Established in 1986 the company’s pioneering idea of vacation owner-ship in India initially witnessed a good response and within 10 years of operations its customer base crossed the one lakh mark. However, subsequently the sales and operations got impacted on account of adverse market conditions and a wrong strategy of aggressive land acquisition. This resulted in higher debt levels and inability to service the debt, and also in developing and maintaining the resorts, eventually resulting in loss of customers. So it was a series of events that resulted in a failure of investor confidence. To tackle the situation the management took various steps. However, all these efforts could not yield desired results. 

So how will the recent fund raising be of any help? Ramesh Ramnathan explains  “The fund raising has provided us with the much required funds for the renovation and refurbishment of resorts and the up-gradation of the IT systems leading to a better quality, better experience and making it top class again to service the client better”. He further adds, “Earlier efforts did not pay off, as the focus was not on the vacation ownership segment which eventually resulted in losses. Our focus now will be on the vacation ownership segment which has high growth opportunities”. The impact of this is obviously becoming visible, as till FY11 around 75 per cent of the company’s revenues came from resort operations and only 25 per cent from vacation ownership. But in Q1FY12 this has changed to 50:50. “Till last year we were not selling memberships and hence there was no growth. Currently we have 56000 active memberships and with higher inventory of refurbished rooms there is a good scope of growth” adds Ramnathan.

Currently it has 15 resorts (10 owned and 5 leased) with 1258 rooms. The important aspect of the resorts is the experience it provides. Hence Sterling has gone ahead with the refurbishment of all of its resorts. It started the efforts in August 2010. While some rooms have been already refurbished currently work is in progress in six resorts. The refurbishment includes painting of the resorts outside as well as inside, change of interiors and furniture, change of lining fabric and putting up the latest entertainment equipment in each of the rooms. The best part is after the refurbishment the Goa, Munnar and Kodai facilities will be provided a five-star rating. Going ahead the company will refurbish its remaining resorts also.

Along with the refurbishment of the resorts Sterling is also going ahead with its expansion plans. The company plans to add another 11 resorts to its kitty in the next three years. “It will be mainly on a leased model and hence expansions will be without much capital expenditure” says Ramnathan about the company’s plans. It has identified Igatpuri and Alibaug (Maharashtra), Coorg (Karnataka), Peernedu (Kerala), Bhimtal and Corbett (Uttarakhand) as the probable locations. The rest will be also declared soon and the expansion will take the total number of rooms to double. The properties at Igatpuri and Alibaug are expected to go on stream soon. This is expected to drive the growth from the vacation ownership segment.[PAGE BREAK]

The financial performance of the company has been poor. Although the company posted a good topline growth for FY11 of Rs 39.47 crore as against Rs 30.55 crore in FY10, the losses only increased. However there are certain positive points we would like to mention. First is, the company is on a growth path as with the economy improving, a number of middle-class families are warming up to the idea of vacation ownership. Secondly the company is virtually a debt free company. So in a scenario of rising interest rates this is an added advantage.

Another factor that goes in favour of the company is the change of guard at the management as well as the operational level. The newly appointed MD, Ramesh Ramanathan is the erstwhile Managing Director of Mahindra Holidays & Resorts, a company which he successfully managed for a period of 11 years.

On the valuation front one needs to look at a few factors other than the financial performance. The company is making a sincere attempt to revamp its business and this adds some strength to our conviction in the capability of this company to do well going forward. This is expected to increase the number of membership significantly and hence help getting a better valuation for the business. It has a portfolio of properties which were bought long ago and hence the expansion of these properties will be much cheaper as compared to someone who wants to create new properties. Further, it has also the right kind of vigilant and successful investors like Rakesh Jhunjhunwala and Radhakishan Damani who have entered the counter at Rs 75 per share. Hence considering these factors we feel the scrip can touch the Rs 150 if someone can stay invested in it with a perspective of 18 months.