Hospitality firms may go for fund raising to stay afloat as recovery eludes

Hotel companies are expected to report a sharp contraction in their earnings for the September quarter
A delayed recovery in the hospitality sector will prompt more companies to look at fundraising options, say analysts. The recently concluded rights issue of EIH (under the aegis of The Oberoi Group) will help the company reduce debt and improve its overall a balance sheet.

A persistent rise in Covid cases in India and a second wave in a few continents is set to derail the overall recovery. Those with a strong balance sheet and comfortable liquidity position are better positioned to deal with the disruption. Even as hotels in leisure destinations have started seeing recovery, for business hotels, the pain will linger amid restricted travel and work from home.

The business hotels of EIH, which is the core revenue generator for the company, continues to operate at sub-optimal levels. “Considering it is unlikely to improve any time soon, it is critical that the hotel has enough liquidity to wade through the pandemic,” says Nandivardhan Jain, chief executive officer, Noesis Capital Advisors.  Other hotel chains are also in discussions to raise funds via non-convertible debentures, equity, and strategic sale at lower valuation, he points out.

Rashesh Shah, analyst at ICICI Securities, says EIH’s fundraising will help the firm pare debt. At the end of 2019-20, EIH had a debt of Rs 533 crore.  “The recent fundraising of Rs 350 crore via rights issue will improve the debt/equity mix to 0.1x, from 0.2x,” says Shah.

While Indian Hotels has a strong promoter backing, its debt/equity is 0.7x, which, combined with capital expenditure (capex) requirements, could lead to rise in debt/equity further to 0.9x if the current Covid issue persists. Lemon Tree Hotels, being in capex mode, is highly leveraged versus peers, but has strong institutional backing for liquidity support, states Shah.

EIH, which runs hotels and resorts under the Oberoi brand, saw its issue oversubscribed, with Rs 561 crore being offered, against the issue size of Rs 350 crore. EIH offered 53.7 million shares for subscription to existing shareholders at a price of Rs 65. The rights issue opened on September 29 and closed on October 13.

The firm received applications for 83.9 million shares or 160 per cent of the issue size at the close, according to exchange filings. EIH plans to use Rs 280 crore out of the net proceeds of the rights issue to repay/prepay some of its existing borrowings, according to the offer letter for the rights issue. EIH had reported a profit of Rs 165.14 crore on revenue of Rs 1,674.69 crore in 2019-20.

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