Speciality Restaurants: Tasty, expensive fare

Speciality Restaurants is banking on the Indian consumer's rising preference for eating out to open 45 new restaurants in the next three years.

This will significantly add to its current 69 outlets and 13 confectionaries across the country. Of these, 37 restaurants are under the Mainland China brand, which has garnered an excellent name and patronage. Speciality has other chains in its portfolio too, spanning different cuisines and formats.

Geographically too, its network is spread out, all of which helps draw in a wide customer base.

Focus on fine dining has delivered superior operating margins; the company works on low debt and quick turnover.

Investors with a medium-term view can subscribe to Speciality's Initial Public Offer. The offer will raise Rs 182 crore at the upper end of the Rs 146-155 price band.

The offer discounts estimated earnings for 2012-13 by 31 times (upper end) on a post-issue equity. While valuations may be a tad expensive for what is a relatively small company, the only listed comparable Jubilant FoodWorks trades at much higher valuations.

Spread out

Speciality, with its varied cuisines and dining formats, addresses different demographic profiles.

Restaurants are present in 22 cities, primarily in metro and Tier I cities where propensity to eat out is higher. This mitigates concentration risks and captures a large market base.

Mainland China averages 60 per cent of revenues. Oh! Calcutta is the next largest revenue contributor at 13 per cent, followed by, in order, Sigree, Flame & Grill, Machaan, Sweet Bengal, and Haka. It has other formats, but these are at present insignificant.

Speciality plans to piggyback on Mainland China's draw, combining this restaurant with others such as Sigree, Flame & Grill to build up these brands. It will stick to larger cities where frequency of dining out is high. Multiple restaurants in the same city are unlikely to cannibalise each other. Situating restaurants in different localities may actually help tap a wider customer base.

As much as Rs 132 crore of the issue proceeds will fund 45 new outlets over the next three years. The business seems to offer quick break-even with new joints delivering profits after an average of six months. Expansion plans have gradual, allowing outlets the time to build their reputation besides keeping costs and debt in check. Expansion is done through franchisees too. In this model, the franchisee owns the outlet and pays royalties while Speciality operates the outlet, ensuring quality standards.

Extending its outdoor catering business, Rs 15.1 crore will fund the development of a ‘food plaza', or a banquet centre also housing all of Speciality's brands.

Strong margins

Revenues and net profits have grown at a compounded annual 28 per cent and 52 per cent respectively over the past three years. . Ingredients are purchased through annual supply contracts, prices of which are reviewed on a yearly basis, with no escalation clauses built in.

The company has also been able to pass on rise in input cost. With only Mainland China actively promoted, adspend is low, though it could inch up in the future as the company markets its other brands.

Operating margins improved substantially to 23 per cent for 2010-11 (22 per cent for the nine months ending December 2011). Debt for Speciality is low at 0.3 times, but even so Rs 9 crore of issue proceeds will pay back high-cost debt. Net operating margins are at 10 per cent, on higher depreciation outgo.

The offer is open till May 18 . Kotak Mahindra Capital is the lead manager to the issue.

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