Speciality Restaurants, Q3FY13 Result Update :: Centrum

Strong growth expected ahead
Speciality Restaurants posted 14.2%YoY revenue growth on the back of
11.8% YoY growth in own restaurant business. With price hike announced
from April 2013 we expect this growth to be higher going ahead. Operating
profit was down by 2.7% on the back of increase in raw material cost and
employee cost which impacted margins. However PAT was up 39% YoY on the
back of lower taxes and high other income. Maintain BUY on back of long
term fundamental growth.
 Q3FY13 results below expectations: Speciality Restaurants posted 14.2% topline
growth in Q3FY13 to Rs612mn on 11.8% growth in core restaurant business as the
company did not take any price hikes in FY13. Operating profit was down by 2.7%
as the company witnessed 294bps margin compression due to higher cost. PAT
was higher by 39% on the back of higher other income and low tax rates.
 Restaurants addition 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 for FY13 and FY14 respectively. The company
is also launching its Italian restaurant, Mizona, in Pune in February which is an all day
bar and eatery catering to the age group of 16-30 years. It plans to further scale up
this brand in small areas with Café Mizona by carving out areas from Mainland China
which will help the company reduce cost.

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 New initiatives to drive incremental growth: Company is planning to enter the
international markets through the JV route which is expected to materialize in the next
3 months. Here the company will hold majority stake and the capex requirement will be
lower. The company has successfully pilot tested catering business and now is
considering operations on a big scale in Kolkatta and Chennai under the brand “MOBICHEF’.
For increasing same store sales growth the company has tied up with Just Dial
for delivery model which is expected to have ~10% of revenues over next 2 years. The
company is also considering the addition of more Asian cuisines in Mainland China
menu which will help increase footfalls and revenues.
 Margins set to expand: Operating margins in the quarter declined by 294bps on
the back of lower sales growth and fixed cost business model. Pre-operative
expenses from Mizone further impacted margins. However going forward, with
price hikes of 4-6% across restaurants, focus on increasing same store sales growth,
new initiatives on international front coupled with entry into catering business, we
believe the company will benefit from the operating leverage in FY14E. Hence we
have modeled operating margins of 20%+ for the next couple of years.
 Estimates lowered; Maintain BUY: We have marginally lowered our FY13E
estimates on the back of lower consumer demand coupled with higher expenses
for new restaurants. The stock is currently trading at 36x and 19.9x 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. Focus on increasing
same store sales growth, on track expansion plans, foray into the UAE market,
venturing into catering business coupled with margin expansion on the back of
economies of scale will help the company achieve its guidance for FY15.