Initiating Coverage
Speciality Restaurant
Buy
Target Price: Rs232
CMP: Rs180
Upside: 29%
Seeking wider patronage
m Organised food services industry to grow at a CAGR of 30%: The food services industry comprises two distinct market segments: the organised and the unorganised. The organised segment comprises 20% of the total industry, or Rs90bn. This segment grew at an estimated rate of 25.6% in FY 11 and is expected to grow at 31.0% in FY12. Key growth drivers are i) increasing young population ii) booming middle class with growing discretionary spends iii) rising urbanisation and increase in nuclear families iv) increase in the number of working women and v) changing food habits.
m Pan India player with portfolio of strong brands: SRL has strategically-located restaurants across 25 cities in India and one city in Bangladesh. Among these, the flagship Mainland China restaurants are located in all 25 cities in which the company operates. The company currently operates through 11 brands including its core brands, Mainland China and Oh! Calcutta. These brands have had a presence for over 17 years.
m Aggressive expansion plans: SRL has aggressive expansion plans over the next 3 years with restaurant counts increasing by 45 over FY12-15E. From 71 restaurants in FY12 we expect the count to become 116 restaurants by FY15E. Main growth is expected to come from Mainland China where the restaurant count is expected to grow from 38 in FY12 to 70 by FY15E and its share in total count is expected to increase from 53% to 60% over same period. The company plans to open restaurants in Metros and Tier-I cities under the owned format and selectively in Tier-II cities through franchisees.
m Focus on increasing same store sales growth: SRL is increasing its focus on optimizing its product offerings to leverage current asset base and increase its customer base. Schemes such as Dine by Nine and Rs678 dinner buffet for weekdays will increase customer churn rate while introducing snacking menu and keeping restaurants open all day in malls will grow the customer base. Introducing takeaway & delivery model will also increase same store sales by 7% over 2 years.
m Robust financials: Net sales will have a CAGR of 29% over FY12-15E to Rs4153mn while operating profit will become 2.25x by FY15E to Rs847mn. Net profit is set to grow at a CAGR of 46% over FY12-15E to Rs544mn in FY15E. Return ratios are expected to improve significantly with RoIC being at 29% in FY15E. SRL is expected to turn free cash positive from FY14E on the back of strong cash flow from operations and lower capex requirement. The company is also expected to become debt free from FY13E.
m Valuations: Global food companies are trading at an average of 25x FY13E and 21x FY13E. SRL is currently trading at 34.9x FY13E and 20.5x FY14E EPS of Rs5.2 and Rs8.8 respectively. We expect the stock to re-rate from current levels and hence value the stock at 20x FY15E (20% premium to international peers) and arrive at a target price of Rs232 (29% upside from current levels).
m Aggressive expansion plans: SRL has aggressive expansion plans over the next 3 years with restaurant counts increasing by 45 over FY12-15E. From 71 restaurants in FY12 we expect the count to become 116 restaurants by FY15E. Main growth is expected to come from Mainland China where the restaurant count is expected to grow from 38 in FY12 to 70 by FY15E and its share in total count is expected to increase from 53% to 60% over same period. The company plans to open restaurants in Metros and Tier-I cities under the owned format and selectively in Tier-II cities through franchisees.
m Focus on increasing same store sales growth: SRL is increasing its focus on optimizing its product offerings to leverage current asset base and increase its customer base. Schemes such as Dine by Nine and Rs678 dinner buffet for weekdays will increase customer churn rate while introducing snacking menu and keeping restaurants open all day in malls will grow the customer base. Introducing takeaway & delivery model will also increase same store sales by 7% over 2 years.
m Robust financials: Net sales will have a CAGR of 29% over FY12-15E to Rs4153mn while operating profit will become 2.25x by FY15E to Rs847mn. Net profit is set to grow at a CAGR of 46% over FY12-15E to Rs544mn in FY15E. Return ratios are expected to improve significantly with RoIC being at 29% in FY15E. SRL is expected to turn free cash positive from FY14E on the back of strong cash flow from operations and lower capex requirement. The company is also expected to become debt free from FY13E.
m Valuations: Global food companies are trading at an average of 25x FY13E and 21x FY13E. SRL is currently trading at 34.9x FY13E and 20.5x FY14E EPS of Rs5.2 and Rs8.8 respectively. We expect the stock to re-rate from current levels and hence value the stock at 20x FY15E (20% premium to international peers) and arrive at a target price of Rs232 (29% upside from current levels).
m Key risks: i) High dependence on single brand ‘Mainland China’; ii) Increasing raw material prices; iii) New formats/restaurants not being successful and iv) Increasing competition from local and global players.
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