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Monday, June 23, 2014


Scrip Code: 538268 WONDERLA

CMP:  Rs. 201.95; Accumulate at every dips.

Medium to Long Term Target: Rs. 226; STOP LOSS – Rs. 185.80; Market Cap: Rs. 1141.03 Cr; 52 Week High/Low: Rs. 226.40 / Rs. 125.00.
Total Shares: 5,65,00,670 shares; Promoters : 4,01,00,222 shares – 70.97 %; Total Public holding : 1,64,00,448 shares – 29.03 %; Book Value: Rs. 21.50; Face Value: Rs. 10.00; EPS: Rs. 5.90; Dividend: 15.00 %; P/E: 22.93 times; Ind. P/E: 10.89; EV/EBITDA: 8.60.
Total Debt: 18.60 Cr; Enterprise Value: Rs. 1133.20 Cr.

WONDERLA HOLIDAYS LIMITED: Incorporated in 2002, Wonderla Holidays Ltd is one of the largest operators of amusement parks in India. The company came out with an IPO on April 2014 offering 1,45,00,000 equity shares of Rs. 10 each for Rs. 125 per share raising Rs. 181.25 Cr. The object of offer for sale was to set up an amusement park in Hyderabad and for other general corporate purposes. Wonderla Holidays Limited (Wonderla) is an operator of amusement parks in India. The Company owns and operates two amusement parks in Bangalore and Kochi under the brand name Wonderla. The Company also owns and operates a resort beside its amusement park in Bangalore under the brand name Wonderla Resort. The Company’s amusement parks offer a range of water and land based attractions catering to all age groups. Wonderla Kochi is located just 15 kilometers from Kochi city, is home for approximately 55 amusement rides. The dry rides at Wonderla comprise of land rides, sky rides and hi-thrill rides. Currently, Wonderla Holidays is in the process of setting up their third amusement park in Hyderabad. They also own and operate a resort beside the amusement park in Bangalore under the brand name 'Wonderla Resort' which has been operational since March 2012. Wonderla amusement parks offer a wide range of water and land based attractions catering to all age groups. They have 22 water based attractions and 34 land based attractions at Wonderla Kochi, situated on 92.95 acres of land and 20 water based attractions and 33 land based attractions at Wonderla Bangalore, situated on 81.75 acres of land. Wonderla Resort is a 'Three Star' leisure resort located beside their amusement park in Bangalore comprising of 84 luxury rooms, with amenities including banquet halls, a board room, conference rooms, a multi-cuisine restaurant, a solar heated swimming pool, recreation area, kid’s activity centre and a well-equipped gym. Wonderla Holidays Limited is locally compared with Nicco Parks & Resorts Ltd, Galaxy Entertainment Corp Ltd, Cineline India Ltd, Delta Corp Ltd, H.S India Ltd, T. Spiritual World Ltd, Oriental Hotels Ltd, B.L. Kashyap and Sons Ltd, Viceroy Hotles Ltd, Mahindra Holidays & Resorts India Ltd, Sterling Holidays & Resorts Ltd, EsselWorld, Appu Ghar, Queens Land, Vismaya, Tikuji-Ni-Wadi, Funtasia Water Park, Snow World, Jalavihar, Aquatica, Adlabs Imagica, Ramoji Film City and globally compared with The Walt Disney Company of USA, Twenty First Century of USA, Dreamworks Animations Plc of USA, Cedar Point of United states, Europa Park of Germany, Port Aventura of Spain, Six Flags Great Adventure and Wild Safari of USA, Blackpool Pleasure beach of United Kingdom, Everland of South Korea, Canada’s Wonderland of Canada, Ocean Park of Hong Kong, Efteling of Netherlands, Dreamworld on the Gold Coast of Australia, Busch Gardens of USA, Wisconsin Dells of USA.

Investment Rationale:
Wonderla Holidays, promoted by the Chittilappilly family owns and operates amusement parks in Kochi and Bangalore along with a resort adjacent to its Bangalore Park under the brand name 'Wonderla Resort' which has been operational since March 2012. The company is in the process of setting up their third amusement park in Hyderabad. Both the amusement parks offer wide range of water and land based attractions and attracted combined footfalls of 23 lakh in FY 13 while total footfalls have witnessed 7.4 % CAGR over FY11-13. Bangalore amusement park and resort accounted for 60 % of 9mFY14 revenues while EBIDTA Margin stood at 47 %. Company has acquired 50 acres of land for its proposed Hyderabad Park and has invested about Rs. 38 Cr so far out of the total cost of Rs. 260 Cr. Company has developed an in-house facility in Kochi to construct the rides used in its amusement park and it has constructed 42 rides so far. This has helped to reduce Capex incurred on the rides. The cost of a ride manufactures in-house is one third of the cost of procuring the ride externally. This has helped the company to build in-house maintenance capabilities thereby reducing the cost of maintenance and downtime for a ride. India’s amusement industry is at nascent stage as compared to its global peers, this is evident from several indicators such as the relative small size of Rs. 260 Cr with about 150 amusement parks and high share of ticket sales in overall revenue pie as opposed more or less even split amongst entry fees, accommodation and F&B. This industry witnesses an annual footfall of around 58 lakhs to 60 lakhs; the industry is far undersized in terms of footfalls as compared to some of the large global amusement parks. In terms of seasonality, with four months of monsoon and less extreme weather conditions in several Tier 1 Cities, India offers very conducive environment for amusement parks. Company main customers are kids, and these are the major drivers of amusement parks, school vacations around Diwali, Christmas and summer attract major crowds to amusement parks. Accordingly, Q1 and Q3 are usually the best months for amusement parks. Amusement parks require large upfront capex though once park operations stabilize, growth can be driven by twin factors of rising footfalls and better revenue mix especially in an Indian context where F&B, merchandising and rentals have vast scope for improvement. Amusement parks are broadly categorised into Large Parks, Medium Parks & Small Parks. Capex required for Large parks are more than Rs. 70 Cr with land size of more than 40 Acres and can have annual visitors of around 5 lakhs. Large parks are usually located in Metros cities and in outskirts like Essel World of Mumbai, Nicco Park of Kolkata, Kishikinta of Chennai, Wonderla of Kochi & Bangalore, there are 16 to 18 such Large Parks in India. Medium Parks: Capex required for Medium parks are between Rs. 30 Cr to Rs. 70 Cr with required land size of between 10 to 40 Acres and can have annual visitors of around 3 to 5 lakhs. Medium parks are usually located in Outskirts of metros, Tier 1 Cities like GRS Fantasy Park of Mysore, Ocean Park of Hyderabad, there are about 40 to 50 such parks in India. Small Parks: Capex required for Small parks are about Rs. 30 Cr with required land size of around 10 Acres and can have annual visitors of around 3 lakhs. Small parks are usually located in Tier II cities, small towns, outskirts of metros and Tier 1 Cities like Fun N Food Kingdom of Dehradun, there are about 85 to 95 such parks in India. Wonderla’s existing business enjoys robust returns on its business and more importantly, a sustainable EBIDTA margin which is in excess of 40 %. Return ratios like RoE and RoCE have historically remained healthy. With a large upfront capex on Hyderabad project could impact return ratios in the near term; however, eventually it is expected that these ratio to trend higher once the park starts contributing in a meaningful manner. Wonderla enjoys RoCE of more than 30 % supported by free cash generation from amusement parks as they attain maturity due to high EBIT margins, lower incremental capex and improved revenue mix. Company came with an IPO and those funds are intended to utilise to finance its amusement park in Hyderabad at a total cost of Rs. 26o Cr. This is expected to be operational in FY17.

Outlook and Valuation:
Wonderla Holidays Limited is a part of the Kochi based V-Guard group. Wonderla Hoildays is a very unique in business model with inherently strong profitability at an attractive valution. Wonderla has high operating margins; high ROCE, niche & ambitious expansion plans make it an attractive stock to pick. The company's Kochi theme park is spread across 93 acres of land of which only 29 acres is used, this park has 55 rides which consists of 22 water and 33 land rides with 270 employees. It also has 7 restaurants (food is charged extra) and its entry fee is aound Rs. 400 to Rs. 600. Kochi park has a footfalls of 11-12 lakh and have seen a growth of 4 % CAGR. The company's Bangalore park is spread across 82 acres of land of which only 39 acres is currently used, this park has 55 rides which consists of 20 water and 35 land rides with 306 employees. It also has 7 restaurants (food is charged extra) and its entry fee is aound Rs. 600 to Rs. 800. Bangalore park has a footfalls of 11-12 lakh. Wonderla Holidays Ltd garnered Rs. 181.25 Cr through its IPO during the month of April 2014. The company will use the net IPO proceeds to fund its third amusement park in Hyderabad. This third amusement park is being set upped in Ranga Reddy District near Hyderabad which is now a part of Telangana for which 49.57 Acers of land have been acquired for Rs. 25 Cr. The total cost of the park is pegged at Rs. 256, of which Rs. 173 Cr will be funded via IPO proceeds and Rs. 45 Cr via debt funding from State Bank of Travencore and balance Rs. 33 Cr from internal accruals. Till date Company has already spend Rs. 37.70 Cr on this Hyderabad Park mainly towards land purchase and placing order for the new rides. The estimated total cost of the upcoming park in Hyderabad would be similar to the existing gross fixed assets of the company, which implies return ratios like RoCE would be suppressed as the park is likely to commence operation by FY17. Wonderla Bangalore Park which spreads around 93 Acers is operative since 2000 and owns and operates 3 star 84 rooms resort since March 2012 which accounted for Rs. 6 Cr or 4 % of Wonderla’s Annual Revenue. With footfalls of 23.4 lakhs in FY13 at these two parks the company clocked in total income of Rs. 139 Cr of which income from Services was Rs. 125 Cr while sale of products accounted for Rs. 13 cr. While the comapny has seen the footfalls growth of 9 to 10 % in last two years, its revenue rose 22 % in FY13 on back of 19 % growth in services income which was mainly from ticket sales and 54 % jump in sales of products such as food & beverages and mementoes etc. For FY13 it earned EBITDA of Rs. 64 Cr and Net Profit of Rs. 33.5 Cr resulting in EBITDA margin of 46 % and Net Margin of 24 %. Wonderla’s earning per Share for FY13 stood at Rs. 7.97 on the equity of Rs. 42 Cr. During 9 months ended 31 Dec 2013, its total income rose to Rs. 122 Cr with EBITDA of Rs. 58 Cr & Net Profit of Rs. 31 Cr giving an expansion in net margin from 24.1 % to 25.5 %. Company’s 9 month FY13 EPS stood at Rs. 7.38 as against Rs. 7.97 for FY13. The book value of Wonderla as on 31 Dec 2013 stood at Rs. 36.3 with debt of Rs. 18 Cr with a liquid investment of Rs. 15 Cr making it debt free company. Since, footfalls and revenue is seasonal in nature Wonderla’s Q1 and Q3 are better performing than Q2 and Q4. Wonderla is likely to witness a maintained footfalls a 78 % CAGR, while its ticket prices have also seen a similar growth of 89 % CAGR which are likely to be sustained in the future. It is expected that its EBIDTA margins to remain stable though return ratios like RoE and RoCE are expected to be dampened due to the large upfront capex for Hyderabad amusement park. Based on post IPO diluted equity, it is expected that its FY15 EPS to be t Rs. 8.00 & its FY16 EPS to be at Rs. 9.5. Comparing Wonderla with its peers on a PE basis, it appears that enough valuation headroom is left, given that larger USlisted peers like Six Flags, Cedar Fair trade between 14x27x on CY14 basis. Amusement parks attain maturity; they can throw up significant cash flows since they require only maintenance capex: for instance, in FY10 and FY11, when there was no large ongoing project, capex/sales was just 5 to 7 % which helped generate large free cash flows. Given attractive valuations, robust growth prospects and inherently strong profitability, One can buy into this Stock with a target price of Rs. 226 for FY15. At the CMP of Rs. 201.95, the stock is trading at a P/E of 25.24x FY15E and 21.25x FY16E. The company can post EPS of Rs. 8.00 for FY15E and Rs. 9.50 for FY16E. One can buy WONDERLA HOLIDAYS LIMITED with a target price of Rs. 226.00 for Medium to Long term investment.

SALES ( Crs)137.90159.50184.10212.50
NET PROFIT (₹ Cr)33.5038.0045.1053.50
EPS ()5.906.708.009.50
PE (x)21.1018.6015.7013.20
P/BV (x)4.303.501.901.70
EV/EBITDA (x)8.607.707.507.10
ROE (%)30.9026.8017.4013.80
ROCE (%)40.4035.9023.9019.70

I would buy WONDERLA HOLIDAYS LTD for Medium to Long term for target of Rs. 226.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 185.80 on every purchase(Why Strict stop loss of 8 % ?) - Click Here



Friday, June 13, 2014


Scrip Code: 505537 ZEEL
CMP:  Rs. 270.70; Buy between Rs. 268.00 - 270.00 levels.

Short Term Target: Rs. 283 - 295; Medium to Long Term Target: Rs. 324; STOP LOSS – Rs. 249.00; Market Cap: Rs. 25,999.34 Cr; 52 Week High/Low: Rs. 302.00 / Rs. 208.00.

Total Shares: 96,04,48,720 shares; Promoters : 41,36,70,212 shares –43.07 %; Total Public holding : 54,67,78,508 shares – 56.93 %; Book Value: Rs. 32.83; Face Value: Rs. 1.00; EPS: Rs. 7.55; Dividend: 200.00 %; P/E: 35.85 times; Ind. P/E: 33.86; EV/EBITDA: 18.39.
Total Debt: 1.70 Cr; Enterprise Value: Rs. 25,468.13 Cr.

ZEE ENTERTAINMENT ENTERPRISES LTD: Zee Entertainment Ltd was founded in the year 1982, based in Mumbai. Company was formerly known as Zee Telefilms Limited and changed its name to Zee Entertainment Enterprises Limited in January 2007. The Company came out with an IPO in 1993 offering 90,00,000 equity shares of Rs. 10 each for Rs. 20 per share raising Rs. 18.00 Cr. ZEEL announced split in its face value from Rs. 10 to Rs.1 on September 1999, later in September 2010 it announced bonus in ratio of 1:1 and on completion of 20 years of broadcasting business in May 2013, the Company announced the distribution of about Rs. 2,015 Crs by way of Bonus issue of 6 % Non-Convertible Redeemable Preference Shares of Face value of Re. 1 each. This bonus issue was in ratio of 21 non-convertible redeemable preference shares with tenure of eight years of Re. 1 each for every 1 Equity share of Re. 1 held in a company. The bonus issue was with one-fifth of the amount i.e. around Rs. 400 Cr redeemable from fourth year onwards in five equal instalments till eight year, this was issued on March 4, 2014. ZEEL, together with its subsidiaries, operates as a vertically integrated media and entertainment company in India. It operates in three segments: Broadcasting and Content, Education, and Film Production. The Broadcasting and Content segment develops, produces, and procures television programming and film content, and delivers through satellites, cable, and Internet. It broadcasts channels, such as Hindi general entertainment channels and regional language general entertainment channels, Bollywood channels, sports channels, English entertainment channels, alternate lifestyle channels. The company broadcasts Hindi entertainment channels - Zee TV, Zee Smile, and 9X; Hindi movies channels - Zee Cinema, Zee Premier, Zee Action, and Zee Classic; English entertainment, movies, and life style channels - Zee Studio, Zee Café, and Zee Trendz; and Sports channels - TEN Cricket, TEN Action, TEN Sports, and TEN Golf. It also broadcasts Regional language entertainment channels, including Zee Marathi, Zee Bangla, Zee Talkies, Zee Telegu, Zee Kannada, ETC Punjabi, and Zee Tamil; religious and alternate lifestyle channels comprising Zee Jagran and Zee Salaam; music channels, such as Zing and ETC Music; niche and special interest channels comprising Zee Khana Khazana; and HD channels, including Zee TV HD, Zee Cinema HD, Zee Studio HD, and TEN HD. Company earns revenues by the way of advertisement and subscription revenues and syndication. The Education segment engages in distribution of software learning products; and provides education and training in information technology. The Film Production segment produces and distributes films. The company has a library housing approximately 1,00,000 hours from 80,000 hours of television content; and rights to approximately 3,000 movie titles. Effective March 29, 2010, Zee News Ltd. demerged its Regional General Entertainment channel business undertaking and transferred its operation to Zee Entertainment Enterprises Limited. It has operations in India, the United States, Canada, Europe, Africa, the Middle East, Southeast Asia, Australia, and New Zealand. ZEE ENTERTAINMENT ENTERPRISES LTD can be locally be compared with Balaji Telefilms Ltd, New Delhi Television Ltd, Sri Adhikari Bros Tele Network, Sun TV Network Ltd, Network 18 Media & Investment Ltd and TV18 Broadcasts Limited, Raj Television Networks Ltd, and Globally with UTV Media PLC of UK, CBS Corporation of USA, British Sky Broadcasting Group of UK, Viacom Inc of USA, Comcast Corp of USA, Direct TV USA, Discovery Communications of USA, Dish Network of USA, Dreamworks Animations SKG of USA, Time Warner Cable Inc of USA, TV Tokyo Holdings Corporation of Japan, Chubu-Nippon Broadcasting Co., Ltd of Japan, Wowow Incorporated of Japan, Twenty First Century Fox of USA, Walt Disney company of USA, News Corp of USA, NBC Universal of USA.

Investment Rationale:
Zee Entertainment Enterprises Limited is one of India’s leading television, media and entertainment companies. It is amongst the largest producers and aggregators of Hindi programming in the world, with extensive library housing over 120,000 hours of television content. ZEE has rights to more than 3,500 movie titles from foremost studios and of iconic film stars; Zee houses the world's largest Hindi film library. Through its strong presence worldwide, Zee entertains over 67 Cr+ viewers across 169 countries. The Zee stable owns an integrated range of businesses. All of these in singularity adhere to the content to consumer value chain model of media and entertainment business. Zee is a pioneer in every aspect of content aggregation and distribution through traditional media like satellite and cable and new media like the internet, in India. Zee Entertainment Enterprise is the first listed media company in India and first to launch a Hindi General Entertainment Channel as Zee TV, Hindi Cinema Channel as Zee Cinema, a 24 hour Hindi News Channel as Zee News, 24-hour Food Channel as Zee Khana Khazana, Urdu infotainment channel as Zee Salaam. Zee Entertainment Enterprises Ltd recently launched a new channel, Zee Bioskop, in Indonesia in January 2014. Zee will launched its fourth GEC Zee Zindagi on June 23, 2014, initially based on content acquired from Pakistan. Zee Zindagi is the first Hindi GEC to be launched pan-India and not just in the Hindi speaking belt but it also targets the Urdu-speaking population across India and abroad. Though Zee Zindagi has been priced aggressively at Rs. 25.80 per month, ZEE is targeting at least 95 % reach for this channel. It is expected that the ZEE’s domestic subscription growth will remain largely unaffected despite the MediaPro split, as benefits of induction of ZEE’s sports channels in the overall bouquet trickles in. After initially starting with four hours of programming which will be sourced from Pakistan, content production will be done in India and Pakistan as well. As per media reports, ZEE has acquired 4,000 hours of content from Pakistan. Content will also be sourced from Egypt, Turkey and Latin America. The company has stated around Rs. 80 Cr to Rs. 100 Cr as the marketing spend on this new channel. ZEE’s entry into Indonesia has done well, and it now plans to venture into Thailand and Vietnam. It is also looking at consolidating its Middle East operations. Going ahead, Africa will be in focus in its international business. In addition, Zee is also likely to come up with additional channels. Zee’s strategy is to invest in quality content for its existing channels and also content requirement for its new launches would increase its programming costs, going ahead. This strategy would help Zee to gain further market share and also drive its subscription revenues when new channels gain popularity. However, the heavy investments may hurt margins in the near term but would be last shortly. Indian economy continues to grow at a sluggish pace of 4.7 % in FY14. By keeping on pressure on overall advertising spends which have barely touched the double digit mark. To some extent election related spends have helped. With a stable government, growth is expected to pick up. The company expects that despite a slow economy, television media industry will continue on its double-digit growth path. The company continues to make investments in creating excellent quality content for its viewers and explores growth opportunities in domestic markets, international markets and in digital space. Over FY2013-16E, It is expected that the company to post a CAGR of 17 % in its top-line and 18 % in its bottom-line. During the quarter, domestic subscription revenues stood at Rs. 334.40 Cr, while international subscription revenues were Rs. 129.20 Cr. The company has recommended a Dividend of Rs. 2.00/- per share on face value of Rs. 1.00/- each, for the FY 2013-14. Advertising revenues for the quarter were Rs. 582.40 Cr, recording a growth of 21.5 % over Q4 FY13. Subscription revenue was Rs. 463.50 Cr for the quarter ended March 31, 2014. During the quarter, Zee TV averaged 305 TVMs recording a relative share of 19.30 % and is now the No.2 channel in the genre. The channel delivered weekly average of 15 shows among top 100 shows. The sports channel business revenue in the fourth quarter of FY2014 were Rs. 195.90 Cr, while cost incurred in this quarter were Rs. 160.80 Cr. Recently, RBI has allowed FII’s to hold 100 % of the paid up capital in ZEE Entertainment Enterprise Ltd, currently promoters hold 43.07 % in company whereas FII’s hold 49.73 % in the company.

Outlook and Valuation: 
ZEE Entertainment Enterprises Ltd is one of India's leading Television, media & Entertainent company. In reflaction of India's growing influence, domestic television channels are increasing their networks internationally. Channels such as Colors, Star Plus, SET and ZEE TV are available in approximately 5,07,077 viewers and in 169 countries respectively. Management has indicated that in the next few quarters, subscription revenue growth is likely to be modest. As this can be on account of a fact that the company believes that it has largely utilized the benefits from Phase -1 and Phase 2 of digitization (until customer level billing improves), and the company has broken its JV with Star (Medipro) and would be now approaching cable operators and other distribution platforms alone – this is likely to have some impact on collections, at least in the near-term. Advertising revenue growth of Zee Entertainment has significantly outperformed industry growth largely because of two reasons, first because of benefits for the movie and music channels which posted improved distribution and greater emphasis of media buyers on these segments, and secondly, on improvement in market shares of Zee channels especially Zee Marathi. These are likely to get almost completely absorbed in the base from 2QFY15 onwards, limiting Zee Entertainment’s outperformance relative to the industry. The company has already announced the launch of a new Hindi GEC “Zee Zindagi” (launch scheduled on June 23rd). The management has also indicated in the course of the conference call that further investments by Zee could be expected. ZEE, following the end of Medipro JV, shall be forced to aggressively launch new channels, and this is likely to impact its profitability but for the shorter term. With the heavy investments in new launches may hurt margins in the near term and it could affect EBITDA margins and it could post margins of 27 % and 27.1 % in FY15E and FY16E, respectively. Though overall EBITDA margins improved 90 bps to 26.3 % in Q4FY14, the ex-sports EBITDA margin contracted 430 bps to 28.7 %. This contraction is primarily on account of the major investments undertaken by the company due to several new launches such as Zee Zindagi, Zee Anmol, etc. The management guided at heavy investments in content even in the coming quarters. This is essential for long term growth and sustainability of the business. However, it will dent margins in the short term. Moreover, with a change in business model in favour of higher investments in content, EBITDA margins will take a hit. It is expected that the PAT margins to reach 18.1 % and 19.0 % in FY15E and FY16E, respectively. However, the PAT margin could improve after the merger of Diligent Media Corporation (DMCL) is complete, which entitles Zee to a tax benefit of Rs. 300 crore, of which Rs. 100 crore may be availed in FY15E. ZEE’s sports business is lumpy in nature while the absence of India related sports content in its sports portfolio will keep its domestic subscription revenue subdued. The management guided sports losses to the tune of Rs.100 crore in the coming future. Going ahead, the ad growth improvement will only be gradual and move in tandem with the economy. At the CMP of Rs. 270.70, the stock is trading at its all-time high P/E of 26.53 x FY15E and 22.18 x FY16E. The company can post EPS of Rs. 10.20 for FY15E and Rs. 12.20 for FY16E. One can buy ZEE ENTERTAINMENT ENTERPRISE LIMITED with a target price of Rs. 324.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 283 - Rs. 295.00.

SALES ( Crs)3,700.004,421.704,935.505,44.30
NET PROFIT (₹ Cr)720.00892.10978.401,170.90
EPS ()7.509.3010.2012.20
PE (x)39.0031.5028.8024.00
P/BV (x)
EV/EBITDA (x)29.0020.6018.1015.00
ROE (%)18.4021.1020.1020.80
ROCE (%)23.3021.3020.0020.80

I would buy ZEE ENTERTAINMENT LTD for Medium to Long term for target of Rs. 324.00 and for the shorter term the target would be Rs. 283 to Rs. 295.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 249.00 on every purchase(Why Strict stop loss of 8 % ?) - Click Here



Tuesday, June 3, 2014


Scrip Code: 534425 SPECIALITY
CMP:  Rs. 148.45; Buy at current levels.

Short Term Target: Rs. 155.80; Medium to Long Term Target: Rs. 200; STOP LOSS – Rs. 136.55; Market Cap: Rs. 697.06 Cr; 52 Week High/Low: Rs. 179.00 / Rs. 101.30.

Total Shares: 4,69,57,657 shares; Promoters : 2,84,99,962 shares –60.69 %; Total Public holding : 1,84,57,695 shares –39.30 %; Book Value: Rs. 65.89; Face Value: Rs. 10.00; EPS: Rs. 4.02; Dividend: 68.00 %; P/E: 36.92 times; Ind. P/E: 38.92; EV/EBITDA: 15.75.
Total Debt: 0.10 Cr; Enterprise Value: Rs. 689.40 Cr.

SPECIALITY RESTAURANTS LIMITED: The Company was founded in 1992 and is based in Mumbai, India. The company was formerly known as Speciality Restaurants Private Ltd and changed its named to Mainland Restaurants Pvt Ltd on May 7, 2003. The company again changed its name to Speciality Restaurants Pvt Ltd in Jan 2004, and on conversion to a public limited company, the name was again changed to Speciality Restaurants Limited on Feb 10, 2011. Speciality Restaurants Limited came out with an IPO on May 2012 offering 1,17,39,415 equity shares of Rs. 10 each for Rs. 155 per share raising Rs. 181.96 Cr. The object of offer for sale was to repay a term loan, development of new corporate restaurants, development of food plaza. Speciality Restaurants Ltd is a fine dining operator in India with 107 restaurants and 14 confectionaries. They focus on providing their guests an affordable fine dining experience with quality food and service in a modern ambience. Speciality Restaurants has established several famous brands across the nation, including Mainland China, Oh! Calcutta, Café Mezzuna, Sigree, Haka, Machaan, Mostly Kababs, Just Biryani and Sweet Bengal, Flame & Grill, Kix, Shack, and Kibbeh brands; and confectionaries under the Sweet Bengal brand. It also operates Mobifeast, an outdoor catering arm for parties. It runs 62 Food & Beverage outlets in various important cities. Mainland China alone serves more than 2 lakhs Chinese meals per month, which is a record of its sorts in the country. Their restaurants consist of different restaurant concepts and are located across India, with the majority concentrated in the western region. The four factors that contribute to the quality of the food that they offer are quality fresh ingredients, modern food preparation and storage equipment, standardised recipes prepared by trained chefs and effective quality monitoring. Speciality Restaurants Limited owns and operates restaurants and confectionaries in India, Middle East, Africa, UK, and Bangladesh. Speciality Restaurants Limited is locally compared with Jubilant Foodworks Ltd, Westlife Development Ltd, Galaxy Entertainment, Indage Restaurant, Viceroy Hotels Ltd, Kamat Hotels India Ltd, H.S. India ltd, Byke Hospitality Ltd, Country Club India Ltd, Srs Ltd and globally compared with China Bistro, Cheesecake Factory, Darden Restaurants, Buffalo Wild Wings, Neo Group Ltd of Singapore, Borneo Oil Berhad of Malaysia, Berjaya Food Bhd of Malaysia, Abu Dhabi National Hotels of UAE, New Palace International Co. Ltd of Taiwan, Misonoza Theatrical Corporation of Japan, JB Eleven Co Ltd of Japan, Burger King Worldwide Inc of USA, Dunkin’ Brands Group Inc of USA, Red Robin Gourmet Burgers Inc of USA, BJ’s Restaurants Inc of USA, DineEquity Inc of USA, Domino’s Pizza Inc of UK, Hilton Worldwide Holdings Inc of USA, Hyatt Hotels Corp of USA, IFA Hotels and Resorts of USA, New Mauritius Hotels Ltd of Mauritius, Kuwait Food Company of UAE, Naiade Resort Ltd of UAE, Carrianna Group Holdings Co of Hong Kong, Bloomberry Resorts Corp of Philippines, Millennium & Copthorne Hotel Plc of UK, InterContinental Hotel Group Plc of UK, Kouni Reisen Holding AG of Switzerland, Resturants Group Plc of UK, Sodexo S.A. of France, Spirit Pub Company of UK.

Investment Rationale: 
Speciality Restaurants, promoted by the Anjan Chatterjee and family who owns and operates chains of fine dine and multi cuisines restaurants in India and abroad. Speciality's very first restaurant was started way back in 1992 named "Only Fish". This group has two flagship brands Oh! Calcutta and Mainland China. This company is backed by multi-stage PE investor SAIF Partner and SAIF Partners has been adding to its holding over past and as of March 31, 2014 it held 16.62 % stake in Speciality Restaurants Ltd. Recently, on May 29 2014, the company approved the proposal for acquisition of 51 % stake in a bakery company named Love Sugar and Dough for Rs. 75 lakh by the way of purchase of shares from the existing shareholders and execution of share purchase and shareholder's agreement subject to the statutory approvals. Love Sugar Dough is Mumbai based company set up in 2011, it has 8 bakery stores spread across Mumbai, Pune & Surat. Speciality looks at entering Quick Service Restaurants as well as Bakery Chains. Speciality Restaurants earlier this year formed a JV in Doha, Qatar in partnership with Al-Mohannadi Group to expand its flagship brand serving oriental cuisine Mainland China overseas. In FY13, Mainland China contributed 62 % to the total sales of the Speciality followed by the Oh! Calcutta and Sigree contributing 10 % each. Speciality's Flame & Grill along with Sweet Bengal contributed 5 % each to the total sales of the company. Its Machaan contributed 3 %, Haka contributed 3 % and Others contributed 2 % to the company's total sales. With an increase in disposable income levels and the culture of dining out is fastly catching up within the middle class and the restaurant industry in India is expected to grow at 17 % annually. The growth of the India food service industry is broadly driven by consumers and food service operators. The food market in India is estimated to be at Rs. 75,000 Cr last year and could reach at about Rs. 1.37 Lakh Cr in 2015 according to a data published by an research group. This industry is highly fragmented with 15 lakh eating outlets of which a little more than 3,000 outlets forms the organised segments. However, the organised segment is rapidly growing at an annual rate of 16 %. The India’s Quick Service segment is the clear winner in the eating out market with a growth rate of 21 %. Organized segment is expected to reach about Rs. 22,000 Cr by 2017, this would be driven by the rising disposable income, nuclear family structure, increasing working population, rapid urbanization and consumerism, increased private equity interest. The market size of Indian Quick Service Restaurants is estimated at Rs. 4,675 Cr and is expected to grow at 21.5 %, the market size of Casual Dining is of Rs. 2,365 Cr and is expected to grow 11.9 %; the Indian Café’s Market size is of Rs. 1,265 Cr and is expected to grow 12.3 %; the market size of India Fine Dining is of Rs. 1,045 Cr, and is expected to grow at 12.00 %, the market size of Pubs , bars, clubs and Lounges is of Rs. 963 Cr and is expected to grow at 11.00 %. Indian's on an average eats out lesser than 2 times a month, as compared to the 40 times in Singapore. Even a small increase in this number would mean a huge market opportunity for restaurants in India. Speciality Restaurants limited posted an healthy 18.1 % YoY growth in revenues on the back of 14.8 % YoY growth from owned restaurants and 92 % increase in revenues from franchisees following the opening of new restaurants. Management is confident of opening 12-15 owned restaurants every year for the next 2 years with 60 % to 70 % of them Mainland China. The company is consolidating its Indian cuisine restaurant under its brand “Sigree Global Grill” and intends it to make the second power brand. Some of its old restaurants brands such as Machaan, Fame & Grill may be converted to Sigree Global Grill over the next 2 years while Haka is being closed down slowly. During the quarter, the company opened 5 new restaurants and closed 2. Newer formats such as ‘Mezzuna’ and ‘Hoppipola’ will continue to cater to younger audiences. Fine dining is an upcoming format in urban India which is gaining good acceptance for serving the highest quality of food and services in a soothing atmosphere. The size of this market is estimated at Rs. 1,045 crore. The average bill size in the fine dining space ranges between Rs. 650 to Rs. 3,000 per person. The industry has an OPM of close to 40%, which is higher in comparison to the 15-25 % OPM in the QSR industry. The company, still has the unutilised amount of Rs. 91.68 Cr collected from the IPO, and plans to deploy it soon. In addition to its expansion-driven growth strategy, the company’s management is focusing on increasing the share of its flagship brand, Mainland China, which has a 30 % to 35 % operating profit margin (OPM) as compared with a blended margin of close to 20 % at the consolidated level. The company is also taking initiatives through the use of technology and centralisation of processes to improve its efficiency. Consequently, the management expects to improve the blended margin by 200- 300 basis points over the next few years. Strong balance sheet with little threat of further equity dilution in the near term and with a good chunk of cash of around Rs. 91 cr gives this company a very good standing on a operational front. Speciality works on an asset-light business model, as all its properties are leased and this aids optimal utilisation of capital for efficiently managing the restaurants at various locations. Its business entails services for cash and thus the business has excellent operating cash flows. With more and more of its restaurants attaining maturity, it can be expected that Speciality’s free cash generation ability will improve substantially in the coming years. This will not only take care of the future expansion plans, but also help in rewarding the investors with good dividend pay-outs. 

Outlook and Valuation: 
Mainland China in Mumbai
Speciality Restaurant is a reputed player with leading and established brands. With a portfolio of well established brands including core brands Mainland China, Sigree and Oh! Calcutta. Speciality Restaurants Ltd (Speciality) is a leading player in the fine dining space. Its value-for-money proposition offers a five-star quality food with fantastic ambience and services at an affordable rates and has enabled it to successfully expand its chain of restaurants to over 107 restaurants spread across 22 cities in India. In Mumbai, Mainland China are located at Kandivali, Malad, Andheri, Bandra, Tardeo, Powai, Ghatkopar, Navi Mumbai and Thane. The management aims to open around 15 restaurants annually over the next three years and is well funded to achieve the target. The company still has the unutilised amount of Rs. 91.68 Cr raised from the IPO. The Company has its own roll-out process, after finalising a particular location; the company normally enters into a lease agreement and applies for regulatory permits. On securing the same the company starts the interiors. Typically the time between entering into a lease agreement and rolling out a restaurant is around 120 days. The breakeven period for any particular restaurant at the EBITDA level ranges from six months to eight months. Location is a critical component for the success of any outlet. The company is focusing on introducing more and more combos and multi-brand formats which will reduce the operational cost (centralised kitchen) and employee cost. Also, the need for a larger space would allow the company to negotiate the lease rentals. Along with introducing more restaurants in the existing and new cities, the company is planning to optimise its logistics to streamline its supply chain, increase the inventory turnover and reduce the waste. The company is planning to enhance the supplier base which will result in economies of scale and streamline the quality assurance mechanisms. The company also intends to go for bulk buying which will help in rationalising the raw material cost. This along with a stable turn-around in the existing restaurants will help the revenues to grow at a CAGR of 31 % over FY2012-15. With an enhanced focus on improving its profitability through cost optimisation measures and the benefits of an improved scale, it is expected that the company’s OPM to grow to 21-22 % going ahead. Overall, it is expected that Speciality’s bottom line to grow at a CAGR of about 50 % over FY2012-15. However, any moderation in the turn-around ratio due to macro uncertainties and any significant increase in the operating cost remain the key risks to our earnings estimates. Consequently, it is expected that Speciality’s revenues to grow at a compounded annual growth rate (CAGR) of 31.5% over the next three years. With growing disposable incomes and rising consumer aspiration for quality foods, ambience and services in the country, the organised players in the domestic food services industry have a unique opportunity to grow at a healthy rate of 28-30 % annually over the next many years. Along with an exponential growth in the quick service restaurants (QSR; eg KFC, Domino’s and McDonald’s) within the organised segment, the fine dining (full service restaurants) are also expected register a healthy high double-digit growth rate for several years. It is expected that the operating margins for the company to expand to 17 % by FY16 on the back of strong operating leverage as more than 80 % of the cost is fixed in the business. Speciality Restaurant is confident on long term growth due to its focus on increasing same store sales growth, foray into international markets and home delivery business. The key downside risks for Speciality are longer break even time for new restaurants along with non-acceptability of new restaurant formats. Speciality Restaurant trades at lowest PE as compared to its peers namely Jubliant Food which trades at PE of 51 times, Brinker International Inc trades at 22 times, Café de Coral trades at 25 times, Darden Restaurant Inc trades at 15 times and Speciality Restaurant trades at 36 times. At the CMP of Rs. 148.45, the stock is trading at P/E of 25.59 x FY15E and 19.03 x FY16E. The company can post EPS of Rs. 5.80 for FY15E and Rs. 7.80 for FY16E. One can buy SPECIALITY RESTAURANTS LIMITED with a target price of Rs. 200.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 155.80.

SALES ( Crs)226.90262.90316.00374.10
NET PROFIT (₹ Cr)23.4019.8027.0036.80
EPS ()
PE (x)22.7026.8019.6014.40
P/BV (x)
EV/EBITDA (x)10.5010.908.106.00
ROE (%)11.506.708.6010.80
ROCE (%)11.406.908.8011.00

I would buy SPECIALITY RESTAURANT LTD for Medium to Long term for target of Rs. 200.00 and for the shorter term the target would be Rs. 155.80. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 136.55 on every purchase(Why Strict stop loss of 8 % ?) - Click Here



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