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May 19, 2012, 11.23 AM IST | Source: Moneycontrol.com

Speciality Restaurants IPO: Fundamental looks average

SMC Global has come out with its report on Speciality Restaurants' IPO issue. According the the research firm, the fundamental of the company looks average.

SMC Global has come out with its report on Speciality Restaurants ' IPO issue. According the the research firm, the fundamental of the company looks average.

Speciality Restaurants Ltd (Speciality) is one of the leading fine-dining restaurant operators in India with 69 restaurants and 13 confectionaries as of February 29, 2012, featuring certain well recognised brands in the Indian restaurant industry. 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.

Strengths
A leading portfolio of core brands including its flagship brand, Mainland China: Both Mainland China and Oh! Calcutta (the “Core Brands”) are well recognised fine dining brands in India. Mainland China is the flagship brand, contributed 60.28% and 61.13% of the total revenues from food and beverages in Fiscal Year 2011 and in the nine months ended December 31, 2011, respectively.

Focus on guest needs: The Company focuses on guest needs. To promote guest loyalty, it has launched its loyalty programme, Speciality Preferred, in 2008, which had over 95,000 members as of February 29, 2012.

Experienced Founder and Promoter, management team and dedicated staff: The Company is equipped with experienced Founder and Promoter, management team and dedicated staff. The company places strong emphasis on instilling its core values in each of its staff.

Diversified business model: From time to time, it has introduced new brand concepts serving food in different formats, such as Flame & Grill which serves kebabs grilled at the table, Machaan which offers traditional Indian dishes and dishes for children in a tropical theme ambience and KIBBEH which offers Lebanese cuisine in a bar lounge format.

Strategic locations: The Company has strategically-located restaurants across 21 cities in India and one city in Bangladesh as of February 29, 2012. It believes that its strong presence in the Indian market positions it to capitalise on the anticipated growth in consumer spending from expected increases in the level of disposable income of guests in India. The company continues to expand in Metros and Tier I cities and selectively, in Tier II cities.

Strong financial position and profitability: The Company has strong financial position and profitability. As of March 31, 2011 and December 31, 2011, it had Rs 47.81 million and Rs 80.08 million of cash and cash equivalents and secured borrowings of Rs 138.90 million and Rs  260.02 million, respectively.

Robust processes and scalable model: The Company has robust processes and scalable model which include Quality control, Brand standards, Operations monitoring & Food and service audits:

Strategy
Leverage its flagship Mainland China brand while selectively expanding into existing and new markets: The Company plans to leverage the brand equity enjoyed by its flagship brand, Mainland China, using its existing restaurant formats while selectively expanding within its existing markets and into new markets. It also seeks to expand new restaurant formats such as Combos and Multibrands. Additinally it also plans to further expand selectively into Tier II cities through new company owned and operated restaurants or opportunistically, through franchise restaurants.

Developing new restaurant concepts focused on new demographic segments: The Company plans to maintain a tight basket of brands with a focus on its Mainland China brand, while targeting a few new market segments in a measured and disciplined way subject to market conditions. It also plan to introduce new products and brands to adapt to dining trends, shifts in guest spending and tastes and nutrition preferences of its targeted guest groups

Valuation: Considering the P/E valuation on the upper end of the price band of Rs 155, the stock is priced at pre issue P/E of 27.26x on its annualized FY11 EPS of Rs 5.69. Post issue, the stock is priced at a P/E of 36.35 on its annualized EPS of Rs 4.26. Looking at the P/B ratio at Rs 155, the stock is priced at P/B ratio of 4.85x on the pre issue book value of Rs 31.98 and on the post issue book value of Rs 62.74, the P/B comes out to 2.47x. On the lower end of the price band of Rs 146 the stock is priced at pre issue P/E of 25.68x on its annualized FY11 EPS of Rs 5.69. Post issue, the stock is priced at a P/E of Rs 34.24 on its EPS of Rs 4.26. Looking at the P/B ratio at Rs 146, the stock is priced at P/B ratio of 4.56x on the pre issue book value of Rs 31.98 and on the post issue book value of Rs 62.74, the P/B comes out to 2.33x.

Outlook: The fundamental of the company looks average. Factors like rising base of working class, increasing urbanization, a growing middle class population and rising disposable income in India are expected to provide momentum to the restaurant business. Moreover, the company has been successful in creating brands like Mainland China (the flagship brand) and Oh! Calcutta, which are characterized by high brand mortality and strong competition. On the flip side, the company will have to consistently set up new outlets as older ones tend to mature in four-five years.

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