Oberois’ stake in Golden Jubilee turns out a dull investment

It’s Hyderabad blues for the Oberois.

East India Hotels (EIH) has fully written off its investments in a special purpose vehicle (SPV) formed for the development of two five-star hotel properties – Trident and Oberoi – in Hyderabad.

The Oberois-controlled hotel major has decided to write off its 16% stake, valued at Rs 41.86 crore, in the joint venture company Golden Jubilee Hotels, EIH disclosed in its earnings details on Thursday.

EIH Ltd did not disclose the reasons what made it write off all its investments in the project, a part of which has been commissioned.

A study of the reports of the credit rating agencies Icra and CARE, over a span of four years, shows that the project had suffered delays, significant cost overruns, change in plans due to changing market dynamics and intense competition.

The series of misfortunes even prompted the rating agency Icra to downgrade the joint venture company to default grade once in 2013 for delays in debt servicing although the company later arranged the funds from the bankers.

The SPV was majority owned by Core Hotel Ventures Pvt Ltd having 83.4% stake.

Core Hotel, in turn, is a joint venture between lead developer L N Sharma & Associates, Basil Infrastructure Projects, and PE investors JP Morgan India Property Mauritius Co and Indus Hotel Reality (Mauritius) Ltd.

The project was to set up two five star hotels, Trident and Oberoi at Madhapur Hitec City in Hyderabad on a 5-acre plot with an initial target to complete the Trident hotel by September 2012 and the Oberoi hotel by July 2013.

It was a Private Public Participation (PPP) project under the Build Operate and Transfer (BOT) basis with land leased by Youth Tourism & Cultural Department of Andhra Pradesh government allocated through a bidding process.

The 5-star deluxe Trident project in Tower 1 started soft operations from September 2013 but there has been a change in plan for the Oberoi Hotel which was converted into a 5-star business hotel-cum-service apartment with project completion revised initially to 2014 and then to 2015. The soft run for a portion of retail area in Tower 2 commenced in September 2015.

These delays led to significant cost overruns with project cost revised from initial envisaged cost of Rs 828 crore to Rs 1,088 crore and then to Rs1,148 crore.

Meanwhile, the company suffered delays in debt servicing and was put under default category in 2013 for its Rs 350 crore long-term debt but the rating was upgraded in 2015 when it arranged long-term funds to the extent of about Rs 145 crore.

“The ratings assigned to the bank facilities of Golden Jubilee Hotels continue to take into account the relatively large-sized project with financing of entire cost overrun yet to be tied up, high post project implementation risk, significant time-lag required for stabilisation of operation and intense competition from the existing and upcoming hotels in Hyderabad with the presence of huge room inventory,” Care Ratings said in its March rating re-affirmation.