JUBILANT FOODWORKS LTD : IT's PIZZA TIME !!!

Scrip Code: 534804 / JUBLFOOD

CMP:  Rs. 1031.10; Market Cap: Rs. 6,800.00 Cr; 52 Week High/Low: Rs. 1348.75 / Rs. 760.50

Total Shares: 6,59,49,070 shares; Promoters : 2,96,52,784 shares – 44.96 %; Total Public holding : 3,62,96,286 shares – 55.04 %; Book Value: Rs. 116.49; Face Value: Rs. 10.00; EPS: Rs. 13.40; Dividend: 25.00 %; P/E: 76.94 times; Ind P/E: 50.12; EV/EBITDA: 24.95.

Total Debt: ZERO; Enterprise Value: Rs. 6,768.62 Cr.

JUBILANT FOODWORKS LTD: The Company was founded on 16th March, 1995 and is based in Noida, India. The company was formerly known as Dominos’s Pizza India Limited and changed its name to Jubilant FoodWorks Limited in 2009. Jubilant FoodWorks Limited operates as a food services company. The company holds the rights to develop and operate Domino's pizza brand in India, Sri Lanka, Bangladesh, and Nepal and Dunkin’ Donuts brands & restaurants in India. Its Dunkin’ Donuts restaurants offer donuts, drip coffee, cappuccino and latte, milkshakes, smoothies, and iced teas, as well as a range of burgers, wraps, sandwiches, and side-bites. In addition, the company sells its products online. The company came with an IPO of 2,26,70,447 equity shares of Rs. 10 each at Rs. 145.00 per share to the general public in January, 2010. The purpose of the issue was to achieve the benefits of listing on the exchanges and for the pre-payment of loans & other general corporate purposes. It got listed at Rs. 160.00 per share making a high of Rs. 240.90 on listing day. Domino's Pizza India has grown into a countrywide network of stores, with a team of over 6,000 people. Jubilant FoodWorks has the sole master franchisee for Domino’s Pizza & Dunkin Donuts in India. It also has, the product profile which are complementary to Domino’s and are run separately from Domino’s outlets. Dunkin’ Donuts is owned globally by Dunkin’ brands, which also owns Baskin Robbins worldwide. Dunkin’ Donuts has over 11,000 outlets worldwide in over 30 countries. As of February 6, 2017, Jubilant FoodWorks Ltd operated 1,111 Domino’s Pizza restaurants in across 260 cities; and 68 Dunkin’ Donuts restaurants in 19 cities in India. Jubilant Foodworks Ltd is locally compared with Westlife Development Ltd (who runs McDonalds in India), Speciality Restaurants (which runs Mainland China & Ohh Calcutta in India), Tata Global Beverages (which runs StarBucks in India) and Globally with Sato Restaurant Systems Co., Ltd of Japan, Hiday Hidaka Corp of Japan, Faurwood Holdings Ltd of Hong Kong, Ajisen (China) Holdings Ltd of Hong Kong, Cafe` de Coral Holdings Ltd of Hong Kong, Jollibee Foods Corporation of Philippiness, Matsuya Foods Co., ltd of Japan, MOS Food Services Inc of Japan, BJ’s Restaurants Inc of California, Bob Evans Farms Inc of Ohio, Carnival Corporation Ltd of Florida, Dunkin’ Brands Group Inc of Massachusetts, The Wendy’s Company of Ohio, Domino’s Pizza Group of UK, McDonald’s Corporation of Illinios, Compass Group PLC of UK, Lowe’s Companies Inc of North Carolina, Starbucks Corporation of Washington, YUM! Brands Inc of Kentucky, Zoe’s Kitchen Inc of Texas. 

Investment Rationale:

Jubilant FoodWorks was incorporated in 1995 but started its operations in 1996. It is the sole master franchisee for both Domino’s Pizza Brand since 1996 as well as Dunkin’ Donuts Brand since 2011 in India. The company is part of the Bhartia group, which owns a 48.9 % stake in Jubilant FoodWorks Ltd. With over 1,100 Domino’s restaurants in India, starting from the first outlet opened in 1996, Jubilant FoodWorks is in charge of the second-largest chain of restaurants for Domino’s worldwide, overtaking UK in the current year but it’s still behind the US which is Domino’s home country, headquartered in Michigan, US. In terms of number of stores as well as sales, Jubilant FoodWorks is the largest player in the Quick Service Restaurants (QSR) market, which is still in nascent stage in India with about 17 % market share whereas there’s more than 60 % market share is of pizza and in excess of 70 % in pizza delivery. QSR’s in India accounts for slightly 2 % of the overall food service market in India and this is expected to grow much faster at 20 % compared to 10 % food service industry’s growth. The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year. In India, the food sector has emerged as a high-growth and high-profit sector due to its immense potential for value addition, particularly within the food processing industry. The food industry, which is currently valued at US$ 39.71 billion, is expected to grow at a Compounded Annual Growth Rate (CAGR) of 11 % to US$ 65.4 billion by 2018. Food and grocery account for around 31 % of India’s consumption basket. Indian food service industry is expected to reach US$ 78 billion by 2018.The Indian gourmet food market is currently valued at US$ 1.3 billion and is growing at a Compound Annual Growth Rate (CAGR) of 20 %. India's organic food market is expected to increase by three times by 2020. The online food ordering business in India is in its nascent stage, but witnessing exponential growth. The organised food business in India is worth US$ 48 billion, of which food delivery is valued at US$ 15 billion. With online food delivery players like FoodPanda, Zomato, TinyOwl and Swiggy building scale through partnerships, the organised food business has a huge potential and a promising future. The online food delivery industry grew at 150 per cent year-on-year with an estimated Gross Merchandise Value (GMV) of US$ 300 million in 2016. Also as a help for QSR industry, there are many business factors such as high turnover, low area occupied; reasonable ticket size matters. In India, the biggest barrier to profitability in the restaurant as well as retail businesses in urban areas, particularly in metros, is high lease rentals. Domino’s predominantly delivery-based model in these cities enables it to circumvent this problem. While the overall proportion of delivery to dine-in is 50:50. Consequently, the store size required is much smaller at around 900-1,500 sq.ft compared to predominantly dine-in restaurants and other QSR (at 2,500-3,000 sq.ft). In addition, the average bill size for pizza outlets like Domino’s is also higher than other QSRs like McDonalds, KFC and coffee shops like Café Coffee Day (CCD), Barista and Costa Coffee. Jubilant FoodWorks has focused on its less competitive intensity delivery start-ups focusing more on profitability and will also focus on Same Stores Sales Growth over store expansion via store opening rationalisation. The demonetization drive was dampening on JFL’s performance in 2HFY17E, but with gradual recovery in consumer confidence, increased promotions, moderation in competition from food aggregators and success of new products could take SSSG to higher levels, going forward. While JFL’s operating cash generation has fallen from 15 % to 10 % of sales in past four years, it still remains strong as the Company generates operating cash in the excess of Rs. 2500 Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL has maintained solid control over its costs. While overall expenditure witnessed 4 % CAGR through FY12-17E, JFL has remarkably been able to maintain its total expenditure per store constant in the last four years. Around half of Dominos’ sales are through the delivery platform with the average online ordering as a percentage of delivery sales has been increasing rapidly, which now accounts for 47 % of delivery sales. Most of these customers are using alternative payment options i.e. credit-debit cards, mobile wallets and net banking for paying the bill. JFL has now also offered cashless payment facilities for all home deliveries ordered through the phone. JFL did witnessed fall in revenues in initial days of demonetization, but gradually it improved as new currency started floating in hence marking improvement in sales. Not with standing significant material impact on revenues in last 4 years owing to dismal SSS growth with additional impact of Dunkin Donuts, JFL has impressively contained its costs. While overall expenditure increased at 24 % CAGR through FY12-17E, it has been able to maintain its total expenditure per store constant in the last 4 years. Despite steady rise in overall cost, JFL has been able to maintain average operating cost per store constant at Rs. 2.2 Cr calculated based on average number of stores per year. Company reduced employee strength per store without hampering efficiency and has also rationalized its power supply expenditure by implementing Wipro’s energy management services. Company have increased its share of online ordering and is renegotiating rentals and increasingly entering into rental contracts based on % of revenue rather than flat structure. The company is reducing the capex costs per store and increasing its emphasis on launching new products, JFL has introduced several new products especially in non-pizza segment like Pizza Mania Extreme & Burger Pizza. While through Pizza Mania Extreme, JFL intends to provide value-added offerings at reasonably lower price points vs. regular pizza, it introduced Burger Pizza to cash in the rising opportunity in Burgers segment with an all-day menu option, unlike Pizza which is more of a meal replacement category. With both these products getting encouraging response from the consumers, they would permanently feature on Dominos’ menu, going forward. In the pizza segment, the company has recently launched Quattro Formaggi Burst Pizza and Choco Pizza. JFL’s new state of the art commissary is expected to be commissioned in Noida by March’17, which is expected to not only manufacture the conventional dough, but also other products such as buns, breads and some types of desserts. This is anticipated to accentuate new product development and increase JFL’s ability to introduce new products at a faster rate. However, only very few of them contributed meaningfully to its growth in past few years, which is evident from share of Pizzas to its overall sales remaining more or less stagnant in past four years. Jubilant’s core business comes from Dominos Pizzas, and Pizzas are consumed during lunch and dinner and are not snacks like in the case of other outlets. A combination of delivery-based model and healthy bill size enables high sales per square feet and aids profitability. Jubilants’s Asset-light business model boosts its high-growth story, the business is remarkably asset-light as a result lease rentals are much lower which helps profitability of the store. Net working capital continues to be in excess of negative 25 days and fixed asset turnover continues to be in excess of 3 times. Even in a subdued economic environment of the past two years, there was no worsening of working capital metrics. When the growth trajectory resumes on same-store sales, cash flow improvement will be significant. It is remarkable that Jubilant FoodWorks, which runs a high-growth business like Domino’s, which expanded from 180 stores in FY08 to around 1,100 stores currently including 68 Dunkin’ Donuts outlets did not have the need to raise fresh equity capital or avail significant amount of debt. This is a testament to strong business model and a kind of proof about the abilities and expertise of management which also shows their understandings about their business in India.  

Outlook and Valuation:

Jubilant FoodWorks Limited is India’s largest food service company. JFL operates Domino’s Pizza & Dunkin Donuts brand with the exclusive rights for India, Sri Lanka, Bangladesh and Nepal. The company have recently launched Pizza Mania Extreme & Burger Pizza and launched Quattro Formaggi Burst Pizza and Choco Pizza, Navratra Pizza and these products are receiving positive response from its customers. It has launched its Online Mobile ordering site in July, 2013 and it is seen as important platform to reach a wider audience base. Till present there are over 62 lakh downloads of the Domino’s Pizza mobile ordering app across various smart phones & the Average Online ordering contributes to 49 % of delivery sales in Q3 FY17 and Mobile Ordering sales contributes to 56 % during the quarter. There are total 68 Dunkin’ Donuts Restaurants as on February 06, 2017 in 19 Cities and offers a wide variety of western menu including donuts, coffee, burgers, sandwiches, snacks, and more. It has introduced Big Joy Paneer Delight, Munchkins, Donut Cakes which is 100 % eggless, DunkyDoos, Big Joy Burger which are gaining popularity amongst kids and youngsters. Within the pizza market, Domino’s has a share of more than 60 %. Domino’s has consistently gained its market share from its pizza peers as well as other QSRs in the past few years. The average bill size of Domino’s Pizza is healthy across stores which range from Rs. 350 to Rs. 450 per head. And most of the stores also have delivery facility except stores that are located next to food courts situated at higher levels in malls and the ones that are newly set up. Delivery proportion in other stores is 20 %, which is healthy and adds another avenue of growth. Delivery portion has minimum bill size of Rs. 150 and has on an average 7 bikes to facilitate that delivery. Looking at these factors it can be easily believed that the break-even of its store could be achieved in two-three years. Company will focus more on Same Store Sales Growth rather than focusing on opening on new stores and expected that SSS growth could be around 8-9 %. Growth in SSS will depend on a mix of company-related and macro factors, like Increase traction in new products, faster growth in value-added offerings, Revival in consumer confidence, especially post demonetization, Level of discounting and promotions, Uptick in job creation, and Extent of price hikes which JFL could pass on to the consumers. The growth in SSS is likely to recover in FY18E on the back of positive improvement in afore-mentioned areas and it could be around 8 %. JFL plans to open over 100 stores annually in next few years. While the number of Dominos outlets stood at 1,100 at Feb 17 end, Dominos International has projected the potential store count for Dominos in India at 1,800. However, with the decline in percentage of new stores opened vis-à-vis extant stores, JFL’s margins would improve at a faster pace as higher number of stores would have attained breakeven. Based on current SSS growth trends, calculation suggests a new Dominos store would typically achieve cash breakeven in 4 years. On financial side Jubilant Foodworks Q3FY17 performance was good, it reported Revenues of Rs. 660 Cr, up 3.9 % YOY; SSG was at -3.3 %, EBITDA at Rs. 64 Cr, down 12 % YOY, gross margin declined 2 % YOY to 74.9 %, impacted by promotional activity and change in mix; EBITDA margin declined 1.80 % YOY to 9.7 %, impacted by higher rent cost, however lower employee cost and controlled other expenditure curtailed decline in EBITDA margins. Home delivery sales through phone has also been impacted due to cash crunch and has been not compensated by online sale, company is working on getting card machines for home delivery. New product launches like Pizza Mania extremes and Burger Pizza are seeing healthy traction and aiding growth. Delivery sales continue to grow faster than dine-in sales as company is aggressive on driving sales through OLO (online ordering) and in long term it expects to be 70 % to 80 % which is the average seen in developed markets. SSSG uptick, GST and break-even in Dunkin are levers to margin expansion. JFL’s operating cash generation has fallen from 15 % to 10% of sales in past four years, yet it still remains strong as the company generates operating cash in the excess of Rs. 250Cr annually. Notably, in past four years JFL has doubled its store count from 550 to 1,100 and added several commissaries without adding any debt on its books, which is impressive. JFL’s gross block increased by >2.5x to Rs. 900 Cr in the last 4 years, while the resultant higher depreciation impacted its earnings as well. This is evident from JFL’s cash profit of Rs. 220 Cr was almost double than the reported net profit Rs. 110 Cr in FY16. The growth shown by Jubilant FoodWorks Ltd is consistently based on the robust operational foundation on which it stands. In the current economic environment, demonetization and slowdown in consumer spending, especially in discretionary expenditure, the company continues to pursue excellence in key areas such as cost management, restaurant selection processes, and continual re-investment in strengthening the supply chain, connecting deeply with consumers, and investing in innovations. This approach is complemented by a robust training apparatus and high operational efficiency standards that allow growing the business in line with the potential. Domino’s Pizza mobile ordering (Online Ordering (OLO)) remains an important platform to reach a wider audience base serving around 63 lakh pizzas every month with its new ad campaign on Order 1 pizza online and get 1 pizza free. This enables to drive higher levels of optimization and supply chain systems into the hinterland, to serve tier 2 and 3 cities. At the current market price of Rs. 1031.10, the stock is trading at a PE of 80.55 x FY17E and 44.83 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 12.80 in FY17E and Rs. 23.00 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

KEY FINANCIALS	FY16	FY17E	FY18E	FY19E
SALES (₹ Crs)	2,410.20	2,608.00	3,116.00	3,788.50
NET PROFIT (₹ Cr)	106.60	84.40	151.20	229.70
EPS (₹)	16.20	12.80	23.00	34.90
PE (x)	62.20	78.60	43.90	28.90
P/BV (x)	8.70	7.90	7.00	5.90
EV/EBITDA (x)	24.30	25.90	17.90	12.90
ROE (%)	14.90	10.60	16.90	22.00
ROCE (%)	20.40	14.30	23.10	30.40

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RETURN ON CAPITAL

SPECIALITY RESTAURANT LTD: SPECIALITY PREFERRED !!!

Scrip Code: 534425 / SPECIALITY

CMP:  Rs. 163.65; Market Cap: Rs. 768.46 Cr; 52 Week High/Low: Rs. 218.60 / Rs. 127.20.

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. 64.72; Face Value: Rs. 10.00; EPS: Rs. 2.33; Dividend: 10.00 %; P/E: 70.23 times; Ind. P/E: 45.23; EV/EBITDA: 20.56.

Total Debt: 0.62 Cr; Enterprise Value: Rs. 756.11 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 of India. 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 BJ’s Resturants Inc of USA, 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, Restaurants 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. The very first restaurant was started in 1992 named Only Fish. This group has two flagship brands Oh! Calcutta and Mainland China. Speciality Restaurants Ltd is a leading restaurant chain having presence with 107 restaurants (2 restaurants are opened in 4QFY15) across India, primarily catering to fine dining. Mainland China is its prime brand and contributes around 60 % in its revenue and also this enjoys strong brand equity and throughout India has virtually become synonymous to Chinese food. Moreover, the company’s experiment with Mainland China Asia Kitchen and Sigree Global Grill formats have borne rich dividends, with Global Grill in particular being a resounding success. Global Grill has aided customer churn for Sigree franchise from 1.4 times to 1.7 times and is commanding a higher Average Per Customer realisation of Rs. 650 to Rs. 680 vis-à-vis Sigree’s APC of Rs. 550 to Rs. 600. Going forward, Sigree & Sigree Global Grill will contribute around 20 % to 22 % to the net revenue for Speciality Restaurant Ltd from current 18 % contribution. The company has so far refrained from taking any menu prices increase, since customer footfalls are under pressure. However, discretionary spending is expected to get better with improvement in macro environment, and there could have a build-in 1 % to 2 % increase in the APC in FY17E for Speciality Restaurants Ltd.’s top- 3 brands. Owing to relative inelastic menu prices of a fine dining restaurant (visà- vis inflation), the margin of Speciality Restaurants is expected to improve going forward. The company continues to get better footfalls on weekends and has now focused on improving the weekday footfalls especially for large corporate clients. If the cover turnaround ratio improves by 5 % to 6 % and raw material prices further reduces from the current level, then there could be an improvement in operating margins and company’s margins would get back to double digits. Also the company is banking on initiatives, such as reducing dependence on imported raw materials and better space management at the restaurant level and this will add-on to the profitability of the company in the long run. With an increase in disposable income levels and the culture of dining out fast catching up with the middle class, the restaurant industry in India is expected to grow at 17 % annually. 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 growth of the Indian food service industry is broadly driven by consumers and food service operators. The food market in India is estimated at Rs. 75,000 Cr last year and would reach Rs. 1.37 Lakh Cr in 2015 according to data. The industry is highly fragmented with 1.5 million eating outlets of which little more than 3,000 outlets form 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 Rs. 22,000 Cr by 2017 driven by 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 of 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 %, the market size of Pubs , bars, clubs and Lounges is of Rs. 963 Cr and is expected to grow at 11.00 % . Indian on an average eats out lesser than 2 times a month as compared to 40 times in Singapore. Even a small increase in this number provides a huge market opportunity for restaurants in India. Speciality Restaurants Ltd is focusing on increasing weekday footfalls in their restaurants. For their flagship brand Mainland China, and company has undertaken various incentives and promotional offers ranging from providing discounted rates for Women Kitty group every Wednesday to 2 times reward points accretion for the members if they dine during weekdays. Further to increase churn rate, various dining formats have been experimented with in recent years; with Asia Kitchen, Global Grill and Hoppipola brands giving rich dividends. Speciality Restaurants Ltd is test marketing its QSR brand Zoodles by opening one restaurant at Andheri (W), Mumbai. Though the potential for Zoodles to grow is huge given the brand pedigree, the QSR format is currently crowded and the management is undertaking a market study for Zoodles before entailing a focused brand capex for the same. Speciality has 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. Most of the lease agreements are for 10 years, however, the company is striving to re-negotiate the lease agreements for 15 years period. 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. Moreover, for new properties, the lease agreement is a minimum guarantee deed, wherein Speciality Restaurants Ltd pays the owner either 12 % of the revenue garnered in the restaurant’s first year of operations or the minimum guarantee, whichever is lower. For the second and third years, the revenue share increases to 13 % and 14 % respectively. Case in point is the new property in the upcoming DLF Mall in Noida. Lease arrangements for 25-30 restaurants out of 77 owned restaurants of Speciality Restaurants Ltd (19 restaurants are franchise managed) have already been reworked. This kind of 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 to 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. Speciality Restaurants is professionally managed and have experienced management team which helps company to cater to aspiration needs of the customer through the largest pan India chain of multi-cuisine fine dining restaurants. Company also maintains a strict check on the quality of service through in-house staff training for all its restaurants, it also conducts regular auditing as well as quality control audit of the ingredients behind the signature dishes through a central hub for non-perishable raw material sourcing.

Outlook and Valuation:

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 with value-for-money proposition to offer five-star quality food, ambience and services at affordable rates this has enabled it to successfully expand its chain of restaurants to over 107 restaurants spread across 22 cities in India. Management mentioned that the payback time for Mainland China is 3 years, while, the breakeven for the blended portfolio on an average has increased to greater than 6 months which was 3 months to 6 months pre-2011. Out of the total annual capex of Rs. 45 Cr that Speciality has entailed, 75 % of it is will be utilized for its top-3 brands. Specialty served 104 guests per restaurant. Since the operational costs per restaurant largely remains constant, lower consumer footfall per restaurant increases the payback period per restaurant and this is hurting Speciality Restaurants Ltd the most. Hence in the wake of expected discretionary spending revival, on a low base, consumer footfalls can increase at 20 % CAGR over FY15-17E. There is a marked increase in the competitive intensity in the chain restaurants’ space with Impresario Entertainment & Hospitality Pvt Ltd. who owns & operates Smoke House Deli, Salt Water Grill, Mocha Café; the Mirah Hospitality who owns & operates Rajdhani, Manchester United Café, Café Mangii, Falafel; the JSM Group who owns & operates Shiro, Hard Rock Café, California Pizza Kitchen; the Indian Cookery Pvt. Ltd. who owns & operates Sanjeev Kapoor’s Yellow Chillies, Signature by Sanjeev Kapoor, Sura Vie, Pin Yin Café; the Sayaji Hotels who owns & operates Barbeque Nation etc. all vying for a share in this Rs. 2.5 lakh Cr food services industry. Moreover, Impresario Entertainment & Hospitality Pvt Ltd. and Mirah Hospitality have also partnered to negotiate lease rentals with various mall owners in pan India basis. This can be business threat for an established chain of Restaurants Company like Speciality Restaurant Ltd, since location is the key to the success of fine-casual dining restaurants. A key location for a restaurant is defined as that location which attracts high number of discretionary spenders; for e.g. a mall like Palladium at Phoenix Mills, Mumbai or Great India place at Noida and Speciality is located in most of the prime areas and in premium malls & remains confident of maintaining its growth momentum of opening 10-15 new restaurants each year despite the above mentioned emerging trend. Speciality Restaurant is adopting innovative marketing like Fixed price, unlimited food model are being followed at Sigree and Sigree Global Grills. Member are being granted rewards for Mainland China patrons, attractive corporate offers on weekdays and discount coupons for LSD on popular websites like Freecharge are some other initiatives taken by the company to increase occupancy. Going forward, Speciality may extend its online visibility for confectionary brand, Sweet Bengal. Speciality Restaurant Ltd is confident of maintaining brand equity of its flagship restaurant and growing its portfolio by opening 10-15 restaurants each year, having entailed an annual capex of Rs. 45 Cr to Rs. 50 Cr for the same. 

Speciality Restaurants Ltd enjoys more than 85 % of its revenue from just 3 brands, notably Mainland China which contributes 60 %, Oh! Calcutta contributes 10 % and Sigree & Sigree Global Grill contributes 18 %. The company has experimented with numerous formats in the past to reduce its dependence on Mainland China and has tasted success with Sigree Global Grill which is the merged version of Sigree, Machaan and Flame & Grill. The Management indicated that in the next 2-3 years, the revenue ratio from Mainland China and its hive off brand Asia Kitchen and other brands may see a shift from current 60:40 to 55:45, with contribution to the net revenue from Sigree Global Grill increasing from current 18 % to 25 % to 30 %. The raw material prices have corrected from its high, but the company is yet to get full benefit of same. The large benefits of lower raw material prices can be seen in the coming quarters. The company has maintained its focus on reducing the operating cost and has undertaken several initiatives in the past including setting up of commissaries in key markets. In its one of the recent initiatives, the company is trying to reduce the kitchen space in its key restaurants from 1500 square feet to around 700- 800 square feet for better space management and improving margins over the period of time. In view of enhancing its footprints in the quick-service restaurant (QSR) space, the company has opened Zoodles restaurant in Mumbai (more of a takeaway and delivery format). It is a 600 square feet outlet, smaller than the other restaurants, which the company has under its portfolio. The average takeaway bill size stands at around Rs. 1000 per order. The takeaway is gaining good acceptance in the recent times especially in the urban markets and Speciality Restaurants Ltd wants to explore opportunities in this space. In H1FY2015, the company opened six restaurants including two Mainland China and two Sigree Global Grill. The company is planning to add another six to eight restaurants in the second half. The Mainland China Asia Kitchen is operating as per the expectation and some of the existing Mainland China restaurants will be converted into Mainland China Asia Kitchen in the coming quarters. Also the company is working on converting some of its brands such as Sigree, Flame & Grill and Machaan under one Indian food brand – Sigree Global Grill. Speciality Restaurants Ltd bought 51 % stake in Love Sugar Dough for an estimated Rs. 75 Lakhs. Love Sugar Dough (LSD) is a Mumbai based company set up in 2011 by Nauzad Munshi and Tarannum Merchant. The chain currently has eight bakery stores spread across Mumbai, Pune and Surat Management is upbeat on LSD’s youth proposition and sees strong synergies with Speciality Restaurants Ltd. Being a low capex business, Speciality plans to sale the its entire stake of 5,100 equity shares held in Love Sugar & dough Pvt ltd and would be getting not more than Rs. 0.57 cr. The company bought stake in May 2014 for Rs. 75 lakhs. There can be a revival in footfalls for Speciality Restaurants in 6-9months. Further, an indirect 4 % price hike through service charge could impact customer churn in the near term. While softening food cost is a structural positive, but it would still be difficult to achieve FY12 levels in gross margins as Indian cuisine is a low margin business and its share is increasing with focus on Sigree Global Grill. Company posted 17.3 % YoY growth in revenues on the back of healthy 20.7 % YoY growth from owned restaurants but faced 20 % decline in revenues from franchisees. Operating profit was down 18 % at Rs. 7 Cr on the back of 4.05 % decline in operating margins at mere 9.3 % as RM cost increased by 29 % YoY while admin and other expenses increased by 21.3 % YoY. PAT was down by 40.8 % at Rs.2.4 Cr due to lower operating profit. Apart from this, the company indirectly raised customer billing by 4 % in November by introducing service charge of 10 % across restaurants where it was not present previously which could hurt footfalls. Company witnessed 1.20 % sequential improvement in gross margins as food cost inflation continued to reduce on MoM basis and is near April 2014 levels. Measures to reduce cost by lowering menu items, smaller restaurant size, centralized kitchen & storing and price hikes will help margin expansion. Formats such as Happipola and Mainland China Asia Kitchen have higher margins. 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 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 22 times. At the CMP, the stock is trading at of Rs. 163.65, the stock is trading at its all-time high P/E of 77.92 x FY15E, 36.36x FY16E and 20.98 x FY17E. The company can post EPS of Rs. 2.10 for FY15E and Rs. 4.50 for FY16E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.  

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	263.80	300.30	397.20	493.60
NET PROFIT (₹ Cr)	19.00	9.90	21.20	36.60
EPS (₹)	4.00	2.10	4.50	7.80
PE (x)	46.40	89.10	41.50	24.00
P/BV (x)	2.90	2.90	2.70	2.50
EV/EBITDA (x)	22.20	27.00	16.90	11.30
ROE (%)	6.40	3.20	6.70	10.90
ROCE (%)	5.00	1.50	5.60	10.70

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*As the author of this blog I disclose that I do not hold Speciality Resturants Ltd in my any of the portfolios.

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