Rakesh Jhunjhunwala’s New Stock Pick: Sterling Holiday Resorts

 
Rakesh Jhunjhunwala, it is well known, is a great believer in the great India consumption story. He made his billions out of picking stocks that profited from the great India consumption story. His favourite stocks like Titan Industries & VIP Industries are two examples of stocks that have become multibaggers due to the huge consumption demand in the Country.

Rakesh Jhunjhunwala loves to buy into stocks that are not in public fancy but which are on the cusp of change. His favourite words of wisdom are “In equities, the key lies in predicting what tomorrow is going to be. The tomorrows are going to determine the equity prices. We can’t see tomorrow; but we can anticipate tomorrow“
 

So, it is no surprise that the Oracle of Mumbai has now set his sights on Sterling Holiday Resorts Ltd, a stock that holds great promise for the future. According to reports, Rakesh Jhunjhunwala accompanied by veteran investor Radhakrishna Damani are planning to buy one crore shares, or 20.06% equity, in Sterling Holiday Resorts at up to Rs. 90 each. Sterling Holiday Resorts is holding an extraordinary general meeting on 13 August 2011 to obtain shareholders’ approval for issuing equity shares and warrants on preferential basis.

Sterling Holiday Resorts is a small cap company with a market capitalization of about Rs. 612 crores. Sterling Holiday Resorts got into deep trouble in the economic downturn of 2008 because it had huge borrowings and the travel & tourism outlook was weak. However, a look at Sterling Holiday Resorts’ annual accounts for the year ended 31st March 2010 as well as of the year ended 31st March 2011 shows that the company is well on the path of recovery.

In the year ended 31st March 2010, Sterling Holiday Resorts achieved total sales of Rs.30.59 crores, comprising the sale of Time Shares of Rs.7.46 crores and through Resort operations of Rs.23.13 crores. Sterling Holiday Resorts also had a strengthened financial position which helped it to clear its past liabilities and become totally debt-free.

In the year ended 31st March 2011, Sterling Holiday Resorts achieved total sales of Rs. 39.46 crores reflecting an impressive upside of 29% though the net loss increased from Rs. 9.02 crores to Rs. 16.94 crores. In the Quarter ended 31st March 2011, Sterling Holiday Resorts reported sales of Rs. 12.05 crores as compared to Rs. 7.87 crores in the same Quarter last year. The net loss spiraled to Rs. 4.34 crores as compared to a meager profit of Rs. 5.89 lakhs in the same Quarter last year. Some part of the loss appears to be attributable to a sharp hike in the employee compensation cost.

There is nothing in Sterling Holiday Resorts’ financial results to cause any excitement.

 
Rakesh Jhunjhunwala doesn’t take investment decisions by looking at historic financial statements but he likes to look into the future. What must have appealed to the great investor is the fact that Sterling Holiday Resorts has, since its incorporation in 1986, built a network of 14 resorts at holiday destinations in India, with over 100,000 members. Of these, Sterling Holiday Resorts owns about 10 resorts and has 4 on lease basis.

Rakesh Jhunjhunwala must have also been enthused by the fact that Sterling Holiday Resorts has plans to open 11 new resorts in the next 10 years.

Rakesh Jhunjhunwala must have also liked the fact that Sterling Holiday Resorts has undertaken a systematic programme for refurbishment of the resorts. In 2010, Sterling Holiday Resorts had taken up 15 % of the rooms for refurbishment and had promised to complete the entire refurbishment process across all existing properties over the next three years. Sterling Holiday Resorts has construction permission for 1,150 rooms in current and new resorts. Sterling Holiday Resorts has also hired and trained a professional sales team to drive the Vacation Ownership Sales and increase membership to 2,60,000 from 1,08,251 with 55% active members, in the next ten years.

The Oracle of Mumbai must certainly have been inspired by the spectacular success of Sterling Holiday Resorts’ comparable competitor Mahindra Holiday Resorts. Mahindra Holiday Resorts has a total market capitalization of Rs. 3215 crores and has been growing at a steady pace. Mahindra Holiday Resorts’ 3 year CAGR sales was 12% while its 3 year CAGR profit was 6%. Mahindra Holiday Resorts has a Net Profit marhin of about 20% while it offers a Return on Equity of 21% which is quite impressive.

Rakesh Jhunjhunwala must have taken a lot of comfort from the fact that Sterling Holiday Resorts has appointed Ramesh Ramanathan as its managing director. Ramesh Ramanathan was instrumental for Mahindra Holidays’ success and will try and replicate the same at Sterling Holiday Resorts.

The master investor must also have his eye on the fact that with the economy improving, a number of middle-class families are warming up to the idea of time-share holidays where they don’t have to deal with the hassles of hotel booking. Time-share may well be the concept whose time has come.

Rakesh Jhunjhunwala’s calculation must be that if Sterling Holiday Resorts reaches even half of Mahindra Holiday Resorts’ market capitalization in the foreseeable future, he will have his multibagger!

Of course, the big dilemma with other investors wanting to follow Rakesh Jhunjhunwala is that the stock price tends to run away much before the official announcement so that there is not much left on the table at least in the near future. Sterling Holiday Resort is no exception and has already soared 80.47% in just one month’s time. Of course, as with other Rakesh Jhunjhunwala‘s stock picks like VIP Industries, the present rise in the stock price may be only the tip of the iceberg and there may be much more to be made! (see When Rakesh Jhunjhunwala Buys … Just Buy, Don’t Think!!)