IPO Recommendation- Speciality Restaurants - Subscribe

Fine dining food services chain speciality restaurants, which operates multiple cuisine restaurants such as Mainland China, Oh! Calcutta and Just Biryani, is debuting with its maiden IPO (initial public offering  at the price band of Rs. 146 to  Rs. 155 per  share.. The offer of 11,739,415 equity shares of face value of Rs 10 each. The issue will constitute 25% of the post-issue paid-up equity share capital, the company said.

The issue, which will close on May 18, will accept bids for a minimum of 40 equity shares and in multiples of 40 equity shares thereafter. The company said it may consider participation by anchor investors, and that the anchor investor bid should be made one working day before the issue opening date.

The issue is being made through the book building process where only 50% will be allocated on a proportionate basis to QIB (Qualified Institutional Buyer), the company said.

The issue is being managed by Kotak Mahindra Capital.

Besides expanding within the fast-growing food services sector, the chain is nursing ambitions to expand its overseas footprint in markets like Dubai, Sri Lanka and London. Speciality Restaurants will be the second food services company to go public; the first one being Jubilant FoodWorks, which operates the Domino's Pizza chain in India. The organised segment of the restaurant industry is estimated at Rs 7,000-8500 crore, clocking a rapid 20-25% growth annually.

  
Strong cash flows..!

The strong cash flows depict the strength of its brand and enable the company to manage its expansion plan without going in for too much of leverage. Revenues have increased at a CAGR of 39% from Rs. 33.2 crore in 2005-06 to Rs. 175.1 crore in 2010-11, primarily driven by addition of new restaurants and better performance from the matured restaurants.

Overall, the total number of restaurants has increased to 62 in 2010-11 from 11 in2005-06 which is a CAGR growth of 41%. Reported net profit has increased to Rs 16 crore in2010-11, registering a 5 year CAGR of  38%.

As on Feb 2012 the company has 82 restaurants and confectioneries across 21 cities in India and 2 in Dhaka and Bangladesh. This shows the strong relation of revenue increase with the number of restaurants increase.

Their main focus is to scale Mainland China to 100 restaurants by 2016. It also plans to expand Sigree to a formidable Indian fine dining brand over next few years.

On valuations front in this segment there is no listed player to compare with but after dilution the multiple comes to 47x for 9 months ending. With the direct relation of the increase in restaurants to its revenue increase with maintained EBITDA and PAT margins over a period of 5 years shows a promising growth potential going forward. We recommend a SUBSCRIBE to the issue.

By Mr. A. K. Prabhakar, Anand Rathi
Senior Vice President - Equity Research,
4th Floor, Silver Metropolis, Jai Coach Compound, Opposite Bimbisar Nagar, Goregaon(East), Mumbai - 400 063. India
Tel No: + 4001 3700 | Direct: + 4001 3999 | Fax No: + 4001 3770 | Website: www.rathi.com

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