Speciality Restaurants IPO Analysis

Speciality Restaurants, promoted by Mr. Anjan Chtterjee and Suchanda Chatterjee, is a fine dining operator with 49 Company owned and operated restaurants, 20 Franchisee and 13 confectionary outlets spread across 20 cities in India and one in Bangladesh. The promoters had launched the network in 1992 under the name Only Fish (later renamed to Oh! Calcutta). First Mainland China restaurant was launched in 1994. Most of tits restaurants located in Metros and Tier 1 cities and it continues to expand its operations in these places and opportunistically in Tier II cities. In future it seeks to expand mainly through ownership and opportunistically through franchising on a Franchisee Owned Company Operated (FOCO) model across India as well as certain international destinations. The FOCO model allows it to enter and operate in markets, which it may not otherwise exploit particularly in to the Tier II cities. Also, the majority of its restaurants are located in western India, which has the highest proportion of people dining out regularly. The Company's flagship brand Mainland China serves Chinese cuisine in a standalone fine dining setting. Chinese is one of most popular foreign cuisines in India. The Company has 36 Mainland China restaurants across India as well as one in Bangladesh. Notably, the revenues contribution from Mainland China is steadily improving from 53.27% in FY'09 to 61.23% in FY'11. It believes that maintaining and enhancing the Mainland China brand is important for maintaining competitive advantage. Also, the brand Oh! Calcutta encompassed seven restaurants across India as well one in Bangladesh. This brand features a range of cuisines from the east India city of kolkata, including the Bengali, Nawabi, British and continental cuisines served in a fine dining setting. The other restaurant brands it owns are Sigree, Flame & Grill, Haka, Just Biryani, KIBBEH, Kix, Machaan, Shack as well the confectionary brand Sweet Bengal. It has consistently improved its revenues and earnings with expanding network of restaurants. The Company increased owned and operated 30 restaurants as on 31st March 2008 to 45 as of 31st March 2011 and further to 49 as of February 29th 2012. Also, the franchise based restaurants from one as of 31st March 2008 increased to 18 as of 31st March 2011 and further to 20 as of February 29th 2011. The revenues increased by 34% to Rs 173.16 crore in FY'11. The Revenue split across the brands in FY'11 was: Mainland China (60.3%) followed by the Oh! Calcutta (12.3%), Sigree (9.5%), Flame & Gril (5.1%), Machaan (4.1%), Haka (3.8%) and others (4.9%). The restaurants in western India has contributed 39% of revenues in FY'11 and 41% of revenues for the nine months ended December 2011. Also, number of guests served were at 2.59 million for FY'11 and 2.09 million in nine months ended December 2011 with an average 7313 and 8127 guests per day respectively. The major portion of proceeds (around Rs 131.60 crore) is proposed to be utilized for opening of 45 New Restaurants for next three fiscal years FY'13, FY'14 and FY'15. Of this, Rs 92.27 crore is planned to be spent towards interior and equipment costs. In addition, Rs 15.1 crore is proposed to be utilised for the development of food plaza in Rajarhat, kolkata, West Bengal. Going forward, The company plans to maintain a tight basket of brands with a focus on Mainland China brand, while targeting a few new market segments. It may introduce new products to adapt to dining trends, shifts in guest spending and tastes and nutrition preferences. Strengths: It has well recognized brands Mainland China and Oh! Calcutta brands with experience of over 17 years. Diversified business model with Mainland China (offers authentic Chinese cuisine), Oh! Calcutta (diverse traditional cuisines), Sigree (authentic Indian cuisine), Flames&Grill (serves Kebabs), Machaan (traditional Indian dishes & children dishes) etc. "Asset light model" as all the restaurant properties are leased. The strong process established over the past 12 years for the quality control, brand standards, operations monitoring and food and service audits. Presence in key strategic locations Weaknesses: The fine dining sector of the restaurant industry is highly fragmented and competitive. The slowdown in the economy could impact the business. Rising property rentals Valuation: Over the last three years (FY08-11), the company's revenues have increased at a CAGR of 27% and reported net profit at a CAGR of 47%. The revenues increased by 34% to Rs 173.16 crore in FY'11. OPM increased to 22% (improved by 150 bps YoY). Accordingly there was robust 44% growth in operating profit to Rs 38.15 crore. There was sharp rise in other income (100%) and marginal decline in interest cost (3%), partly offset by the increase in depreciation (25%). Eventually, PBT grew by 69% to Rs 24.08 crore. After the rise in effective tax rate by 130 bps to 33.5%, there was 66% growth in PAT to Rs 16.02 crore. After adjusting for prior period items, adjusted PAT increased 40% to Rs 15.63 crore. For the nine months ended December 2011, Revenues stood at Rs 149.70 crore with OPM of 20.9%, PAT was Rs 15.02 crore for the same period. At the issue price of Rs 146-155, the P/E works out 43-45 times the FY'11 EPS Rs 3.4 (on post-IPO equity). There is no comparable listed player focused on fine dining. However fine dining is part of Food Service sector of which Jubilant Foodworks is a listed player trading at FY 2011 P/E of 103. Jubilant Food's brand, business model and prospects are more robust than that of Speciality Restaurants. Due to rising urbanization and nuclear families, growing young population, growing number of working women, increasing preference for dining out/ eating outside food and changing food habits away from traditional food, the Food service sector offers excellent growth potential. But there is scarcity of listed stocks in this sector. Hence valuations of such stocks will remain high.