Investing in Sterling Holiday Resort is beneficial says Siddharth Mehta Bay Capital

1
Holiday Resorts is staging a comeback

• Timeshare pioneer Sterling

2
Timeshare pioneer Sterling Holiday Resorts is
staging a comeback
Timeshare pioneer made efforts to increase
revenues by adding new members, focusing on
nonmember businesses, and offering a wide range
of food and beverages options at resorts. A
strong social media strategy was drawn up, and
human resources were given top priority to make a
comeback.
Sterling's Chairman Siddharth Mehta (in lounger)
with Vice Chairman Sidharth Subramanian (far
left) and MD Ramesh Ramanathan 
3
Pankaj Gupta loved his annual vacation. The
Bangalore-based businessmans favorite
destination was the Nilgiri hills on the
Karnataka-Tamil Nadu border. In 1996, when he
heard of the concept of timeshare vacations,
pioneered in India by Sterling Holiday Resorts
Ltd, he bought into it. He paid close to Rs 1
lakh, which allowed him a week each year in any
of Sterling's 11 resorts in the country, for the
next 25 years. For him, the added attraction was
that Sterling had two resorts in Ooty - Fern Hill
and Elk Hill. But his first timeshare holiday in
the summer of 1997 was a nightmare. One look at
the rooms in both resorts, and his family refused
to stay there. From then on, he avoided using his
timeshare. Like Gupta, some 86,000 members lost
faith in the company. Sixteen years on, Sterling
is fighting hard to regain it.Started in 1987
by R. Subramanian, Sterling enjoyed smooth
sailing in its early years. By March 1996, it was
selling 4,500 timeshare accounts a month through
its 60 sales offices nationwide. It had 12
resorts - with a total of 1,100 rooms - and
occupancy was a healthy 65 percent. Using surplus
cash, the company built up a land bank of 175
acres in top tourist destinations.
4
(No Transcript)
5
"Vacation timeshare is a cash flow positive
business model, where members pay up-front for
holidays for 25 years," says Ramesh Ramanathan,
who was vice-president of marketing and sales
during his first stint in the company, from 1991
to 1996. He rejoined the company as Managing
Director in 2011. "In 1996, we were generating a
cash flow of Rs 500 crore a year through
timeshare sales."Healthy cash flows tend to
feed outsized ambitions, and Sterling, too, fell
prey to that temptation. It embarked on a Rs 500
crore five-star resort project with two 16-hole
golf courses in Noida, near Delhi. It leased 420
acres of land from the Greater Noida Development
Authority in 1994/95 for Rs 100 crore. Famous
golfer Greg Norman was appointed to develop it,
for a fee of 2 million. The grass for the entire
course was imported. But in 1996, the
market began to tank. India saw an explosion in
the demand for white goods, triggered by the
entry of multinational manufacturers.People
chose white goods over future holidays. The
competition also increased when the Mahindra
Group entered the timeshare business with the
launch of Club Mahindra. "In just 18 months, our
timeshare sales dropped from 4,500 per month to
just 200," says R. Mohan, Sterling's Senior Vice
President - Finance. His company's cash flow
collapsed.
6
"From being cash-rich, we began to borrow to fund
the Noida project and run our resorts. By March
2007, we had debt of Rs 200 crore," he adds.
Things got worse. The company cut its marketing
spending and closed all sales offices except in
Mumbai. This hurt sales further, and they
plummeted to five a month. Resort maintenance
began to suffer. Occupancy levels fell, and
members stopped paying annual amenities charges
and maintenance fees. The company began to
default on payments to the Greater Noida
Development Authority, banks, creditors, and
suppliers.In 2000, the Greater Noida
Development Authority canceled the land
allotment. Sterling lost everything it had
invested in the project (one of the two golf
courses was ready in 1999). Legal challenges
started to mount. Irate members hauled the
company to consumer courts, saying it had failed
to develop resorts as promised. Sterling faced 70
cases under the Negotiable Instruments Act for
cheque dishonor. Banks filed as many as 15
winding-up petitions. Some dragged the company to
the Debt Recovery Tribunal. "We had to appear in
court and at the police station every other day,"
says Mohan. He left Sterling in 2000 as he could
not handle the pressure (he returned to the
company in 2005). Its share price crashed to its
lowest level of Rs 1.55 in September 2001.
7
(No Transcript)
8
Siddharth Mehta, who runs Bay Capital Investment
Ltd, took a 35 percent stake in Sterling Holiday
Resorts in 2009 and became its Chairman.
Sterling has an interesting portfolio of assets
in great locales, and the domestic tourism sector
is under-penetrated in India. I see an
opportunity there, says Mehta.The Rs 50 crore
he brought into the company was used to settle
the remaining debts. By 2010/11, Sterling was
almost a zero-debt company, with most legal
issues resolved and its focus shifted to
operational turnaround. Siddharth and
Vice-Chairman Subramanian reached out to
Ramanathan, who had launched Club Mahindra after
leaving Sterling in 1996 and, as its CEO, made it
the market leader. He had quit Club Mahindra
earlier in 2011.What he saw on his return
stumped him. "There was no sales organization, no
marketing set-up, no banker, an outdated IT
system that ran on Sybase, occupancy levels of
just 11 percent, no presence in digital media,
and, most worryingly, an organization that
exhibited a total lack of energy," he says.To
infuse energy into the company, he drew up a
mission statement seeking to make it the market
leader again. He also devised a strategy to
rebuild credibility and customer confidence and
increase cash flow.In October 2011, investors
Rakesh Jhunjhunwala and Radhakrishnan Damani each
took a seven percent stake in the company.
Ramanathan used the money to renovate resorts and
re-establish credibility among members. "We spent
Rs 95 crore to renovate rooms and common areas,"
he says. Today, 466 of the 1,109 rooms the
company owns are renovated. The rest will be
completed in 2014/15.
9
Ramanathan began to take new resorts on lease in
locations such as Goa, Thekkady in Kerala,
Corbett National Park in Uttarakhand, Gangtok in
Sikkim, Karwar in coastal Karnataka, and
Dharamsala in Himachal Pradesh, even though the
company's occupancy levels were low then so that
members could have better options. This added 541
rooms, taking the total room tally to 1,650, with
21 resorts in 19 destinations. A 50-seat call
center was started and a new information and
communication technology backbone was
implemented. We wanted to ensure that from
reservation to the experience at the resorts,
customers were satisfied, he says. A strong
social media strategy was drawn up, and human
resources were given top priority.On the
financial side, efforts were made to increase
revenues by adding new members, focusing on
nonmember business by starting a hotel sales
division and offering a wide range of food and
beverages options at resorts. Simultaneously,
expenses were attacked. The 3Cs strategy seems
to have worked. Sterling Holidays made its first
quarterly profit - Rs 62 lakh - in 16 years
during the first quarter of the current financial
year. Arrivals have increased in renovated
resorts, and overall room nights for the company
have increased from 158,000 in 2010/11 to 201,000
in 2012/13. Average occupancy was up from 19 to
43 percent in the same period. The company's
online presence is growing, too - in 2012/13, its
website got 1.47 million visitors, and its
Facebook fan count crossed 200,000. In the same
year, it added 3,409 new members (averaging 285 a
month), up from 1,135 in 2010/11. The hotel sales
division's revenues rose to Rs 29 crore, from Rs
8 crore in 2010/11.Many old customers have
started holidaying with Sterling again. The
company is cash flow-positive, and losses have
shrunk from Rs 41.31 crore in 2011/12 to Rs 20.2
crore in 2012/13. The company hopes to make a
profit in the current year. The stock market has
responded, and the company's stock trades at
around Rs 65 a share.
10
"The revival at Sterling is interesting," says
Kaushik Vardharajan, Managing Director at HVS
South Asia, a hotel consultancy company. "But
they need to keep the member-to-room ratio at a
level that will offer customers the flexibility
to choose their holiday destination. To keep
customer satisfaction levels high, Sterling needs
to keep adding more resorts, and preferably lease
them." As far as expansion is concerned, Sterling
is sitting pretty, as its land bank - now 150
acres - gives it the potential to add 2,000 rooms
at a low capital cost.
After 16 years, Gupta and his family returned to
stay at the Fern Hill resort in Ooty this April.
They were in for a pleasant surprise. "The rooms
were great, and so was the service," he says. "We
thoroughly enjoyed our stay. We are looking
forward to our next holiday." That should be
music to the ears of Sterling's management team.