Velan Hotels - Should you consider the Rights issue?

Velan Hotel is all set to raise funds through a Rights Issue, where the company is offering 69 shares for every 20 shares held (on the record date of August 9, 2011) at Rs 23. The Issue opens on August 24, 2011 and closes on September 10, 2011. Company plans to raise 61.49 crore through the issue. Shares of the company are listed on Bombay Stock Exchange, B group and the Current Market Price as on September 2, 2011, was Rs 16.90.

Objective Of The Issue

The objective of the issue is to set up a mall, multiplex and entertainment hub in the city, and a bio-mass based power plant of 2.7 MW capacity. The setup of the entire project is on a plot of land measuring 2,44,642 sq. ft., which is adjacent to its existing hotel Velan Green field at Tirupur. The total cost of the project is 129.97 crore, out of which 66.50 crore is financed by two banks (Allahabad Bank and Andhra Bank), and the cost of which is their respective base rate (currently, base rate of both banks is 10.75 per cent) plus 4.25 per cent. An amount of 61.49 crore will be raised through the Issue and the remaining two crore from internal accruals. The following table gives information on the cost and project area of each one:

All the projects have already commenced. The mall and the renovation projects are going to be completed by October 2011, the power plant in January 2012, and the multiplex and centre will be completed by June 2012.

Velan Esplanade Mall: The company has a tie-up with retail players like Reliance Trends, Reliance Footprints, Reliance Vision Express and Dominos. It proposes to open a Spa Centre, and would have a food court and two food and beverages outlets.
Esplanade Multiplex: It has a built-up area of 1,26,780 sq. ft. The multiplex would have six screens and a capacity of 2212 seats. It would also consist of 20 service departments, with a bar and food outlet.

Convention Centre: The total Area of the hall would be 36300 sq. ft., which will have a seating capacity of 1250 to 1600 pax and 500 pax seating for dining.

Bio-mass based Co-Gen Energy Project: The company plans to set up a bio-mass based power plant of 2.7 MW capacity. The project is designed to meet the power requirement for its existing hotel and for the mall and multiplex in the future. Post-expansion power consumption is 650 lakhs units per annum. The average cost of power is Rs 6.80, and after the formation of the plant, the company can generate power at Rs 4.80, thus saving Rs 2 per unit for the company.

Existing Business

There are four major hotels/restaurants in the company’s portfolio, which are Hotel Greenfield, Velan Hotel, Uthara Restaurant and Velan Food Park.

The company has a standalone restaurant named Uthara, which is located north of Tirupur, and Velan Food Park, which is a multi-tier food outlet located at Coimbatore. Of the total revenue, 51 per cent comes from the room rent, 39 per cent is contributed by food and beverages, liquor contributes around seven per cent and the remaining three per cent from others.

Financials

For FY11, the company’s topline increased by 11 per cent on a YoY basis to Rs 14.79 crore. Its net profit margin increased by just four per cent to Rs 1.16 crore. The company’s Q1 FY12 numbers were very weak. Its topline decreased by 10 per cent, while the bottomline declined by 33 per cent on a YoY basis. Velan Hotel also is not well established — its market capitalization is Rs 58.97 crore, which is low when compared to that of its peers.

The company is expanding its business into malls and multiplexes, where there are margin concerns. Major players like Cinema and PVR’s net profit margin is just around four to five per cent, and the occupancy rate is in the range of 26 to 30 per cent. Both have a pan-India presence. In the case of Velan, the company will be operating in a Tier-3 city (Tirupur), where the occupancy rate and average ticket price will be less.

On the other hand, major companies in the retail segment, like Pantaloons, Koutons, and Trent have faced net profit margin issues, which are in the range of three to six per cent. In the coming quarters, the net profit of the company might be affected due to higher depreciation and interest cost, while the company’s revenues may remain subdued as of now and would increase once the projects are executed.

At present, the company is commanding a high P/E (Price to Earnings) of 51, as compared to its peers like Indian Hotels (39), Hotel Leela (38) and Mahindra Holidays (29). Also, the Issue price at which the company is offering to the shareholders is way above the current market price. The average volume of the scrip is around eleven thousand, which is very low (average per day for the last two months).

There is uncertainty about the future prospects of the segment which the company is going to enter, and with disappointment on Q1 FY12 numbers, we, at DSIJ, would recommend our investors to avoid the Rights issue of Velan Hotels and also exit the counter, as the volumes are high at present.