Sterling Moves

Susan George investigates whether Sterling Resorts’ latest move is based on unfounded optimism or business acumen, or both...

Sterling Resorts, one of the pioneers of India’s time-share industry, is being acquired by Auromatrix Hotels Pvt Ltd, the master franchisee of the Days Inn brand in India. Riddled with problems and mired in debt, it would be euphemistic to say that Sterling has seen better days. An estimated Rs 250 crore debt is weighing down Sterling Holiday Resorts India Ltd (SHRIL). A sinking ship in the time-share segment, Sterling, by all accounts, is down. But it is not yet out, believe its three new promoters. The announcements of the last few months are aimed at restoring the troubled brand to its former glory.

Making the moves

The deal, struck in December 2003, is the work of three key people over nine months. Auromatrix Hotels’ Kumar Sitaraman, chairman and chief executive officer, Uddaykumar Krishnan, managing director and Steve Borgia, president of Sterling Resorts - in his personal capacity - arrived at an understanding to acquire about 47 per cent of Sterling’s shares. As reported earlier in Express Hotelier & Caterer, Auromatrix and Steve Borgia together acquired 34.32 per cent of the paid-up capital of Sterling, entering into four share purchase agreements with the other main promoters of SHRIL, including P N Mohan, R Subramaniam and the Pai family. In addition to this, Star Logistics, an associate company of Auromatrix, and Borgia already held Sterling shares to the tune of 13.56 per cent, hence raising their stake in the company to 47 per cent. As per SEBI directives, the new management has made a public announcement to buy another 20 per cent of equity shares of the company at Rs 11.15, between February 6 and March 6, 2004, from Sterling’s shareholders.

Restructuring the debt and renovating the 14 resorts in the Sterling fold will give a new lease of life to India’s largest time-share company, say Sterling’s new suitors. On all accounts, this internal arrangement appears to be a sweet deal. Yet many in the industry raised their eyebrows, questioning the ability of a Rs six crore company to manage around Rs 100 crore debt in order to turn around a much larger company. Have they thrown caution to the wind? Or, is it a strategic business decision that is ushering in a much-needed turnaround in fortunes?

Bolstered by several decades of experience in the hospitality field and a hands-on understanding of the nitty-gritty of the time-share industry, the new promoters are confident that the Sterling Days Inn brand will be able to rebuild its name.

Says Sitaraman, “While Auromatrix may only be a Rs six crore company, it is still making a profit. It may only be one-fifth the size of Sterling, but it has a positive net worth. Today, the company is in a much stronger position as Days Inn, than as Sterling.”

The fact of the matter

Once upon a time, in the fairytale days of the vacation ownership concept, Sterling Resorts commanded an enviable position in the time-share. When time-share vacations crumbled, so did Sterling. Court cases were slapped on the Chennai-based promoters for incomplete resorts and the quality of operational resorts left a lot to be desired. However, as India’s first time-share company, Sterling proved resilient. “When other smaller companies folded, Sterling Resorts held its own. Today, it is still the largest time-share company in India, with about 1.5 lakh members,” contends Sitaraman, emphasising that the Sterling brand has an `intrinsic brand value’. Radhika Shastry, general manager, Resort Condominium International (RCI), India operations, concurs, “Even in their tough times, Sterling managed to service their members very well. This is evident from the award that Sterling Fernhill, Ooty, won in the form of RCI Resort of International Distinction, which is entirely based member feedback.”

For the past one and a half years, Days Inn has been managing Sterling resorts, but was unable to counter the deeply-rooted problems of the brand. “The challenges could not be addressed on an operational level,” said Sitaraman. About nine months ago, internal discussion on Sterling Resorts changing hands kicked off, with talks between the new promoters. “The promoters of SHRIL had been wanting to exit for the last few years. They have now reposed faith in the new management.” Sealing the deal is the combined expertise and experience of the three new promoters. “We are bringing more into this than money. We are pooling our combined expertise into the kitty,” says Sitaraman, outlining their experience in finance, operations and marketing.

Game plan

The new promoters are adopting a two-pronged approach in delivering the commitment made to Sterling time-share members: debt restructuring and renovation. As a result of past borrowings, Sterling Resorts has raked up a debt of about Rs 250 crores - at interest rates of 20 to 25 per cent - from an ICICI-led consortium, which included Bank of Punjab, Catholic Syrian Bank and Citibank. “Debt servicing was therefore an issue. In the same context, because of Sterling’s defaults with banks and other lenders, the banks were unable to grant them concessions as per RBI regulations. Therefore, the old promoters found themselves in a Catch 22 situation,” states Sitaraman.

Relatively independent of these encumbrances, the three new owners plan on raising fresh loans to replace the old debt - loans which will be borrowed at lower, more competitive rates. They also propose to approach existing lenders to negotiate the debt and reach settlements. “By selling off some of the debt we will be able to reduce the debt burden. The new debts that we will be taking will be at the existing interest rates of between 11 to 14 per cent. Therefore debt servicing will also come down by about 50 per cent,” says Sitaraman, adding that the promoters are in `advanced stages’ of talks with creditors.

Becoming zero debt is not the aim of the company, at the moment. “Over the next two years we plan on becoming operationally self-sufficient and generating enough revenue to pay the interest,” the company states.

Simultaneously, the company plans on consolidating operations of the existing resorts over the next two years. According to Sitaraman, only about 30 to 40 per cent of time-share members are taking advantage of their vacation ownership packages - due largely to the poor upkeep of the resorts.

“If more members use the resorts then automatically the revenue will go up, with annual amenities and food and beverage charges. When we renovate we will be able to sell more aggressively and the share value will automatically go up,” says Sitaraman.

Renovation of the existing resorts is high on the priority list with the company planning on pumping in Rs 15 crore into refurbishment and upgradation. The target group for the company is very clear - they aim to focus on the higher middle income group and are steering clear of branding themselves as a premium product. “We may also sell some of the unutilised assets in the process of restructuring,” said Sitaraman, quick to add that the intention of the new promoters is not to strip Sterling of its assets, but to strengthen the brand through long-term investment. Shastry is positive about the outcome of the renovation plans. “The takeover is meant to renovate Sterling Resorts and I am hopeful that the properties are heading for a bright start,” she says.

Capabilities questioned

With the intense focus on Sterling Resorts, how is Days Inn going to balance its role as hotel operator? According to Sitaraman, the Sterling acquisition has only strengthened the Days Inn brand. “Now as hotel owners, and not just operators, we have more credibility with the industry,” says Sitaraman. As reported in the Express Hotelier & Caterer, Days Inn has entered into an agreement with an UK-based promoter to develop five properties in India over the next three years. “In the past few months we have not gone out and aggressively sought out management contracts for Days Inn, because the Sterling deal was in the pipeline. We are now definitely looking at operating other properties across India,” contends Sitaraman.

While earlier time-share was the focus area, now the new promoters plan on intensifying the attention paid to the hotel division, as well. Earlier, time-share occupied all the attention of the promoters, while now Sitaraman and company are planning on exclusively promoting the hotel division in a strategic manner. Defining the strengths of the company, Sitaraman points to, “Simple credibility, professional wherewithal, financial restructuring and discipline in acquisition. We are in this for the long haul. For the next two years our plan is to increase satisfaction levels and regain credibility with the members.” “We are in this for the long haul. For the next two years our plan is to increase satisfaction levels and regain credibility with the members,” is what Sitaraman says is the mantra for Sterling’s new team.