Indian Hotels bids for Orient: May not pay-off in near-term

There are many ways to read the Indian Hotels deal. I can't say that I have gone into the nitty-gritty of it, but it is a very strategic call for Tata. The Tata Group often make acquisitions, which don’t make too much financial sense in the near term, but make a lot of strategic sense.

When JLR happened it did not go down very well with the street, they took some time to turn it around and eventually it paid off, said Udayan Mukherjee, managing editor, CNBC-TV18.

Corus is still not paying off. It has been so many years, but they hit a bad cycle after the Corus acquisition and it’s still been a big drag on their back. Strategically, at some point it would make sense, but the near term reactions to many of the Tata Group acquisitions have not always gone down well with the street.

You can see what they are trying to do by buying Orient Express, it is a very high value chain, they want to move up the ladder, they want to have more international presence in the luxury hospitality space.

The problem is what it will do to their balance sheet because Indian Hotels has a market cap of about a billion dollars. They are trying to buy something which has got an imputed value of nearly USD 2 billion. They already have nearly Rs 4,000 crore of debt on their balance sheet and this will load it up by at least that much. In first quarter of Indian Hotels 60 percent of their EBITDA was eaten up by interest costs.

So already they are running a fairly significant run rate in interest cost and it is not a very unleveraged balance sheet at all. This will stretch it further and you look at the history of their overseas acquisitions.

They bought The Pierre in New York a while back. It is a fabulous hotel, but it is still loosing money for them and interest costs are still very high. In the near term, because of the size of the acquisition which dwarfs their own market cap and probably doubles the debt on their books with not commensurate EBITDA flowing it yet from that acquisition, I fear for what the interest cost will do to near term performance.

Longer term may be in 2-3 years if the US economy picks up we’ll look back and say it was a great deal, we couldn’t see it then. Right now, analysts and the market might fret over what it does to their balance sheet.

People did not think that JLR will work out but they turned it around. So may be 3-4 years down the line it will be the right thing to have done and you can't fault the management. The managements cannot think like analysts and say what will it do to my interest cost next quarter?

So they have to take long-term strategic calls. I am not criticizing what the Tata’s are doing in this deal, I am just worrying about what it does for the next one year kind of performance in Indian hotels because investors often don’t have the same kind of perspective as promoters do in their long-term vision.

In the near term, the stock might sweat. I don’t know what today’s reaction would be. If they can pull the deal off, it is not a done deal yet, there are many slips between the cup and the lip on this one. So assuming that the deal is done, the market might worry in the near term.