Sterling Holidays Resorts & Rakesh Jhunjhunwala

Rakesh Jhunjhunwalaaccompanied by veteran investorRadhakrishna Damaniare planning to buy one crore shares, or 20.06% equity, inSterling Holiday Resortsat up to Rs. 75 each.Sterling Holiday Resortsis holding an extraordinary general meeting on 13 August 2011 to obtain shareholdersâ approval for issuing equity shares and warrants on preferential basis convertible into shares in 18 months in 1 or 2 transaction.

Story:Sterling Holiday Resorts pioneered the concept of time-share in the country.This company went through a very bad phase in the late 90s and saw its losses mounting every year.However, in the last few years, the company management has been taking various steps to bring the company back on track.The positive factor about this company is that this company owns 14 mid-sized hotels,The Resort, at various places in the country. These include resorts at Goa, Kodaikanal,Lonavla, Ooty and various other places.Of late, we have been seeing a lot of interest from various Indian and foreign hotel chains.Everyone wants to set up a chain of budget hotels in India, be it the Tatas , ITC or foreign hotel chains. Most of these hotel chains are aggressively scouting for land for making the hotels or ready-made properties, which can be converted into hotels. Sterling provides an excellent vehicle for them to get into the segment at a very low cost and without any gestation period.At the current price, the market cap of the company is just Rs 418 crore.One is getting 14 ready properties for a market cap of just about Rs 418 crore, which could be a juicy valuation for many players who want to enter into this segment So I believe that there is a huge potential within the sector and that is why so many players are getting into this sector.The financials are nothing great to go by, as of now. This company has been making losses but there is a huge potential in the sector. Once this company starts making profits or if the company sells the stake to somebody, it will be at a much higher price. Once that happens, then people will get more convinced about the potential of the company.It looks to be a good hold at present prices.

Ex-MD of Club Mahindra has joined Mahindra Holidays and New UK based fund has stepped in.

The stage is set for Sterling to make a mark as multi-bagger. Yet am cautious about it. Lets see if new team unlocks the value n back it up withsterling` performance

The new md appointed is the ex md of mahindra holidays. Appointed in July 2011. Old promoters have also left. Makings of a 5 bag ger

AGM ON -13-08-2011

www.sterlingholidays.in/uploadedfiles/file/EGM-Notice-13-08-2011(1).pdf

Since Rakesh Jhunjhunwala and RK Damani is getting in, this is sure to be the darling of the markets in the short term. And they must have seen some value that is not apparent to me. The properties that Sterling has are all in non-prime locations and the valuation for them would not be very high.

But, I am sure there is more to the story and I am missing something. But till the time I know (and by then it will be too late), I am willing to pass.

Mr. Ramanathan has a three-pronged plan to renovate existing holiday homes, dry-lease more, and build two new ones.

“We are going back to basics this year,” Mr. Ramanathan said. “We are first putting money in renovating the resorts. We are requesting old customers to visit the renovated properties free of charge. We are writing to our old customers personally and our sales team is acquiring new customers.”

The fresh capital will be used to renovate Sterling’s properties.

“To start with, we will refurbish at least 10 properties,” said Mr. Ramanathan, who now manages 14 resorts in 12 locations. The company is also betting on the 150 acres of land it has in 13 locations in India for which it has regulatory clearance to build resorts.

Most of their resorts are in pretty bad shape. It is going to take a while and lots of money to bring them back to shape. If my understanding is correct, majority the existing customers have paid full membership fee. I have heard some of them got the membership initially for a very long duration. Even with the assumption that the new MD is going bring back existing customers to the resorts, the only revenue they can expect from them is inflation adjusted annual fee and charges for actual expenses during the stay which is not going to be big.

For Sterling to see a good top line growth, it should be able to attract new customers in big numbers. For this to really happen, they need to address the above issues. Also, please note to add new customers they need to add additional capacity as they have to keep a fixed ratio of rooms to the members.

I think most of similar companies stay afloat in the market due to investors’ hope. A few of them survive, and a fewer of them truly turn around and become multi baggers. I think it is too early to say if it is one of them as we don’t have many data points. Yes, we need to keep a watch and monitor closely.