After receiving a good response to the initial public offer in May and touching a high of Rs 227 on June 14, Speciality Restaurants’ stock recently touched three month low level of Rs 155.25 on August 31 (very close to its issue price of Rs 150). However, the stock has smartly recovered by 21% to Rs 187 (current market price) within ten days, it is still down by 18% from the high levels.
Jubilant, which was trading at 36 times one year forward (FY14 estimated earnings) during Specialty’s IPO, has become even more expensive at 38 times. However, Speciality’s valuation of 34-36 times (based on FY12 annualised earnings), which was considered expensive during the IPO, trades at 29 times FY14 earnings.
Analysts say that Speciality’s valuation factored in the concerns of slowdown and thus the stock recovered so sharply. It also indicates that there seem to be enough players in the market to buy the company’s long term growth story as it has strong growth prospects similar to Jubilant.
Slowdown bites
The company’s performance in June 2012 quarter (Q1) slipped compared to FY12. Net sales growth of 13.4% in FY12 slowed down further to 12.4% year on year (y-o-y) despite Q1 being the summer vacation time. This indicates that slowdown has definitely had its impact on demand for discretionary cuisine like the Chinese food especially since the company’s strategy is to offer five star food at non-five star price, which though is still costlier than a typical fast food restaurant offering Chinese food.
Operating profit margin came under further pressure with the same dropping 442 basis points y-o-y to 20.1% as costs increased at a faster rate. But net profit margin fell by a lower rate of 133 basis points to 12% thanks to lower interest (debt to equity of 0.3 times) and taxes. The company undertakes price hikes twice a year or depending on inflationary pressures and is able to entirely pass on cost escalations within six months. Hence the disappointing performance of Q1 should correct in the coming quarters.
Festive season should also help support financial performance. In the longer run, the company expects its employee cost and rent (together forming 36% of sales as on Q1) to come down with economies of scale and cost rationalisation, which augurs well for margin.
…but reasons for recovery
Like Jubilant, the company also benefits from rising incomes, growing aspirations of Indian people and demand for Chinese food in India. The restaurants business is increasingly moving towards the organised players. According to the company’s presentation in August, “While the total industry worth Rs 43,000 crore in 2010 is expected to grow at a CAGR of 8% till 2015, organised segment is expected to grow at a faster pace of 30-32% and hence its share is likely to jump from 16% to 45% in the same period.”
This is positive for players like Speciality Restuarants. The company has developed strong brand recall in Chinese food with its flagship brand ‘Mainland China’ (62% of revenues) and strong presence in western India (41% of revenues) where eating out is most frequent.
The share of Mainland China, which fetches higher margins than other brands, in overall revenues is expected to only improve going ahead as the company plans to open 32 restaurants under the brand out of the total 45 targeted in next three years. This will provide good support to the company’s future performance both in terms of sales growth and margins. However, based on conservative estimates (FY13 sales growth and margins), there is no room for disappointment at current levels. Hence, investors looking at accumulating the stock should closely monitor Speciality’s financial performance.