursor to the need to dilute at a future date.
Whatever may be the funding compulsions that the company may face in the future, the promoters have cut out sweetheart deals, neatly worked out in their favor. Royal Orchid was initially promoted as Universal Resorts Ltd for the business of developing and managing hotels. It affected a name change to its present one in 1997. What operating assets this company owned at that point of time is not clear. But the promoters also owned two other companies, Hotel Stay Longer Pvt Ltd, and Baljee Hotels and Real Estates Pvt Ltd, which apparently owned the group's first hotel venture, the renamed Ramada, at Bangalore. The management of this hotel was handed over to Royal Orchid under a lease cum operating management agreement initially in 2002, and through a revised agreement in 2008. Under the terms of the renewed deal, Royal Orchid has to make annual payments at a specified percentage of the gross room revenues, or a minimum committed amount whichever is higher. (Significantly the rate of payment remains unspecified even though Royal Orchid is a listed company.)
That is only a part of a more intricate deal. Royal Orchid also had to pay a security deposit of Rs 60 m to Chander Baljee and a further deposit of Rs 10 m to other key management people for the right to operate the Ramada. And what was the need to make a deposit with Mr. Chander Baljee personally, and to an entity controlled by other key management personnel, when Ramada's ownership rests with another company? The question also is whether Royal Orchid had much of a choice on the terms and conditions that bound it, when the deal was finalized. One also wonders whether these deposits carry any coupon rate at all. The proprietors also get to squeeze every dime out in every which way, as Royal Orchid also paid rental expenses of Rs 14.3 m to Baljee Hotels and another Rs 3.3 m to Hotel Stay Longer in FY10. What's more, the Chairman and Managing Director helps himself to an annual remuneration which is higher than that permitted under the law, and require Central government permission to regularize the payment. (The promoters also separately own what look like two other hospitality companies, Royal Orchid West Pvt Ltd and Royal Orchid Resorts Pvt Ltd. What play these two companies have in the overall scheme of things is not known?)
The chain of hotels
Royal Orchid at end March 2010 operated 13 hotels across 7 major cities in India. Of this 5 are in Bangalore, 2 each in Mysore and Pune, and one each in Jaipur, Goa, Ahmedabad, and Navi Mumbai. At year end it also boasted 13 direct subsidiaries (including a wholly owned subsidiary called Multi Hotels based out of Tanzania), has separately a 50% stake in 5 joint ventures, and a 30% stake in one associate. The total book value of its investments was Rs 1.1 bn. How many hotels Royal Orchid directly owns is not known, but the gross block at end March, including the very sizeable capital work in progress of Rs 837 m, was Rs 1.4 bn. Further, the total borrowings at year end were a very healthy Rs 1.4 bn, with loans to subsidiaries at year end totaling up to Rs 302 m. The total interest payment at Rs 91 m would have drilled a large hole in its bottom-line, but for the fact that Rs 68 m of it got capitalized. Based on a back of the envelope calculation, the company paid a coupon rate of 9% on its outstanding debt.
Pampering the subsidiaries
The way the dice is loaded, as things stand, the company takes on interest bearing loans and in turn advances interest free loans to its 100% owned subsidiaries - there are 8 such. It also offers low interest bearing loans to 2 of its partly owned subsidiaries. The company has two subsidiaries in which it has a 51% stake, and one subsidiary in which it has a 53% stake. The vast bulk of the loans that it has advanced are to its 100% subsidiaries. As stated earlier, the company has a 50% stake in 5 jointly controlled joint sector projects. Fortunately, no loans as yet appear to have been dangled to these joint venture entities - though a note to the accounts states that the company has given guarantees to banks for loans sanctioned to subsidiary and joint ventures. Only one of the 5 ventures appears to be operationally functional, and the operating results of this venture for the period ending March 2010 is not stimulating to say the least. The other four entities appear to be in various stages of development. When they will give a return on their equity is another matter.
Some 'strange' entries
But what is intriguing about some of these joint ventures is in the similarity of the balance sheet figures as on the same date - March 31. The fixed assets of Ksheer Sagar Buildcom, Raj Kamal Buildcom, and J K Builders as on March 31, was identical at Rs 52.8 m each. That is not the only similarity. The current liabilities and provisions of the three companies were also almost identical and synchronized at Rs 686,000. How can three wholly different companies have such matching figures as on balance sheet date? There appears to more to it here than meets the eye.
A study in diversity
The 14 subsidiaries of the consolidated group (including the step down subsidiary Royal Orchid East Pvt Ltd) are an interesting study in diversity. Collectively they commanded total assets of Rs 2.2 bn, and rustled up a turnover of Rs 423 m. But the collective profits of the combine was in negative territory at minus Rs 22 m. Nine of the 14 entities do not boast any revenues as yet, but presumably will do so in the near future. But expect any returns on investment to be way down the line. The real big boy among the subsidiaries is Icon Hospitality, and it is still operating on uneven ground. With total assets of Rs 915 m, it ran up a turnover of Rs 173 m, but registered a pre-tax loss of Rs 38 m. Remarkably enough, the company even made a provision for tax of Rs 14 m on this pre-tax book loss figure, and so ended up with a gross loss of Rs 52 m! Hotel companies seem to encounter problems of multicolored hues it appears.
In addition to the equity and the loans that it has forked out to it siblings, there is yet another nexus. One subsidiary, Icon Hospitality and one 50% joint venture going by the name of Cosmos Premises, figure in the sundry debtors list. In other words the parent had sales dues accruing from them (is the parent hocking rooms and/or other services to its siblings?) and in the case of Icon Hospitality these sales dues aggregated to over 6 months receivables. As a matter of fact almost the entire debtor dues of over six months were care of Icon Hospitality. Another means of giving succor to a struggling relative if you please. Cosmos Premises on the other hand is a part of its 5 joint venture enterprises that it has set up, and the only functioning JV at that. Even in the case of trade debtor dues, the company seems to specialize in doing synchronized business. The maximum amount of trade debtor dues in FY09 and FY10 from its subsidiary Maruti Comforts and Inns was identical at Rs 15.1 m. What is all this about please?
The company is setting much store by its ability to expand at a furious pace. Much will depend on its ability to manage its finances, and this is crucial, and the simultaneous ability to fill its rooms, and derive the crucial revenues from the foods and beverages business too. How it all pans out only time will tell.
Disclosure: Please note that i am not a shareholder of this company
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.