Run of the mill, is probably the best adjective for the recent financial results posted by Hotel Leelaventure for year-ended March 1997. Justifying this statement is mere 2.52 per cent growth in the company's bottmline which stood at Rs 45.15 crore. The company has been hit by a host of problems prime amongst which was the reduction in available room capacity due to the expansion and renovation programme at its 220 room Goa property.

The second half has been miserable with the company posting a negative earnings growth of 10.5 per cent on a year-on-year basis. A drop in occupancy rates from 86 per cent in 1995-96 to 73 per cent has compounded the company's problems.

Income from operations at Rs 130.90 crore was up a mere 5.05 per cent (last year income grew 49 per cent) compared to Rs 124.61 crore for the twelve months ended March 1996. But despite the minimal growth margins at Hotel Leelaventure remained buoyant, largely due to increased average room realisations (ARRs). In fact the ARR in 1996-97 was up 31 per cent from Rs 5,731 to Rs 7,491. The operating margins thus improved from 47.64 per cent to 47.94 per cent. Furthermore forex earnings which at Rs 110.13 crore accounted for almost 84 per cent of sales also helped.

The 250 room Bangalore property is expected to go on stream in mid 1999, while the HUDCO acquired Delhi facility should be operational by the year 2000. The company's expansion at Mumbai, at a site adjacent to its existing hotel has also been halted due to controversy surrounding the acquisition of land.

Thus with any kind of revenue from all these projects still far away, growth in the interim would have to come from its two operational facilities. Earnings in the first half could well be suppressed again due to renovations in Goa only likely to be concluded during the last quarter of 1997. There is also very little room for another large hike in the ARRs at Mumbai as these are already quite high. Thus till Goa goes on-line again margins and earnings growth could be squeezed.

Ispat Industries

After extending the period for subscription, the largest ever rights issue made by Ispat Industries has finally sailed through courtesy additional subscription by management and the ever-friendly financial institutions.

Financial Institutions had no option but to bail out the issue as otherwise the project could not have gone on. As a result, the stake of FIs and banks in the company would exceed 50 per cent.

The lowest price at which debentures could have been converted was Rs 15, the price at which shares were available in the market. The investor could therefore have very well bought the shares from the market. The entire issue reveals that the non-institutional investor has come of age. In the letter of offer, the management has projected dividend at the rate of Rs 2.5 per share. Any investor buying shares at the current market price would get a yield of 16.66 per cent.

With their increased stakes, FIs should be able to exercise control in a more effective manner. Technologically, the project is very sound and it also enjoys locational advantage. Maharastra, where the project is located accounts for 25 per cent of total HRC consumption. Being the lowest cost producer and because of freight advantage, the company will be able to capture the majority of the market. However, the offer document itself states that the company will dilute the equity further. Besides, the technology advantage that the company enjoys is because of its hot-metal route.To make HRC, the company proposes to use a mix of hot metal, sponge iron and scrap. The hot metal will be procured from a group company-Ispat Metallics India. As on March 1996, Ispat Industries had extended an advance of Rs 49.81 crore to Ispat Metallics as promoter's contribution for equity of Ispat Metallics.

The cost of the project for Ispat Metallics works out to be Rs 1,100 crore. The basic question is, how will the furnace be financed? Ispat Metallics will have to dilute the equity to the public. Ispat Industries itself will contribute Rs 100 crore and the Mittals will also chip in.

The debt equity of the project is 2:1. If the HRC project has to go on stram in October-1997, as per schedule, the blast furnace will have to go on stream simultaneously, otherwise the advantage of low cost will not be available. However, production at Ispat Metallics is expected to start in April 1998. Any cost overrun in the project will be borne by Ispat Industries.

The indication from the above is clear. Ispat Metallics will be merged with Ispat Industries. The management had accepted this possibility and now with FIs in control, it will have to be the case. The option for investor is to pick up the shares only after the companies are merged. Till then, FIs should play the role of venture capitalist. And with their holding, FIs should also be able to install new management in case the existing management does not perform.

Clarification

In our comment on GIPCL, Jayesh Shah, analyst, First Global Finance was misquoted. An utility can never create value for the shareholder as the return can't exceed 17.85 per cent of capital base. The return does not exceed the cost of capital by a margin that justifies investment. Even IPPs are taking an exposure to SEBs which are in a financial mess. The comment should be, "at the current price, the scrip is attractively valued."

(With contributions from Percy Dubash and Urmik Chhaya)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.