ICICI Direct's research report on EIH
The EIH board has approved fund raising of Rs 350 crore through rights issue to shore up liquidity and strengthen the balance-sheet in the wake of an uncertain business environment. The company would issue 5.38 crore shares at Rs 65/share (including premium of Rs 63/share). The rights entitlement ratio has been set at eight shares for every 85 shares held in the company. While this would lead to equity dilution of 8.6% on a post diluted equity base of 62.5 crore, it would have a positive impact on EPS given the current lower RoE of 4.2% for FY22E (due to restricted business) vs. average cost of debt of ~9.2%. Assuming debt repayment of Rs 250 crore in the current fiscal, we expect loss of FY21E to get reduced by 9.4%. For FY22E, we expect EPS to improve 4.8% to Rs 2.3/share. Further improved liquidity buffer would place the company in a better position to cope up with the current business uncertainty. On the valuation front, the stock is available at EV/room of Rs 1.5 crore (refer exhibit 3), factoring in the impact of equity infusion that is still at a discount of ~50% from the current replacement value. Hence, we remain positive on the company from a long term perspective and recommend subscribing to the rights issue.
The current pandemic environment has thrown up severe challenges for the entire hotel industry. However, EIH, with its strong b/s and strategic property locations is poised to benefit from a favourable demand supply matrix in the long run due to likely postponement or reduction in new room supplies in the industry. We maintain our BUY rating on the stock with a revised target price of Rs 105/share (i.e. @ 19.5x FY22E EV/EBITDA).
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