Speciality Restaurants - A voracious growth appetite - Kim Eng

Speciality Restaurants (SRL) is India's leading restaurant chain. Its promoter Anjan Chatterjee is a pioneer in the Indian restaurant sector and enjoys strong credibility as a successful entrepreneur. SRL's Mainland China and Oh Calcutta restaurants have become household names in the metro and Tier-1 cities. SRL has capitalized on increasing urbanization and descretionary spending in India and, the growing 'eating out' trend among young Indians. We expect SRL's earnings to more than double over the next 3 years led by 1) 50% increase in the number of restaurants, 2) favorable sales mix due to addition of newformat restaurants/bars, and 3) better cost control and operating leverage in the existing restaurants. SRL's stock is trading at PER of 14.9x and EV/EBIDTA of 8.8x FY15F. It has a net cash B/S and catalysts in the form of acquisitions and joint ventures in India and the overseas markets.

We expect SRL to double revenue to Rs4.1bn in 3 years. SRL's revenue would grow faster over the next 3 years. This would be due to a full reflection of newly rolled out restaurants, asset sweating through increased dining hours, merging of restaurants with varied cuisine offerings, and increasing revenue from 'take away' and 'home delivery' offerings.

Gross margin compression for FY13E is an aberration; Expect margin expansion over the next 2 years. SRL clarified to us that the 200bp lower gross margin to 30% this year is due to its decision of not to raise prices. However, it we expect it to take a price increase in April'13, with another increase in 2HFY14. Moreover, we are confident of SRL's margin expansion of 500bp by FY15 supported by operating leverage and savings in cost of RM/Wastage, etc.

Strong expansion plan is supported by net cash B/S. The addition of 17 new restaurants by SRL means that it has 98 restaurants in 26 cities by FY13. It plans to increase restaurants by 30% to 130 by FY15. Moreover, it plans a JV in the Middle East/UK/Singapore along with starting a café/quick service restaurant (QSR) chain in India. We believe its surplus cash/IPO proceeds of Rs1.4bn would support inorganic growth. This is not included in our forecast.

Since its listing in May'12, the SRL stock has underperformed due to a slowing economy and discretionary spending. SRL's expansion plan, however, is progressing well and its strong earnings growth for the next 2 years would allay growth concerns. Its valuation of 8.8x EV/EBIDTA and PER of 14.9x FY15F are justified, given its pedigree and leadership position in a fast growing consumer business. Our discounted CF valuation for SRL works out to Rs209/sh.

Source : Equity Bulls

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