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Oriental Hotels: Creature of economic cycle - Outside View by Luke Verghese

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Oriental Hotels: Creature of economic cycle
Dec 12, 2011

A long standing partnership

This 41 year old warhorse, primarily owns the upmarket Taj Coromandel, Chennai. The company itself is a joint venture between the Obul Reddy Group, if my memory serves me right, and the Indian Hotels Company Ltd - a partnership which has withstood the rigours of time. As a matter of fact it an attempt to cement its relationship, Oriental Hotels holds 5.1 lakh shares in Indian Hotels Company Ltd, with a book value of Rs 27 m. It also pays operating/management fees etc to Indian Hotels. (Its shareholding in Indian Hotels also gets to become a part of the management holding of Indian Hotels).The co-promoters in turn apparently own an enterprise called Dodla International to which Oriental Hotels apparently pays obeisance to, through monetary outlays.

The group companies

The company operates some 8 hotels - 4 of them going under the nomenclature of The Gateway Hotel, while three function under the Vivanta by Taj brand. The Taj Coromandel does not appear to belong to both brandings and stands separately. How many of these hotels are owned outright by Oriental Hotels is not readily known, nor is the number of rooms that come under this umbrella. However from the information that it has made available, the Covelong Beach Hotels (Fisherman's Cove) was merged with the company in 2002, and the company is also setting up a hotel at Coimbatore. It has also mortgaged the Coonoor hotel property to acquire a loan. The company has spent Rs 871 m during the latest accounting year sprucing up the assets of its owned properties. Quite some bit of this expenditure is unlikely to lead to any dramatic increase in revenues as barring the expenditure on the new hotel the rest were merely tucking in jobs.

The company however has one subsidiary, OHL Hotels (HK) Ltd, two associate companies, Taj Madurai and Lanka Island Resorts, and two joint ventures sporting the name of TAL Hotels and Resorts and Prestige Garden Resorts Ltd. Then there is a category styled as ‘significant influence’ and the companies that feature under this category include Indian Hotels company (IHL) and two 100% subsidiaries of IHL, going under the names of Roots Corporation, and TIFCO Holdings. Last but not the least is a company called Dodla International Ltd, in which key management personnel have influence.

The Investment Portfolio

The company had an investment portfolio of Rs 725 m, though down from Rs 1,225 m previously. It redeemed the preference stock held in Roots Corporations valued at Rs 500 m during the year. The cash came in handy to part finance the capital expenditure programme that is currently underway. Its significant investment in the investment portfolio is in its dollar denominated Hong Kong based subsidiary OHL International, in which it has a capital stake of Rs 468 m of US$ 10 each face value per share at an average price of Rs 312 per share. This investment alone accounts for 65% by value of all investments. The less significant investments are in Prestige Garden Resorts Rs 63 m, Taj Air Rs 63 m and in another dollar denominated share -TAL Hotels and Resorts, valued at Rs 44 m of US$ 1 each. It has several piddling other investments in other hotel companies and such like, and barring the fact that they lock up capital there appears to be no monetary benefits accruing to the company. (The vast bulk by value of the investments is in unquoted shares). As a matter of fact the total dividends realised during the year on its investments portfolio amounted to a laughable Rs 2 m. What type of fuddy duddy return on capital is this please? (The subsidiary which paid out a dividend of Rs 58 m in the preceding year did not do a similar in the latest year). The dividend returns exclude the probable benefits derived from other inter-se group transactions.

The inter-se transactions

A dekko at the inter-se group company transactions shows that the vast bulk of the deals are with just three companies that come under the orbit of 'Significant Influence'. Oriental Hotels sold goods and services worth Rs 80 m to such companies, and it simultaneously purchased goods and services valued at Rs 144 m from them. It also paid operating/ management/ licence fees of Rs 99 m to them. Why would Oriental Hotels be paying such a medley of fees to them when it is itself in the business of hospitality, unless it specifically refers to licence fees only? The company in turn received similar fees of Rs 43 m from TAL Hotel & Resorts Ltd and from Taj Madurai Ltd. It also paid out Sales and Marketing Reservation fees of Rs 100 m, but does not appear to have received a dime in return from any group company. How is this possible? However these kindred souls have advanced loans worth Rs 780 m to Oriental Hotels, though the loan schedule does not specifically mention any such receipt from group companies. It is also due Rs 60 m from Roots Corporation whose preference shares it has sold in the latest year. What does this company do, and what is the inter-connection?

But the big revelation is the Rs 475 m that is due to it from enterprises in which key management personnel have influence. This is not a sum to be sniffed at. The debtor could as well be Dodla Corporation. This due is categorised as long term licence deposit receivable. A similar amount was due in the preceding year too. What does this sum refers to, and is there any coupon rate attached to this loan, or is it some sort of a gratis or what? More importantly, what does the oddly christened Dodla Corporation do for a living? Then there is its investment in Taj Karnataka Hotels and Resorts which is on the sick bed. It has also simultaneously ceased to be an associate from the last financial year. What pray is the relationship now? The dues from this company have not been separately disclosed from the current year, as the statutory requirement does not apply to their relationship any longer. Taj Karnataka owes Oriental Rs 56 m being advances made to it besides the investment of Rs 3 m. Oriental has not made any provisions against its dues on the ground that this company will revive after the financial restructuring.

Shareholder rewards

The best years for the shareholders from the rewards point of view were the years 1988 to 1996.Between this period the shareholders were rewarded with 4 bonus issues and two rights issues. Since then the company has gone thanda on this front and merely concentrated on the dividend front. The dividend for 2010-11 was 75%. Why the change in heart please, especially when the promoters together have a comfortable controlling stake of 57.3% in the company? The point is also that presently the company's reserves and surplus at Rs 2.7 bn

Among the more important points to be noted about the hospitality industry is that it is fixed assets heavy relative to the revenues that it generates. This is one major reason that hotels tariffs and every other available service are so high priced. The other reason being the cascading taxes that government's levy. For example, to take the first instance, Oriental Hotels, on an average gross fixed asset base of Rs 3.6 bn could rustle up revenues of only Rs 2.3 bn in 2010-11.That is to say the fixed assets to revenue ratio was 1.5:1. And hotel companies are also invariably highly geared to boot. Fortunately however the company continues to charge ahead with revenues from Rooms, restaurants banquets and other services rising 23% to Rs 2.3 bn. (Income from rooms is the top drawer with 52.5% % of revenues, followed by food and beverages with 41.1%, and bringing up the rear was other operating income with 6.2%). Other income including 'operating fee receipts' interest income, and some book entries together however took a precipitous dive to Rs 74 m from Rs 177 m previously, due in the main to the dip in dividend income etc. While the increase in the big ticket operating and general expenses was contained to just above that of the increase in revenues, the higher interest and depreciation provisions put a brake on the profitability. Also adding to working capital costs was the higher level of trade debtors that it had to service. Consequently the pre-tax profit fell to Rs 321 m from Rs 353 m previously.

In the balance sheet financials, the increase in borrowings was limited to Rs 260 m, but even this was partly occasioned by the company putting more cash in the inter-corporate deposit market. The outstanding year end ICDs (inter-corporate deposits) rose to Rs 116 m from Rs 56 m previously. (A part of this ICD is due from Taj Karnataka and is a non performing asset). The company obviously reckons that effecting funds flow in such a manner is a more profitable way of earning its bread.

The subsidiary

This brings us to the performance of its only subsidiary, OHL international (HK) Ltd. HK presumably means Hong Kong. (Are there any specific reasons why the parent has based this subsidiary out of Hong Kong please?) As stated earlier this sibling accounts for 65% of its total investment portfolio of Rs 725 m. The brief financials of this company does not reveal much - as a matter of fact it reveals nothing. But the present rupee capital base of this company stands at Rs 669 m (though it is a wholly owned subsidiary) and it has reserves to the tune of Rs 117 m. It boasts investments of its own valued at Rs 728 m and it probably represents the capital that Oriental holds in its international ventures including its Sri Lankan venture. However, according to the brief P&L account statement it earned an income of Rs 14.6 m and it netted a pre-tax profit of Rs 14.2 m. (The Hongkong based sibling is more of a letter head company one reckons). The income in turn would translate into a return of a mere 2% on the book value of the investment. Presumably the management is more than happy with the return that it is generating. On the face of it, the investments are yet to bear any fruit as yet. There would have been greater clarity if the details of its investment portfolio had been furnished. The sibling has deemed it fit not to pay any dividend for reasons best known to it.

Well, Oriental Hotels has not missed out on a single dividend payment since 1979-80, though the profit after tax has shown a very fluctuating pattern over the last fifteen years -from Rs 308 m in 1988-89 to a low of Rs 54 m in 2002-03 to an all time high of Rs 435 m in 2007-08 and then a steady fall yet again. Not exactly the bottom-line performance that exudes much confidence.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme.

This column Cool Hand Luke is written by . 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.

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