Avoid Speciality Restaurants IPO: Nirmal Bang

Speciality Restaurants Ltd (Speciality) is one of the leading fine-dining restaurant operators in India. Besides its flagship brand Mainland China, the company operates a chain of restaurants under various brands like Oh! Calcutta, Machaan, Sigree, Flame & Grill and Haka. The company also operates a confectionery brand, Sweet Bengal, in Mumbai. As of February 29, 2012, the company operates 69 restaurants and 13 confectionaries. Of the 69 restaurants, 20 are under the franchise owned and company operated (FOCO) model and the rest is owned and operated by the company (COCO).

Speciality’s promoters launched their first restaurant in 1992 under the name Only Fish at Mahim, Mumbai, which was renamed Oh! Calcutta in 1996. In 1994, they launched their first Mainland China restaurant at Sakinaka, Mumbai. Speciality was incorporated on December 1, 1999 as a private limited company to expand the network of its restaurants. It also acquired from its promoters, the existing two Mainland China restaurants in April 2002 and one Oh! Calcutta restaurant in April 2005. Since its incorporation, the company has successfully grown its business to 69 restaurants and 13 confectionaries in 21 cities in India and one in Bangladesh. In 9MFY12, the number of guests served at restaurants was approximately 2.09 million, or, on average over 8127 guests each day.

CRISIL has assigned a ‘Grade 4 out of 5’ to the Speciality Restaurant IPO which indicates ‘Above Average Fundamentals’.
The income from operations increased from Rs. 51.9 crores in FY07 to Rs. 173.2 crores in FY11 at a CAGR of 35.11%. The PAT increased from Rs. 3.1 crores in FY07 to Rs. 15.6 crores in FY11 at a CAGR of 49.6%. The income from operations and PAT for 9MFY12 was Rs. 149.7 crores and Rs. 15.4 crores, respectively. Mainland China is a flagship brand of Speciality restaurant, contributing to 60.28% and 61.13% of the total revenues from food and beverages in FY11 and in 9MFY12, respectively.

Outlook
Speciality, the net sales has grown at a CAGR of 35.2% over FY07 to FY11 whereas; the PAT has grown at a CAGR of 49.7% over the same period. The EBITDA margin has improved by 580 bps over FY08 to FY12E which signifies the strong fundamental for the company. The concerned point for the company which we feel is lower Same Store Sales (SSS) growth meaning, the sales growth rate will come only from opening of new store. We feel that the management will witness restriction in the aggressive capacity expansion due to requirement of high capex.

Speciality shares are offered at P/E of 36.3x and 34.2x at higher band and at lower band for FY12E (9MFY12 annualized). Even on the rough estimates for FY13E, the shares are offered at 28.6x. We feel that the investors can “AVOID” the IPO on expensive valuation.

Objects of the Issue
Development of New Restaurants (Rs. 131.6 crores), Development of a Food Plaza (Rs. 15.1 crores) and repayment of term Loan facilities (Rs. 9.42 crores).

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