Despite the weak sentiments, Speciality Restaurants has priced its initial public offer (IPO) at valuations way above those of the broader markets. Based on annualised earnings of nine months ended December 2011, the issue is priced between 33.6-35.7 times on the post-IPO capital. Even assuming a 30 per cent rise in earnings in the current financial year, the price to earnings valuation at 27 is far from cheap and leaves little on the table for investors in the near-term. However, the company's track record has been good and long-term prospects are equally bright given rising incomes, growing aspirations of Indian people and acceptability of Chinese food in India. The absence of any listed player in the fine dining space with a pan-India presence may also lead to good demand for the stock and support these valuations, which has been the case with stocks like Jubilant FoodWorks. In this backdrop, investors with a long-term perspective may consider the offer.
Strong brand recall
The company operates 69 fine dining restaurants in India (spread over 21 cities) offering multiple cuisines across multiple brands. Its flagship brand, Mainland China (38 in India and two in Dhaka, Bangladesh) has a strong brand recall and will continue to play a significant role in the company's growth. Its share in overall sales (currently 61 per cent) will continue to improve, which augurs well for margins. Says Anjan Chatterjee, founder and managing director of the company, "Margins are better for Mainland China, compared to our other brands as prices are cheaper, since 60 per cent of raw material is imported from China and we buy in bulk due to our economies of scale."
There are several other theme-based restaurants in the portfolio, such as Sigree (north-western food), Oh! Calcutta (Bengali, Nawabi, British, Continental), Haka (fast meal option from Hong Kong and Shanghai), Machaan (traditional Indian cuisine), Flame and Grill (fixed buffet), Kix (bar with a dance floor and music), Just Biryani (flavoured Indian rice preparations in take-away and home delivery format), Shack (bar lounge with a beach theme), Kibbeh (Lebanese bar lounge) and Sweet Bengal (Bengali sweets and snacks). The company plans to develop Italian cafes as Italian food is catching up.
| STRONG PROFIT GROWTH | |||
| In Rs crore | FY10 | FY11 | 9MFY12 |
| Net sales | 129.0 | 173.2 | 150.0 |
| % chg y-o-y | 11.6 | 34.3 |
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| Operating profit | 26.6 | 38.2 | 31.7 |
| % chg y-o-y | 35.7 | 43.6 |
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| Adj. net profit | 11.2 | 15.6 | 15.3 |
| % chg y-o-y | 77.8 | 39.3 |
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| Source: Company | |||
Besides opening 45 restaurants (including 32 under Mainland China) over the next three years, the company also plans to build a food plaza in Kolkata, which will consist of banquet halls and its various restaurants, all of which will be funded through the IPO proceeds.
| ISSUE DETAILS | |
| Size (Rs crore) | 171.4-182 |
| Price band (Rs) | 146-155 |
| Opens/Closes on | May 16/18 |
| CRISIL IPO grade | 41004.0 |
Robust prospects
Currently, there is no fine dining player operating in the country with a pan-India presence. Besides, Chinese cuisine is the most popular foreign cuisine in India and the company has developed a very strong presence over the years. Thus, the ongoing slowdown has not affected the company much.
In FY07-11, revenues have grown at a CAGR of 35 per cent while operating profit and net profit have seen larger increases at 48 per cent and 50 per cent, respectively.
The company's overall strategy is to offer five star food and service at non-five star prices. Its focus on consolidating presence in metros and expanding in
Tier-1 cities (Durgapur, Coimbatore, Mangalore and Kochi) with consumer traffic zones augurs well for it since the purchasing power of consumers in such cities is also high and the trend of people eating out is gaining momentum. Further, a majority of revenues (41 per cent) come from western India, which has highest proportion of people dining out regularly.
The company has its own training school in Kolkata, where chefs for the Mainland China restaurants are trained by master chefs (all Chinese). Even for back-end and front-end, people are hired and properly trained to adapt to the company's principles and philosophy.
While the company has a high employee base of 3,300 and its proportion to sales (in the nine months ended December 2011) was high at 21 per cent, it plans to rationalise the same with better training. Says Chatterjee, "Employee cost to sales is expected to come down, as we plan to bring the number of employees per restaurant from 77 to 50."
Also, the company's strategy of offering new restaurant formats, such as combos (two branded restaurants, which are co-located) and multi-brands (various formats in the same premises) will enable it to negotiate better lease rentals (another major cost component forming 13.55 of sales) and employee costs. The company also offers a revenue sharing model with or without minimum guarantee.
