Companies & Sectors
Reliance and EIH: The white knight and the elephant

Despite being India's third largest hotel chain, EIH's expansion and growth has remained stagnant over the past few years. RIL buying stake and infusing the much-required cash inflows will help EIH both in terms of survival and expansion

Reliance Industries Ltd (RIL), the country's largest company, has said that it has bought a 14.12% stake in Oberoi group company EIH Ltd for Rs1,021 crore. At the same time, RIL also said that it has "full faith in" and "would support" the management of EIH and there is no change of management, operation or control of EIH.

The fact is that Reliance has never had a successful joint venture in its entire existence. Dhirubhai Ambani was famous for always going it alone. He lobbied alone and he set up plants alone. He did not even take the path of the joint venture which RP Goenka, the Singhanias and others did when they set up polyester plants. All the Ambanis needed was technology and they paid Du Pont and others for it quite generously. Mukesh Ambani has the same DNA. Even in a new and challenging business like retailing he has no partners unlike Sunil Mittal who has tied up with Wal-Mart. Would the same Ambani spend small change like Rs1,000 odd crore to act as a white knight to Oberoi? Most unlikely.

RIL's stake purchase in EIH, a hotel company, is significant in two ways. First, EIH was always under pressure that ITC Ltd, which holds 14.98% stake in the company will make a hostile bid.

And second, with a conglomerate like RIL buying stake and infusing the much-required cash inflows, it will help EIH both in terms of survival and expansion.

Despite being India's third largest hotel chain, EIH's expansion and growth has remained stagnant over the past few years. After a gap of about four to five years, recently, EIH opened 'Trident', a 436-room hotel at Bandra Kurla Complex (BKC) in Mumbai. The opening was also delayed by about five quarters.

According to a report by Edelweiss Capital, post the launch of Trident at BKC, in the absence of no major project in the pipeline for the next 12-18 months, EIH's earnings growth is dependent on increase in average room rates (ARRs) and occupancy rates (ORs). "We believe, with a slow expansion programme, EIH is curtailing its earnings expansion and not leveraging on its brand image," the brokerage added.

In short, EIH needed a deep-pocketed investor and the Rs1,021 crore infused by RIL will help EIH to take care of immediate needs and speed up its expansion plans.

Cigarette-to-hotels conglomerate ITC, which operates India's second-largest hotel chain with over 80 hotels, had maintained a 14.98% stake in EIH over a decade. The main reason for keeping its stake in EIH below 15% is that according to Indian takeover law, if any entity crosses the 15% stake limit, then it will have to make an open offer to buy additional 20% stake.

Speaking at the annual general meeting, Prithvi Raj Singh Oberoi, the chairman of EIH, said, "The demand for hotel rooms in India should grow in this financial year. Whilst room rates should begin to improve, margins are likely to be under strain due to high inflation."

While EIH lacked funding for expansion, ITC was more than willing to invest money into its own hotel business. ITC is planning to add about 2,000 to 3,000 rooms in the next two-three years. According to a note by Ambit Capital Pvt Ltd, ITC expects ORs to go up to 70% from 60% and sees the peak ARRs reached in 2006-07 to be only one year away. Currently ARRs are considered to be stable.

According to World Travel & Tourism Council (WTTC) estimates, travel and tourism demand in India will grow at 8.2% annually till 2019, the highest growth after China in the big countries league.

"Considering that the US offers 40x and China 10x hotel rooms as compared to the 1.1 lakh hotel rooms in India, the Indian hospitality industry has huge potential to grow structurally. However, high land prices, low floor space index (FSI), (a) plethora of taxes, and low incentive from (the) government are some key hurdles for hotel companies in India," the Edelweiss report said.

RIL's unit Reliance Industries Investment and Holding Pvt Ltd bought the stake from Oberoi Hotels Pvt Ltd, Aravali Polymers LLP and PRS Oberoi. EIH operates hotels and resorts under the Oberoi brand. The promoter and promoter group had a 46.43% stake in EIH prior to the deal.



Nandan Maluste

6 years ago

What was reported was that RIL had bought shares from the promoters of EIH. Hence the Rs 1021 cr would not go into company.

State-owned oil marketing companies reduce ATF prices by 4%

New Delhi: State-owned oil firms today cut jet fuel, or aviation turbine fuel (ATF), prices by 4%, the first reduction in rates since July, on softening of international oil prices, reports PTI.

ATF rates in Delhi will come down by Rs1,715 per kilolitre (kl), or 4.09%, to Rs40,138 per kl from midnight tonight, said an official of Indian Oil Corporation (IOC), the nation's largest fuel retailer.

The rates for Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), the other dominant jet fuel retailers, will see a similar price hike, as the three state-run firms fix prices in tandem.

The reduction follows two successive rise in prices on 1st and 16th August.

In Mumbai, the price of ATF was reduced by Rs1,800, or 4.16%, to Rs41,388 per kl.

IOC, BPCL and HPCL revise jet fuel prices on the first and the 16th of every month, based on the average global oil price in the previous fortnight. Today's price cut is only the third this fiscal, the previous reductions being on 1st June and 16th July.

ATF rates have gone up on 10 occasions since March.

Jet fuel in Delhi was priced at Rs37,982.22 per kl in the second half of February before international oil rates started firming up, resulting in an increase in domestic rates.

Today's cut in fuel rates will reduce the burden on Indian air carriers, but no comments could immediately be obtained from airlines about the impact on passenger fares.

The ATF price in Kolkata was reduced by Rs1,799 to Rs48,462 per kl, while in Chennai, it came down from Rs46,255 to Rs44,397 per kl.


The Direct Taxes Code 2010 Bill: Who gains, who loses?

Kotak Institutional Equities Research has come out with an analysis of the Direct Taxes Code (DTC) 2010 Bill, which will be effective FY13, if implemented. Kotak says that it sees the Bill as a short-term negative for corporate India, whose effective tax rate may actually go up by 1%-2%.

However, says the report, DTC does bring in a stable and efficient tax regime and a stronger fiscal position for the government (although delayed). Despite the slightly higher tax rate for corporate India, the immediate impact on capital markets may still be positive, says Kotak, with the 'no long-term capital gains' tax policy continued and short-term capital gains tax likely to be between 5% and 15% depending on which income slab you are in (15% flat

By removing the surcharge and the education cess, the DTC 2010 Bill proposes to reduce the effective corporate tax rate to a flat 30% against the current 33.2% rate (30% corporate income-tax rate + 7.5% surcharge + 3% cess). However, Kotak believes that with the removal of exemptions as well, the effective tax rate for the corporate sector is likely to go up over a period of time. A report that it sent to its institutional clients today says, "The effective tax rate for a sample of 370,000 Indian firms for FY09 was 23%; with fewer exemptions under
the DTC, the effective rate could go up by 1-2 ppt, as per our calculations."

Kotak believes that the new tax structure scores on impartiality and efficiency - firms that used to pay very little taxes - such as Minimum Alternate Tax (MAT) - stand to lose while firms that already pay high taxes may stand to gain. Some of the winners it listed in its report


While some of the losers include....

Source: Kotak report (dated 31 August 2010).

The Bill has retained the calculation of MAT on book profits itself (profit which has been made but not yet realised through a transaction, such as a stock which has risen in value but is still being held) instead of on gross block (total value of all of the assets that a company owns).

Kotak believes that although mutual funds and Unit-linked Insurance Plans (ULIPs), which are currently exempt from dividend distribution tax, would now be taxed at 5%, it will only be marginally negative as MFs and ULIPs hardly distribute dividends. A more negative fact is that short-term capital gains tax for companies would now be at 30% and this may negatively impact corporate and capital market activity.

However, short-term capital gains tax for individuals, which is currently levied at a flat 15%, would now be levied at 50% of the three income-tax slabs of 10%, 20% and 30%, i.e. 5%, 10% and 15%. The best news is the status quo maintained on long-term capital gains tax that would continue to attract no tax subject to the levy of Securities Transaction Tax, says the report.

Kotak is not happy with the deferment in implementation of the DTC. It says, "The DTC 2010 Bill, if enacted into an Act after the approval of Parliament, will apply from 1 April 2012. This implies deferment of the DTC by a year to FY2013 from the earlier target of FY2012." This delay, along with a deferment in implementing the Goods and Service Tax will put pressure on the government's target to reduce the GFD/GDP ratio to 4.8% in FY12. However, it does expect DTC to bring in additional corporate income-tax revenue of about Rs322 billion in FY13.

Among companies likely to be affected, "Reliance Industries likely to be impacted by MAT liability for its SEZ refinery," says Kotak. Other players that may be affected include SEZ developers such as Adani Power - as per existing rules, SEZ developers have exemption from payment of MAT. If SEZ developers are made liable to pay MAT, valuations could



harish maheshwari

6 years ago

Good Analysis !.
Keep it up.
It could have been better if it had included individuals tax point of view too alongwith the companies.

jignasa talajiya

6 years ago

please clarify the norms regarding insurance sector


6 years ago

are dividends from NON EQUITY mutual funds tax free or not?

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