Speciality Restaurants IPO: Pedigree warrants investment

OFFER AT A GLANCE
Name	Speciality Restaurants Ltd
Offer Quantity	117.39 lakh shares of Rs 10 each
% on Total Equity	25%
Offer Price	Rs 146 to Rs 155
Offer Amount	Rs 171 cr to Rs 182  cr
Application Quantity	40 & Multiples of 40
Offer Opens	May 16, 2012
Bid/Offer Closes	May 18, 2012
Rated By	CRISIL
Rating	4 out of 5
Listing	BSE and NSE
Lead Managers	Kotak Mahindra Capital
Registrars	Link Intime

                                                                       Issue Details The Kolkata-registered but Mumbai head-quartered Speciality Restaurants Ltd (SRL) is offering public 117.39 lakh shares at a price band of Rs 146 and Rs 155. The IPO constitutes 25% of the post-issue equity capital of the company. The offer is being made through the book-building route wherein up to 50% of the quantum would be allocated to qualified institutional buyers (QIBs) and 15% is earmarked for non-institutional bidders. Not less than 35% is reserved for retail investors. The shares are proposed to be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Issue Object Of the issue proceeds, SRL proposes to spend an aggregate amount of Rs 132 cr on 45 New Restaurants in Fiscal Years 2013, 2014 and 2015. About Rs 15 cr is earmarked for developing a food plaza in Rajarhat, Kolkata. Of the proposed capital expenditure of Rs 147 cr, interiors and equipment account for around Rs 100 cr. Issue Grade CRISIL has assigned a grade of ‘4/5’ (pronounced "four on five") to the IPO. While the rating indicates that the fundamentals of the IPO were above average relative to the other listed equity securities in the country, it explicitly puts out that the grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. Promoter The founder-managing director of SRL, Anjan Chatterjee, has ample knowledge and experience in running fine dining restaurants. He is currently the vice president of the National Restaurants Association of India. Having obtained a diploma in hotel management in 1982 and trained as a management trainee at a leading five star hotel in India, the promoter has brought core values from his experiences to the operation of SRL’s restaurant network. Even though some of the stable mates of SRL have similar objectives, the promoter claims that none of his group companies will compete with the public company. While the closely-held group companies own and lease out hotel properties, SRL is said to be the only company operating the restaurants. The managing director and his spouse collectively hold about 81% of the pre-IPO equity. Even on the enlarged post-issue equity the promoters would hold a comfortable 61%. Financial Track The twelve-year old SRL has had a creditable growth in recent years. Its number of restaurants and confectionaries increased from 17 in March 2007 to 82 in February, 2012. The company opened 16 and 11 restaurants in fiscals 2010 and 2011 respectively. Its revenue registered a CAGR of 39%, from Rs 33 cr in FY06 to Rs 175 cr in FY11, primarily driven by addition of new restaurants (from 11 to 62) and better performance from the matured restaurants. EBITDA margin expanded from 18% in FY06 to 22% in FY11. Net profit clocked a five year CAGR of 38%. At the end of December 2011, the net worth of the company was Rs 113 cr against which its debts were less than Rs 32 cr. Prospects Post-IPO, SRL’s equity capital would increase 33.3% to Rs 46.95 cr. The existing bottom line of Rs 16 cr yields an EPS of 3.41 on the enlarged equity which does make the offer look costly. Nevertheless, if the company’s recent growth rate is any indication, its EPS could spurt significantly in next couple of years partly due to savings in interest costs in view of huge share premium collected through the IPO and largely on account of the  additions (more than 50% increase) in number of restaurants. Valuation Hospitality industry mainly consisting star hotels currently commands a much higher discounting than the market average. This is largely due to the attractive real estates/properties owned by them. Compared to this, restaurants should have a lower P/E as they generally do not own the properties. Nonetheless this does not deter SRL’s investment banker Kotak Mahindra Capital (KMC) from advising a steep valuation for SRL. The offer band of Rs 146–155 values SRL nearly Rs 700 cr at an ultra high P/E of more 40 times (on fiscal 2011 earnings). KMC’s advice on SRL seems to be largely influenced by the current discounting of Jubilant FoodWorks which IPO was incidentally lead-managed by KMC two years ago. Jubilant, which survives on the imported brand of Domino’s Pizza, currently commands a P/E of more than 68 times and its Price-Book Value is as high as 25 times. Interestingly, Jubilant’s current market capitalization is nearly double of Indian hospitality giants like Taj and Oberoi. Whereas the New York listed Domino’s Pizza Inc has a P/E of about 21 times at a market cap equivalent to Rs 10,500 cr, Jubilant is valued close to Rs 7,500 cr at an exorbitant P/E. How long such a steep valuation will sustain remains to be seen.
        
As regards the cost of holding of SRL’s existing shareholders, it is abysmally low at just 18 paise per share for the promoters. And, for the private equity and FII, it works out to Rs 71 and Rs 87 a piece respectively.