Speciality Restaurants - Strong growth expected ahead - Centrum

Speciality Restaurants posted 14.2%YoY revenue growth on the back of 11.8% YoY growth in own restaurant business. With price hike announced from April 2013 we expect this growth to be higher going ahead. Operating profit was down by 2.7% on the back of increase in raw material cost and employee cost which impacted margins. However PAT was up 39% YoY on the back of lower taxes and high other income. Maintain BUY on back of long term fundamental growth.

- Q3FY13 results below expectations: Speciality Restaurants posted 14.2% topline growth in Q3FY13 to Rs612mn on 11.8% growth in core restaurant business as the company did not take any price hikes in FY13. Operating profit was down by 2.7% as the company witnessed 294bps margin compression due to higher cost. PAT was higher by 39% on the back of higher other income and low tax rates.

- Restaurants addition on track: New restaurant addition is on track as the company currently has 82 restaurants of which 23 are franchisee. The management maintained that they will open 16 restaurants each for FY13 and FY14 respectively. The company is also launching its Italian restaurant, Mizona, in Pune in February which is an all day bar and eatery catering to the age group of 16-30 years. It plans to further scale up this brand in small areas with Café Mizona by carving out areas from Mainland China which will help the company reduce cost.

- New initiatives to drive incremental growth: Company is planning to enter the international markets through the JV route which is expected to materialize in the next 3 months. Here the company will hold majority stake and the capex requirement will be lower. The company has successfully pilot tested catering business and now is considering operations on a big scale in Kolkatta and Chennai under the brand 'MOBICHEF'. For increasing same store sales growth the company has tied up with Just Dial for delivery model which is expected to have ~10% of revenues over next 2 years. The company is also considering the addition of more Asian cuisines in Mainland China menu which will help increase footfalls and revenues.

- Margins set to expand: Operating margins in the quarter declined by 294bps on the back of lower sales growth and fixed cost business model. Pre-operative expenses from Mizone further impacted margins. However going forward, with price hikes of 4-6% across restaurants, focus on increasing same store sales growth, new initiatives on international front coupled with entry into catering business, we believe the company will benefit from the operating leverage in FY14E. Hence we have modeled operating margins of 20%+ for the next couple of years.

- Estimates lowered; Maintain BUY: We have marginally lowered our FY13E estimates on the back of lower consumer demand coupled with higher expenses for new restaurants. The stock is currently trading at 36x and 19.9x FY13E and FY14E respectively. We value the company at 20x FY15E EPS of Rs11.6 with our target price of Rs232 and maintain BUY rating on the stock. Focus on increasing same store sales growth, on track expansion plans, foray into the UAE market, venturing into catering business coupled with margin expansion on the back of economies of scale will help the company achieve its guidance for FY15.

Source : Equity Bulls

Keywords