Speciality Restaurants - Feeble demand impacting financials - Centrum

We recently interacted with the management of Speciality Restaurants to get their outlook on business environment. The key highlights are:

- Restaurant openings on track: New restaurant addition is on track as the company currently has 83 restaurants of which 21 are franchisee. In FY13 it opened 14 new restaurants including 10 owned, while 3 owned restaurants were opened in the first fortnight of April. Management maintained that they will open 15 restaurants each in FY14 and FY15 in the owned format. Management has already lined up 6 restaurants for opening by October 2013 and is finalizing plans for H2FY14. Mainland China and Sigree Global Grill are the brands the company has slated for expansion. The company launched an Italian restaurant, Mizona, in Pune in the second week of April which is an all day bar and eatery catering to the age group of 16-30 years with the second restaurant expected for launch in Kolkata. The company is also closing loss making restaurants and in FY14 it closed one owned 'Fame & Grill' and 2 franchisee owned Mainland China restaurants.

- Consumer demand remains weak: The management indicated that consumer demand continued to be lacklustre and under pressure in the current economic environment. Corporate spends have reduced significantly, impacting business. It believes more time is needed for demand revival. Bangalore market is the worst hit with significant depression in sales. The company continues to introduce schemes to increase footfalls.

- 5-7% price hike inevitable before August 2013: Company was expected to increase prices from March/April 2013 but deferred it to July/August 2013 due to poor demand. Now it plans to increase prices by 5-7% in two tranches to lower the impact on demand. Coupled with this, it is introducing regular portions along with currently available large portions. This will help customers try more variety by ordering more dishes, eat small portions of each dish and spend lower amount per dish. The company has already pilot tested this in Bangalore market and in the next one month will introduce it pan India. It will launch a TV ad campaign with the slogan, "Why order a large when you can do with a regular."

- Exploring acquisitions in QSR category: Company is considering an acquisition in the QSR or bakery category and is in advanced stages of negotiations to close the deal within the next couple of months. Management does not want to spend more than Rs300mn on the acquisition and expects to leverage the synergies and scale up operations further.

- Entry into international markets: Management is considering leveraging its brands in the international markets and plans to launch restaurants in the UK, Middle East and Singapore in FY14. The company is planning to open Oh!Calcutta restaurants in London and Singapore and introduce Mainland China restaurants in West Asian countries including UAE and Doha where seven restaurants, mostly in malls, are being planned. Expansion in these countries will be through franchisee or JV route where capex requirement will be minimal.

- To tap outdoor catering & delivery business: Company has pilot tested outdoor business in Kolkata and is further expanding it to Chennai and Mumbai as this business has 40% operating margins. It has launched a brand "Mobi-Feast' for this business and has bagged a few big orders including one from KKR IPL franchise. The company is expecting to launch a delivery model which could have the potential to garner 10% of the revenues in a couple of years from 3% currently. It has tied-up with Just Dial for back end call centre operations and pilot test this in Mumbai in the next month. It also plans to advertise for the same.

- Reducing estimates: We have reduced our FY14/FY15 revenues by 10.8% and 13.2% respectively on the back of lower than expected churn per restaurants, closure of restaurants, delay in price hikes coupled with weaker economic sentiments impacting average bill per cover. Operating profit has been reduced by 23.7%/20.9% for FY14/FY15 on the back of increase in breakeven time from 5-6 months for a new restaurant to 8-10 months now, coupled with high fixed cost. On the back of lower operating profit, PAT has also reduced by 25.5% and 27.9% for FY14 and FY15 respectively. We expect the company to post revenue of Rs2861mn and Rs3602 for FY14 and FY15 respectively. Operating profit will be Rs495mn and Rs669mn over the period. We expect margins to expand from 16.2% in FY13 to 17.3% in FY14E on the back of gross margin expansion coupled with operating leverage. PAT will be Rs306mn and Rs393mn over the same period.

- Expensive Valuations: We believe fine dining is the worst hit segment in the current economic slowdown as corporate are cutting budgets with customers reducing the frequency of eating out. The company is facing dual challenges of increasing prices to mitigate inflation which could impact demand and a drop in footfalls due to the trying economic environment. Though the company is on track to open 15 new restaurants in FY14 and FY15 respectively, we believe this will lower return ratios and delay FCF generation to FY16 on the back of lower profitability. The stock is currently trading at 24.8x and 19.4x FY14E and FY15E respectively. We continue to value the company at 20x FY15E EPS of Rs8.4 with a revised target price of Rs167 and downgrade the stock to Neutral.

Source : Equity Bulls

Keywords