Speciality Restaurants - Finally! A price hike - Centrum

We cut our FY14/FY15 estimates and target price on the back of lower guidance for new restaurant openings as current environment continues to be challenging. But we maintain Hold rating on the stock and believe that 4-5% price hike from August end, strong operating leverage on the back of fixed cost business model and 26% fall in stock price against 8% for CNX Midcap index (post our downgrade to Hold on 17th June '13) augur well for the company despite weak Q1FY14 operating results where the company posted 26% YoY fall in operating profit and 24% YoY drop in PAT.

High cost impacts Q1FY14 results: Despite posting 14.5% YoY growth in sales, operating profit declined by 26.1% YoY with OPM lower by 710bps. High front end cost for new restaurants, 193bps decline in gross margins on the back of 59% revenue share from Mainland China (63% in Q1FY13) and longer maturity time for new restaurants impacted operating profit. Despite higher other income, PAT for the quarter was down 24.2% YoY.

Finally! 4-5% price hike: The Company is finally hiking prices by 4-5% across restaurants from August end. This is being done after two years and after postponing it for the last 6 months due to weak economic conditions. During the quarter, APC for Mainland China was at ~Rs675-700 with churn remaining flat at 1.44. Management expects the billing to further increase as they are introducing regular portions along with currently available large portions in Mainland China restaurants and believe this will help customers try out a larger variety by ordering more dishes.

Lower guidance for new restaurants: Due to weak economic conditions, management has lowered guidance for new restaurant openings to 8-10 from 14-16 for FY14. Five new restaurants are in the pipeline while 5 others have been opened (including 3 rollover restaurants from FY13) till date. The company can expand restaurant count in new formats such as 'Mezzuna' and 'Hoppipola' as both are casual dining restaurants targeted at younger audiences.

Estimates cut, Maintain Hold: We cut our revenues by 3.4%/5.5% on the back of lower new restaurants opening while PAT has been cut by 5.9%/13.8% on the back of lower revenues as it has adopted a high fixed cost business model. The company is currently trading at 19.8x and 16.9x FY14E and FY15E respectively. We maintain Hold rating on the stock with a target price of Rs144 (based on 20x FY15E), upside of 18%. Key upside possibilities are higher customer churn in the upcoming festive season on faster than expected economic recovery while downside risks are lower openings of new restaurants, lower customer churn and nonacceptability of new restaurant formats.

Source : Equity Bulls

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