Avoid Speciality Restaurants Limited IPO - Valuation on higher side - K R Choksey

Development of new restaurants to provide next leg of growth

Speciality plans to leverage its flagship brand Mainland China to selectively expand within existing markets and into new markets. The company plans to open 45 new restaurants during FY13-15 across metro, tier I and tier II cities as mentioned below. The launch period for new restaurant averages about 4 months while it takes an average of 4 to 6 months from the launch date to reach maturity and start contributing to revenues and profits. Also favourable demographic profile and growing working population would lead to higher demand of such restaurant chains in India.

Strong brand recall – Mainland China and Oh! Calcutta

Speciality's core brands, Mainland China (60% revenue share) and Oh! Calcutta (12% share) are well recognized fine dining brands in India. Both the brands have had a presence of over 17 years in an industry characterized by high brand mortality. The company's core brands have won multiple awards in India. For FY11 and 9MFY12, the guests served in Mainland China were ~4361 and 5196 per day with a cover turnaround of ~1.55 and 1.65 per day respectively. Likewise guests served in Oh! Calcutta were ~677 and 701 per day with a cover turnaround of ~1.01 and 1.09 times per day respectively. We believe concentration of the company on its core brands will auger well in terms of increasing revenues and profitability going ahead.

Leveraging the flagship Mainland China to promote other brands.

One of the strategies of the company is to use the flagship Mainland China to promote other brands and to optimize cost. Currently, the company has eight such format restaurants in place (four combos and four multi-brands) where it includes other brands like Flame&Grill or Sigree or Machaan alongside a Mainland China restaurant. This will also hold the company in good stead to negotiate a better lease rental deal with the property owner by seeking a large space, using a common kitchen space which in turn frees up more area to accommodate more covers and hence generate higher revenues, while a common management and staff reduces employee cost.

Asset light business model provides financial strength

Speciality follows an "Asset light model" as all its properties occupied by the 'company owned and operated' restaurants are on lease agreements which allows the company to optimize the capital for growth. Over the past five years, the company has mainly funded its capex requirement through equity dilution and internal accruals rather than stretching its balance sheet through incremental debt.

Key risks :

- High raw material costs, inflation and wage increases of skilled and semi-skilled workers can adversely affect the margins

- As speciality operates under leased premises, rising rentals may impact its profitability and growth.

- Changing consumer preferences and inability to adapt to the changes may affect the results of the operations leading to high concentration risks.

Valuation & Outlook:

The annualized earnings on diluted equity for FY12E is Rs 4.4 valued at a P/E of 33.5-35.6x. We believe though the business is inherently strong and the company has healthy balance sheet, the valuation seems expensive. Hence we recommend to Avoid the issue.

Source : Equity Bulls

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