Stock market investors Rakesh Jhunjunwala, Radhakrishna Damani and others agreed on Wednesday to invest a total Rs120 crore in Sterling Holiday Resorts India Ltd, putting their stamp on the turnaround plan of the company that pioneered time-share vacations in India. Jhunjunwala and Damani will invest Rs40crore each, with the rest coming from other investors.
That mark of approval is significant for a company that felt the wrath of clients for not meeting expectations after promising much with an initial burst of explosive growth soon after its 1986 launch.
Customers were asking for their money back, properties went to seed, and a Sterling time share became something that couldn’t even be given away.
The turnaround process began when private equity firm Bay Capital Partners Ltd invested $13.8 million (Rs61.41 crore today) in 2009 and R. Subramanian, Sterlings’s chairman and managing director, ceded management control. It helped that Siddharth Mehta, Bay Capital’s chief executive, and Subramian’s son, S. Sidharth Shankar, were schoolmates. Subramanian remains a silent investor in the company.
The company is on the verge of a recovery following a series of steps taken by the management. It’s paid off debt worth Rs280 crore by selling so-called non-core real estate to software companies, settled 90% of the cases against it and hired former employee Ramesh Ramanathan as managing director.
Ramanathan was earlier managing director, Mahindra Holidays, India’s largest vacation ownership company and 10th in the world. While Sterling managed to make a small operating profit in the quarter ended 31 March, it posted a net loss of Rs4.34 crore compared with a net loss of Rs7.59 crore in the preceding three-month period.
Ramanathan will need to push Sterling to catch up with its younger but larger rival. Mahindra Holidays, which was begun in 1996, has a market value of Rs3,211 crore with 1,750 rooms. Sterling, which was set up in 1986, has a market value of Rs545 crore with 1,200 rooms.
“Sterling lost its first-mover advantage as it faltered on many counts,” said Naimish Dave, director at OC&C Strategy Consultants India Pvt. Ltd. “It expanded too fast, losing customer loyalty.” To win back its reputation will be challenging, added Dave, who advises hotel chains.
Bay Capital’s Mehta is aware of the challenges.
“The key issue was lack of management bandwidth in the company that had legacy issues of the last 15 years,” Mehta told Mint last week. “I was trying to fill the last of piece of the puzzle and the master salesman Ramesh (Ramanathan) is here. He has sales and execution in his DNA.”
According to a July report by consulting firm Icra, “The Indian hospitality industry appears to have embarked on a recovery cycle, triggered largely by the revival in domestic travel (both leisure and business) since the second half of fiscal 2009-10; foreign tourist arrivals have also improved since December 2009, and were up 7.9% to 55.8 lakh travellers during calendar year 2010.”
Sterling may be timing its time-share holiday revival strategy just right.
“We are coming close to an inflexion point with respect to discretionary spend,” said Dave of OC&C Strategy Consultants. “There is a very large segment of population moving to the threshold of meeting the needs of spending over their wants.”
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,” 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 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.
Deals India, published jointly by Mint Dow Jones Newswires and The Wall Street Journal is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture-capital activity in India.