JUBILANT FOODWORKS LTD : PARTY HAS JUST BEGUN !!!

Scrip Code: 534804 / JUBLFOOD

CMP:  Rs. 1405.00; Market Cap: Rs. 9,200.40 Cr; 52 Week High/Low: Rs. 1497.40 / Rs. 937.70

Total Shares: 6,54,83,310 shares; Promoters : 3,24,47,474 shares – 49.55 %; Total Public holding : 3,30,35,836 shares – 50.45 %; Book Value: Rs. 79.87; Face Value: Rs. 10.00; EPS: Rs. 17.59; Dividend: 0.00 %; P/E: 80.07 times; Ind P/E: 48.71; EV/EBITDA: 36.47.

Total Debt: ZERO; Enterprise Value: Rs. 9,177.22 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 also 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 wide range of 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 August 6, 2014, Jubilant FoodWorks Ltd operated 772 Domino’s Pizza restaurants in approximately 158 cities; and 34 Dunkin’ Donuts restaurants in 11 cities in India. Jubilant Foodworks Ltd is locally compared with Westlife Development Ltd (who runs McDonalds in India), Speciality Restaurants, 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 772 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 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. According to Euromonitor report, QSR 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 Services Industry (FSI) continues to expand rapidly. The size of the Indian FSI, has scaled from Rs. 53,000 Cr in 2010 to Rs. 75,000 Cr in 2012 and is expected to reach Rs. 1,37,000 Cr by 2016, growing at a healthy Compounded Annual Growth Rate of 17 %. The Indian FSI's growth is driven by the strong consumer side drivers, the innovations and expansion from the industry players. The organised sector is continually innovating and introducing smart and new formats. The organised sector has also penetrated into Tier II and Tier III cities, with the large brands targeting several smaller cities, while the local brands are looking to increase their presence in the Tier I cities. Looking at the various emerging trends, the organised sector in FSI, which currently accounts for 30 % of the business, is expected to account for nearly 45 % of the total food service sector by 2016. Also there are many Business factors such as high turnover, low area occupied; reasonable ticket size helps the QSR sectors. 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 900-1,500sq 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. Jubilants 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. Company’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 will resume on same-store sales, its cash flow will also improve 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 800 stores currently including 38 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. Jubilant FoodWorks Ltd. is a strong market leader in the organized pizza market with a 67 % market share in India and is focused on creating brand value, innovation, cost productivity, product quality, consumer value and loyalty for both Domino’s Pizza and Dunkin’ Donuts. Recently, on 22 oct 2014, Jubilant FoodWorks Limited announced the launch of its new Oven-baked Subwich. The new product offering has been conceptualized with the aim of making the boring lunch options more interesting and enjoyable. Domino's latest offering, the Oven-baked Subwich, is made with a Chilli Jalapeno three Bean Patty (Veg) and on the juicy American herbed Chicken patty (Non-Veg) stuffed between the soft & freshly baked buttery crusts, which is priced at just Rs. 89.00 only. The consumers have the option of buying a medium/large pizza with a Coke and get the new Oven-baked Subwich - Veg or Chicken – just for Rs. 45.00. It is available for the consumers in both dine-in and delivery. For Jubilant the most important factor is the fact that India accounts for the largest 15-34 age population cluster of 43.5 Cr people. This is equivalent to the entire population of Singapore, Hong Kong, Australia, South Africa, Nigeria, Ghana, Angola Kenya and Zambia combined. That age group tends to have willingness to try out new cuisines and especially its seen high in students and professionals. Domino’s is the market leader in the QSR space in India with around 17 % market shares. While Jubilant FoodWorks’ sales were around Rs. 1,740 Cr in YE March FY14, the room to grow is immense given the low penetration of the QSR space.

Outlook and Valuation: 

Jubilant FoodWorks Limited is India’s largest food service company. JFL & its subsidiary operate Domino’s Pizza brand with the exclusive rights for India, Sri Lanka, Bangladesh and Nepal. The company have recently launched three new products in the quarter - Spicy Baked Chicken, Lebanese rolls and Calzone Pockets; positive response received by all the three products. 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 9 lakh downloads of the Domino’s Pizza mobile ordering app across various smart phones & the Average Online ordering contributes to 18 % of delivery sales in Q2 FY14 and Mobile Ordering sales contributes to 12 % during the quarter. There are total 22 Dunkin’ Donuts Restaurants as on 31 October, 2014 and offers a wide variety of western menu including donuts, coffee, burgers, sandwiches, snacks, and more. It is notable here that the gap between the stores of Domino’s and the rest of its peers is huge. Domino’s has 806 stores versus 307 of Pizza Hut, 350 McDonalds and 360 stores of KFC. 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. Jubilant FoodWorks’ also has plans to expand its networks adding around 150 Domino’s outlet every year and looking at the scale at which its peers plans their expansion, Jubilant looks faster and better positioned. Domino’s in India has traditionally added new stores particularly in the past five years which are anywhere between 19 %-22 % of existing stores. New stores take time to break-even and the burden on overall profitability goes on reducing as time goes forward. Innovations also are essential for any consumer business and particularly during an early stage of operations compared to overall growth potential. 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. Jubilant FoodWorks Ltd has recently renewed their contract with master franchise controller Dominos International. The new contract is for 15 years, which gives them exclusive rights for operations in India, Nepal, Sri Lanka and Bangladesh. The growth shown by Jubilant FoodWorks Ltd is consistently based on the robust operational foundation on which it stands. In the current economic environment 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 has made rapid strides in restaurant expansion and has 772 Domino’s Pizza restaurants. The company launched three new products in the quarter - Spicy Baked Chicken, Lebanese rolls and Calzone Pockets; in Domino’s Pizza and burgers in Dunkin’ Donuts received positive response by all the three products and Domino’s Pizza mobile ordering (Online Ordering (OLO)) remains an important platform to reach a wider audience base serving around 8 million pizzas every month. This enables to drive higher levels of optimization and supply chain systems into the hinterland, to serve tier 2 and 3 cities. On Financials Jubilant FoodWorks Ltd’s Net sales were up 14.8 % YoY at Rs. 501.2 Cr. Its Same-Store Sales Growth (SSG) declined 5.3 % YoY. 2QFY14 was the last quarter of positive SSG at 6.6 % because of a Buy One Get One’ scheme and the base going forward are not challenging. Its EBITDA declined and fell to Rs. 61.1 Cr down by 6.5 % YoY. Gross margin was up 1.50 % YoY, aided by lower proportion of special schemes in 2QFY15, EBITDA margin was down 2.80 % YoY owing to SSG decline. Ongoing expansion (including Dunkin’ Donuts) meant that staff costs and rent cost increase as a percentage of sales were unabated. Jubilant pays Domino’s around 3.2 % of sales as royalty. The management stated that in FY15, there will be a 1.50 % to 1.60 % impact on margins because of Dunkin’ Donuts rollout. Number of Dominos outlets (including Dunkin Donuts outlets) touched 797 which are spread across 167 cities at the end of September 2014 quarter and 806 at the end of October 2014. The company added 80 Domino’s stores in 1HFY15, and are on target to add 150 stores by the end of the year. Company had its new commissaries at Guwahati, Nagpur and Hyderabad these are expected to commence operations in 2HFY15. The pace at which the Jubilant FoodWorks Ltd is setting up its stores it can be easily assumed that it can easily set up 2,000 Domino’s stores in India. The management stated that it is confident of industry growth potential and the company’s own brands. Market share in the organised QSR space actually increased from 6 % to 7 % five years ago to 14 % to 15 % in FY13 and 16 % & 17 % in FY14. Jubilant FoodWorks business model, scale and ability to innovate are creating significant barriers to entry to competitors. Most important is the learning from its experience of being at the forefront of expansion in unchartered territories. As demonstrated by the improvement in Dunkin’ Donuts business after the menu makeover, the management has demonstrated its ability to innovate and think out of the box and use the learning that it has developed in the food business in India. A learning organisation will find new levers of growth. Looking forward the medium-term earnings growth and improvement of return ratios gives immense opportunity to this company will help to sustain high valuation metrics. Also its Earnings growth potential is far superior compared to peers. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. 

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	1,736.30	2,043.60	2,548.40	3,323.10
NET PROFIT (₹ Cr)	118.20	119.30	161.10	254.70
EPS (₹)	18.10	18.20	24.50	38.60
PE (x)	66.00	73.70	54.70	34.70
P/BV (x)	16.00	13.40	10.80	9.40
EV/EBITDA (x)	34.70	32.30	23.40	15.70
ROE (%)	24.10	19.80	21.90	29.10
ROCE (%)	24.10	19.80	21.90	29.10

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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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