Fearing a liquidity crunch as a result of the purchase of 85 per cent

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stake in Mumbai’s Sea Rock Hotel and its redevelopment – together slated to cost several hundred crores -- the Indian Hotels Company of the Tata group has cut its stake in the venture to 20 per cent.

Anil Goel, chief financial officer of Indian Hotels, told an analysts’ meet on Wednesday that the company had moved its investment of Rs 680 crore in Sea Rock into a special purpose vehicle (SPV) and infused an equivalent sum back into his company that owns the Taj chain.

“Indian Hotels will now hold 20 per cent in the SPV, while other Tata companies and banks will hold the balance shares,” he said.

Manoj Bahety, vice-president at Edelweiss, said Indian Hotels was focused on completion of new hotels in New Delhi, Bangalore and Hyderabad. This, coupled with the acquisition of Sea Rock, resulted in increased cost of borrowings.

“So this move will help the company to improve liquidity needed for completion of on-going projects,” he said.

For the quarter ended December 2009 the company’s interest costs rose by 80.57 per cent to Rs 44.18 crore.

Another hotel sector analyst at a domestic brokerage said that since Indian Hotels had not received money from detachable warrants, it was forced to form an SPV for Sea Rock. “This move will de-leverage their balance sheet as well,” he said.

On August 11, 2009 Financial Chronicle had reported that the Tatas were unlikely to exercise their right to buy shares of Indian Hotels at Rs 150 apiece as provided in the warrants issue. (The stock closed at Rs 90.8 on the BSE on Wednesday.) Had the warrant holders done so, the company would have received almost Rs 900 crore as equity.

This would have helped it implement the capital- intensive Sea Rock project which, in addition to the Rs 680 crore for the 85 per cent stake, required another Rs 500 crore to be turned into a world-class convention centre with commercial and retail outlets.

Indian Hotels also used up around Rs 105.5 crore of funds left over from its May 2008 rights issue and Rs 360 crore raised from fixed deposits from the public to help part- fund its Rs 680 crore investment.

The company also decided to forgo its entitlement to the rights issue of shares of Orient Express Hotels in which it held a 9.7 per cent.

“For strategic reasons, Indian Hotels has restructured its shareholding in Sea Rock,” the company said in a statement to the stock exchange on Wednesday.

It said the company had in place an operating and management contract as also a technical services agreement with Sea Rock. “Indian Hotels has an option to re-purchase the shares of Sea Rock at the end of 37 months and upon the happening of certain events,” the statement added.

In response to a query by Financial Chronicle, the company said, “The important issue is that the asset continues to be under the ownership of the Taj group and developed under the guidance of Indian Hotels.”

Indian Hotels announced its third- quarter results ending December 31 on Wednesday. It suffered a 22.62 per cent drop in net profit to Rs 64.88 crore, mainly because of closure of the 287- room palace wing of the Taj Mahal Palace and Towers. The wing is expected to reopen in May.

The company said that the business interruption insurance policy for the Taj Palace expired on November 26. As a result the insurance companies would not underwrite the loss of profit due to the closure of one of its most important hotels.

The total income was lower by over four per cent at Rs 437.88 crore. However, the consumption of raw materials rose by 17.66 per cent to Rs 33.77 crore on a year- on- year basis.