SPECIALITY RESTAURANTS LTD : THEIR SPECIALITY WILL WORK !!!

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
www.bhavikkshah.blogspot.in

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.

KEY FINANCIALS	FY13	FY14	FY15E	FY16E
SALES (₹ Crs)	226.90	262.90	316.00	374.10
NET PROFIT (₹ Cr)	23.40	19.80	27.00	36.80
EPS (₹)	5.00	4.20	5.80	7.80
PE (x)	22.70	26.80	19.60	14.40
P/BV (x)	0.00	0.00	0.00	0.00
EV/EBITDA (x)	10.50	10.90	8.10	6.00
ROE (%)	11.50	6.70	8.60	10.80
ROCE (%)	11.40	6.90	8.80	11.00

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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