Clearwater (PE) checks in

Incorporated in 1986, Kamat Hotels India Ltd (KHI) categorizes its business under four heads - Owned hotels, Management of hotels owned by other parties, Catering services and Others.

It has four brands - The Orchid (which is the flagship brand), VITS, Gadh hotels and Lotus resorts. The Orchid hotel, located at Mumbai, is an environment friendly 5-star hotel (Ecotel) that contributes maximum to the company's revenue. VITS hotels are luxury business hotels and are present in cities such as Mumbai, Aurangabad, Nagpur, Pune, Nasik, Delhi and Bhubaneshwar. The Lotus brand is applied to luxury resorts. They are located at Silvassa, Murud, Udaipur, Konark, Karwar and Goa. The Gadh hotel at Fort Jadhavgadh is located 22 km from Pune and has 38 rooms and 12 tents spread across 3 wings.  Last year, Kamat Hotels absorbed some of the hotels run by the Kamat family, taking promoters' stake to as much as 57%.

However, what is interesting about this company, apart from a very good reputation and pedigree of its founder, one Mr. Vithal Kamat, is a recent development.

Clearwater Capital Partners (who are based out of Cyprus & Singapore) had approx. 23% stake in KHI previously. KHI had issued FCCBs worth $18 million in 2007 to fund their expansion plans (Mumbai Orchid and all that). Anyway, the conversion price back then (at the height of bull market) was set to Rs.225/-. After sanity prevailed, the conversion price was reset to Rs. 135/- in June 2010. Now, KHIL over the past 6 months or so has been converting FCCBs into equity at Rs.135/- (check the various announcements they have made). Clearwater with a complete FCCB conversion would hold approx. 31% of KHI’s diluted equity. Once the percentage holding crossed 25%, open offer rules were triggered and Clearwater made the open offer @135 to the remaining shareholders for the mandatory 26%, which closed recently. Post the closure of the offer, and equity dilution, the shareholding status is as follows:

Promoters (Kamat family & associates) – 51.7%

Clearwater Capital Partners – 41.3%

Public shareholding – 7%

It must be noted that this open offer to acquire 26% @135/share was first announced in January 2012, and made in March 2012, but got delayed due to various reasons. Finally it took place at the end of December 2012.

With the mandatory 25% public shareholding rule to be implemented by June ’13, it remains to be seen how this plays out. Clearwater being a PE would want to make a quick buck on its investment and may not hesitate to sell its stake to hospitality major, local or global. And with brands spanning most segments from budget to luxury, Kamat would be an attractive bet for many hopefuls. Besides, a majority shareholding of the founding family would be an added show of confidence in the long term viability of the business. This could well turn out to be a case similar to that of Wabco where there were 2 equal partners running the company and eventually one wanted total control.

KHI is currently quoting at 112, about 17% below what Clearwater Capital paid for it for such a big stake. However, it must be remembered that it has made a loss of about 6-7 crore each in the last 2 quarters and only a slight profit in the 2 quarters prior to that. So the numbers are not worth talking about at this stage. With the debt of FCCB gone, the interest outgo on this count would stop completely and add straightway to the bottom-line. With the economy slowly on an upswing, hotel and travel tourism segments are doing well and India is now being looked at as a market with tremendous growth potential. With the continuing economic reforms, growing economy and major restructuring of the Company's business, the future outlook of the Company looks promising. Considering all these factors, the stock holds lot of potential at present levels.

Interestingly, Clearwater Capital also has a 27% stake in Vadodara-based Sayaji Hotels.