Management Interaction Takeaways
Speciality Restaurants
Buy
Target Price: Rs232
CMP: Rs168
Upside: 37%
Expansion on track
We recently interacted with the management of Speciality Restaurants to get their feedback on business environment. The key highlights are:
m Restaurant opening on track: New restaurant addition is on track as the company currently has 82 restaurants of which 23 are franchisee. The management maintained that they will open 16 restaurants each in FY13 and FY14 respectively in the owned format. The company is also launching its Italian restaurant, Mizona, in Pune in the first week of April which is an all day bar and eatery catering to the age group of 16-30 years and is currently under trial runs. It plans to further scale up this brand in small areas by carving out areas from Mainland China which will help the company reduce cost.m Consumer demand remains lackluster: The management said consumer demand continued to be lack-luster and under pressure. Corporate spends had reduced significantly impacting business. To mitigate the pressure, the company is introducing schemes such as ‘Dine by 9’, buffet at Rs678 on weekdays and buy 4 and take 5 dishes. They believe this has given consumers some benefit, increasing footfalls.
m Price hike inevitable from April 2013: The management is raising prices by 4-6% from April 2013 across restaurants. This will be the first hike since September 2011 and will help the company mitigate raw material cost pressure. We believe same store sales growth will be 7-8% for FY14 on the back of increasing churn from H2FY14.
m Exploring acquisitions in QSR category: The Company is considering an acquisition in the QSR category and is in advanced stages of negotiations to close the deal within the next couple of months. It will be a non-pizza American QSR brand with a small presence in a particular city. The management does not want to spend more than Rs300mn on the acquisition and expect to leverage the synergies and scale up operations further.
m Entry into international markets: The management is considering leveraging its brands in the international markets and plans to launch restaurants in the UK, Middle EAST and Singapore in FY14. The company is planning to open Oh!Calcutta restaurants in London and Singapore and introduce Mainland China and Flame & Grill restaurants in West Asian countries such as the UAE where seven restaurants, mostly in malls, are being planned. Entry into UAE will follow the JV route but in other markets it will be through franchisee.
m To tap outdoor catering business: This business has the potential to reach Rs100cr over the next couple of years. Currently, the company has pilot tested this business in Kolkatta and is further expanding it in Chennai and Mumbai. The company has launched a brand “Mobifeast’ for this business. It has bagged a few big orders including one from KKR IPL franchise. This business is expected to have 40% operating margins.
m Takeaway and delivery business to contribute 10% of topline: The Company is expecting to start a takeaway & delivery model which could have the potential to garner 10% of the topline in a couple of years from 3% currently. It has tied-up with Just Dial for the back end call centre operations for this business. This could further increase same store sales growth and add to the margins.
m Financials: We expect the company to post revenue of Rs2252mn and Rs3207 for FY13 and FY14 respectively. Operating profit will be Rs375mn and Rs648mn over the period. We expect margins to expand from 16.6% in FY13 to 20.2% in FY14E on the back of gross margins expansion coupled with operating leverage. PAT will be Rs227mn and Rs411mn over the same period
m Attractive Valuations: The stock is currently trading at 35x and 19.3x FY13E and FY14E respectively. We value the company at 20x FY15E EPS of Rs11.6 with our target price of Rs232 and maintain BUY rating on the stock. Though near term uncertainties remain, we are confident on long term growth on the back of its focus on increasing same store sales growth, track expansion plan, foray into international markets, venturing into catering business coupled with margin expansion on the back of economies of scale.
