Monday, January 14, 2013

Clearwater (PE) checks in

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Incorporated in 1986, Kamat Hotels India Ltd (KHI) categorizes its business under four heads - Owned hotels, Management of hotels owned by other parties, Catering services and Others.

It has four brands - The Orchid (which is the flagship brand), VITS, Gadh hotels and Lotus resorts. The Orchid hotel, located at Mumbai, is an environment friendly 5-star hotel (Ecotel) that contributes maximum to the company's revenue. VITS hotels are luxury business hotels and are present in cities such as Mumbai, Aurangabad, Nagpur, Pune, Nasik, Delhi and Bhubaneshwar. The Lotus brand is applied to luxury resorts. They are located at Silvassa, Murud, Udaipur, Konark, Karwar and Goa. The Gadh hotel at Fort Jadhavgadh is located 22 km from Pune and has 38 rooms and 12 tents spread across 3 wings.  Last year, Kamat Hotels absorbed some of the hotels run by the Kamat family, taking promoters' stake to as much as 57%.

However, what is interesting about this company, apart from a very good reputation and pedigree of its founder, one Mr. Vithal Kamat, is a recent development.

Clearwater Capital Partners (who are based out of Cyprus & Singapore) had approx. 23% stake in KHI previously. KHI had issued FCCBs worth $18 million in 2007 to fund their expansion plans (Mumbai Orchid and all that). Anyway, the conversion price back then (at the height of bull market) was set to Rs.225/-. After sanity prevailed, the conversion price was reset to Rs. 135/- in June 2010. Now, KHIL over the past 6 months or so has been converting FCCBs into equity at Rs.135/- (check the various announcements they have made). Clearwater with a complete FCCB conversion would hold approx. 31% of KHI’s diluted equity. Once the percentage holding crossed 25%, open offer rules were triggered and Clearwater made the open offer @135 to the remaining shareholders for the mandatory 26%, which closed recently. Post the closure of the offer, and equity dilution, the shareholding status is as follows:
Promoters (Kamat family & associates) – 51.7%
Clearwater Capital Partners – 41.3%
Public shareholding – 7%

It must be noted that this open offer to acquire 26% @135/share was first announced in January 2012, and made in March 2012, but got delayed due to various reasons. Finally it took place at the end of December 2012.
With the mandatory 25% public shareholding rule to be implemented by June ’13, it remains to be seen how this plays out. Clearwater being a PE would want to make a quick buck on its investment and may not hesitate to sell its stake to hospitality major, local or global. And with brands spanning most segments from budget to luxury, Kamat would be an attractive bet for many hopefuls. Besides, a majority shareholding of the founding family would be an added show of confidence in the long term viability of the business. This could well turn out to be a case similar to that of Wabco where there were 2 equal partners running the company and eventually one wanted total control.

KHI is currently quoting at 112, about 17% below what Clearwater Capital paid for it for such a big stake. However, it must be remembered that it has made a loss of about 6-7 crore each in the last 2 quarters and only a slight profit in the 2 quarters prior to that. So the numbers are not worth talking about at this stage. With the debt of FCCB gone, the interest outgo on this count would stop completely and add straightway to the bottom-line. With the economy slowly on an upswing, hotel and travel tourism segments are doing well and India is now being looked at as a market with tremendous growth potential. With the continuing economic reforms, growing economy and major restructuring of the Company's business, the future outlook of the Company looks promising. Considering all these factors, the stock holds lot of potential at present levels.

Interestingly, Clearwater Capital also has a 27% stake in Vadodara-based Sayaji Hotels.

Monday, January 7, 2013

Profitable holidays

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Launched in the mid-1980s Sterling Holiday Resorts was the pioneer in the time share industry which registered red hot growth in the period 1986 to 1995. Mahindra Holidays took a cue from them in this nascent industry and surely but firmly established themselves as the timeshare company in the country. Meanwhile Sterling Holidays sank deeper, not least because of its own doings. So much so that its image for the past many years has been one that of dissatisfied customers coupled with run-down resorts.

The company expanded too fast in the mid-1990s, buying many pieces of land during that time and landing in a lot of debt. Then the crash of 2000 happened and Sterling found that they couldn’t dispose of the excess land that they had bought as property prices had come down. They compounded their problems by overselling their timeshares. Even in the most advanced economies, overselling of time shares has been a problem.

But Sterling Holiday Resorts, which has 19 resorts offering 1523 rooms, has been turning things around. In June ’11, they appointed Ramesh Ramanathan, their President in the nineties (1991-95), and then MD of their arch rival Mahindra Holidays as their MD. And he has started the revival earnestly. The company turned cash positive in the last quarter of the last financial year – the first time in 60 quarters and the trend should continue, if developments over the last year or so are any indication. But things may not happen in a hurry. Sterling wound up the March ’12 quarter with a net loss of Rs 5.91 crore. The comforting factor -- this was lower than the loss of Rs 17.97 crore the immediate previous quarter. Being EBIDTA positive is the start of a turnaround. The tougher task is to do so in the minds of their customers as well and bring back the credibility which they enjoyed once upon a time.

The turning point came when Bay Capital Partners Ltd invested Rs 15.97 crore in early 2009. The accumulated losses at the end of FY 2009 were Rs 203 crore. Bay Capital continued to invest in the company - altogether Rs 78.24 crore - and today has a 32.72 per cent stake. Bay’s Siddharth Mehta took over as Chairman in July 2011. Once Mehta put in the money, Sterling could negotiate with the banks and settle debts. And now, for the first time since 1995, Sterling is a debt-free company.

Then about a year ago the Mumbai-based investor duo – Rakesh Jhunjhunwala and Radhakrishna Damani – invested Rs 120 crore in the company (in a combination of equity and warrants; with warrants issued to them to be converted soon each will have a 7.71% stake).

It is pertinent to read the thoughts of RJ, the astute investor. He says “Any buyer of a Rs 5 lakh car is a potential customer. The entry barriers for this business are high because you need at least 10-12 resorts to offer. There are only two players in the market. And, now Sterling has a good management so long term potential is good.” This logic is obviously unquestionable.

Two things have stood Sterling in good stead: keeping the resorts going and not selling the land. That land is going to come in mighty handy now. It has 150 acres of land across 15 destinations, from Mahabaleshwar to Munnar, which will allow it to construct 2,000-plus rooms. More importantly, they have kept all their permissions to build in green areas alive all these years.

Now, Sterling’s resorts are being renovated at a cost of over Rs 100 crore. This also includes the cost of leasing new properties. At Kodaikanal, its first resort has been renovated and rebranded as Kodai by the Lake. Its Munnar resort has been renovated as well. Around 350 rooms of the company's resorts have been refurbished and another 400 will be done by March 2013.

Sterling is reconnecting with its existing member base of 65,000, many of whom are a disgruntled lot. With renovated and new resorts, it expects its members to take it seriously again. Last year, it enrolled 2,500 members. Greenfield resorts are at least 18 months away.  Mahindra Holidays, a company where Ramanathan was earlier the MD, and the leader in this business has more than twice Sterling’s members at 145,000. It operates over 2,000 rooms across 40 resorts.

Sterling’s time share is 30 per cent cheaper than Mahindra’s but the latter’s resorts are superior. They were the pioneers in the business and even when they started nose-diving, they continued to service their members. Sterling’s turnaround has already begun but the real impact will be felt only next year.

Debts wiped out, new investors and a new management. The results are showing. It should only be a matter of time when they will regain their lost glory.