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Tuesday, May 15, 2012

Specialty Restaurants Limited (SRL) IPO Review



   (A)  Issue Highlights

(1)    Issue Period: 16/5/2012-18/5/2012
(2)    Price band: Rs. 146-155
(3)    Issue Size: 181.96 crore  at the upper price band
(4)    Issue Type: 100 % Book Building
(5)    Market Lot: 40
(6)    Face value: Rs. 10
(7)    Maximum Retail Subscription: Rs. 1,98,400 (32 lots)
(8)    Registrar: Link Intime
(9)    Listing: BSE,NSE
(10) Industry: Fine dining Restaurant chain

    (B)   Industry profile

Food industry in India is one of the fastest growing industries in India and by the year 2015 it is estimated to reach $ 300 billion (Rs.15,900 crore).Restaurant industry amounted to Rs. 430 billion with an annual growth rate of 5-6 %.



Company Profile

Specialty Restaurants Ltd. operates 69 restaurants and 13 confectionaries located across 21 cities of India. The company has also marked its footprint in Dhaka (Bangladesh).

Restaurant Brands of the company
·         Mainland China (Flagship Brand)- 16 year old ‘Coca Cola Golden Spoon’ award winner brand that serves Chinese food and constitutes around 60 % of the total revenue.
·         Oh! Calcutta-Serves Bengali, Nawabi, British & Continental food
·         Flame & Grill: serves grilled Kababs
·         Haka: serves quick modern-Chinese dishes and snacks
·         Just Biryani: serves traditional Indian rice delicacies
·         KIBBEH: provides Lebanese cuisine
·         Kix: bar featuring a dance floor and music  targeted at young professional segment
·         Machaan: provides traditional Indian dishes
·         Sigree: serves slowly cooked food over a charcoal flame which is known for much-better taste than the burner-flame cooked food
·         Shack: bar lounge with beach theme targeted at young professional segment
·         Sweet Bengal: another 16-year old confectionary restaurant brand and winner of Times Good Food Awards in many cities.


SRL’s Footprints



Outlet Matrix




     (C)   Strengths
·         The company boasts 69 strategically located restaurants spread across 21 cities
·         Stable & securer ratio of ‘Owned to Franchised’ restaurants
·         Very high Profit CAGR of 45%

    (D)  Concerns
·         Geographical concentration of restaurants skewed towards western region
·         So far only Mainland China and Oh! Calcutta are widely recognized brands
·         Rising property-rentals shall be a major concern
·         In case of Contingent liability worth Rs. 17 crore if materializes shall result in total debt increasing by around 70 %

    (E)   Objects of the Issue
·         Development of new corporate restaurants: Rs. 144.7 crore
·         Development of food plaza: Rs. 15.1 crore
·         Repayment of a term loan: Rs. 10.43 crore
·         General corporate purposes: shall be finalized after the finalization of the issue price




     (F)    Financial analysis #

(1) All calculation at the upper price band
(2) FY12calculations were done considering post-issue equity (conversion of     preferential shares factored-in) using restated financial statements
(2) FY 2012 data is annualized
(3)   Preference shares were converted into equity shares in Nov 2011

Parameter
FY 12 Annualized
FY 11
FY10
EPS
Rs. 4.2
Rs. 5.4
Rs.3.9
Book Value
Rs. 24
Rs.33.8
Rs. 24.8
P/E
36.5
28.6
40.2
P/B
6.5
4.6
6.3
Profit CAGR (4 year)
45%
50%
37%
PEG
.8
.6
1.1
Return on Equity (ROE)
17.7
16.1%
15.6%
Net Profit Margin(NPM)
10%
9%
9%
ROCE
19.8%
20.6%
15.2%
Debt/Equity Ratio
.6
.5
.6
Interest Cover
8.5
14.4
8.3
Current Ratio
1.9
1.6
1.8
M-Cap/ Sales
3.7
2.6
3.4



     (G)  Comparison with the peers

Jubilant food can’t be directly compared with this company as-

·        Jubilant food is the Indian franchise of global brands like Domino’s Pizza and Dunkin Donuts while SRL             owns the fine dine restaurant business in India and issues franchise business to interested parties.                    
·        SRL is not involved in  home delivery business
·         Domino’s and Dunkin brands are global brands while SRLs brands have domestic acceptance only


As there is no fine dine service provider company which is listed on the Indian bourses comparison is done for valuation purpose only.

# FY 11 peer data is as per moneycontrol site


Company
SRL
Jubilant Food
P/E
36.5
70.87  (# latest possible)
NPM
10%
9.38%
PEG
.8
.79
ROE
17.7%
37.48%
Interest cover
8.5
271.98
Debt equity ratio
.6
.07  ( # FY 2010)
M-cap/ Sales
3.7
9.78

     (H)  Inference

Post issue, at the upper price band issue shall be available at 36.5 times its earnings, which is very high especially during the IPO phase.  Though SRL’s profit is growing at a profit CAGR of 45 % resulting in PEG ratio under 1, still for a company like SRL with recognition limited domestically valuations are very high.
I have mentioned above why we can’t put SRL in the shoes of the Jubilant Foodworks’ shoes.
SRL has got only two well-recognized brands- Mainland China & Oh! Calcutta that too in India only while rest all brands are going through their inception phase and success of these brands is difficult to predict.
It is strange that despite lackadaisical market condition this issue has been offered at such a high premium to its earnings.
Value investors and risk-averse investors should clearly avoid this issue.

Who can apply for this issue?

Dare-devils with deep pockets having long-term view who clearly understand the inherent risk and having a capacity to cost-average in case prices going below issue-price significantly, should only go for this issue especially during the present time when many recent issues trading below their issue price.

     (I)     Disclaimer
 Analysis is for the information purpose only. Though due diligence has been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of this report.

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