Despite being India's third largest hotel chain, EIH's expansion and growth has remained stagnant over the past few years. RIL buying stake and infusing the much-required cash inflows will help EIH both in terms of survival and expansion

Reliance Industries Ltd (RIL), the country's largest company, has said that it has bought a 14.12% stake in Oberoi group company EIH Ltd for Rs1,021 crore. At the same time, RIL also said that it has "full faith in" and "would support" the management of EIH and there is no change of management, operation or control of EIH.

The fact is that Reliance has never had a successful joint venture in its entire existence. Dhirubhai Ambani was famous for always going it alone. He lobbied alone and he set up plants alone. He did not even take the path of the joint venture which RP Goenka, the Singhanias and others did when they set up polyester plants. All the Ambanis needed was technology and they paid Du Pont and others for it quite generously. Mukesh Ambani has the same DNA. Even in a new and challenging business like retailing he has no partners unlike Sunil Mittal who has tied up with Wal-Mart. Would the same Ambani spend small change like Rs1,000 odd crore to act as a white knight to Oberoi? Most unlikely.

RIL's stake purchase in EIH, a hotel company, is significant in two ways. First, EIH was always under pressure that ITC Ltd, which holds 14.98% stake in the company will make a hostile bid.

And second, with a conglomerate like RIL buying stake and infusing the much-required cash inflows, it will help EIH both in terms of survival and expansion.

Despite being India's third largest hotel chain, EIH's expansion and growth has remained stagnant over the past few years. After a gap of about four to five years, recently, EIH opened 'Trident', a 436-room hotel at Bandra Kurla Complex (BKC) in Mumbai. The opening was also delayed by about five quarters.

According to a report by Edelweiss Capital, post the launch of Trident at BKC, in the absence of no major project in the pipeline for the next 12-18 months, EIH's earnings growth is dependent on increase in average room rates (ARRs) and occupancy rates (ORs). "We believe, with a slow expansion programme, EIH is curtailing its earnings expansion and not leveraging on its brand image," the brokerage added.

In short, EIH needed a deep-pocketed investor and the Rs1,021 crore infused by RIL will help EIH to take care of immediate needs and speed up its expansion plans.

Cigarette-to-hotels conglomerate ITC, which operates India's second-largest hotel chain with over 80 hotels, had maintained a 14.98% stake in EIH over a decade. The main reason for keeping its stake in EIH below 15% is that according to Indian takeover law, if any entity crosses the 15% stake limit, then it will have to make an open offer to buy additional 20% stake.

Speaking at the annual general meeting, Prithvi Raj Singh Oberoi, the chairman of EIH, said, "The demand for hotel rooms in India should grow in this financial year. Whilst room rates should begin to improve, margins are likely to be under strain due to high inflation."

While EIH lacked funding for expansion, ITC was more than willing to invest money into its own hotel business. ITC is planning to add about 2,000 to 3,000 rooms in the next two-three years. According to a note by Ambit Capital Pvt Ltd, ITC expects ORs to go up to 70% from 60% and sees the peak ARRs reached in 2006-07 to be only one year away. Currently ARRs are considered to be stable.

According to World Travel & Tourism Council (WTTC) estimates, travel and tourism demand in India will grow at 8.2% annually till 2019, the highest growth after China in the big countries league.

"Considering that the US offers 40x and China 10x hotel rooms as compared to the 1.1 lakh hotel rooms in India, the Indian hospitality industry has huge potential to grow structurally. However, high land prices, low floor space index (FSI), (a) plethora of taxes, and low incentive from (the) government are some key hurdles for hotel companies in India," the Edelweiss report said.

RIL's unit Reliance Industries Investment and Holding Pvt Ltd bought the stake from Oberoi Hotels Pvt Ltd, Aravali Polymers LLP and PRS Oberoi. EIH operates hotels and resorts under the Oberoi brand. The promoter and promoter group had a 46.43% stake in EIH prior to the deal.