Pedigree warrants investment, P/E dampens sentiment!
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OFFER AT A GLANCE |
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|
Name |
Speciality Restaurants Ltd |
|
Offer Quantity |
117.39 lakh shares of Rs 10 each |
|
% on Total Equity |
25% |
|
Offer Price |
Rs 146 to Rs 155 |
|
Offer Amount |
Rs 171 cr to Rs 182 cr |
|
Application Quantity |
40 & Multiples of 40 |
|
Offer Opens |
May 16, 2012 |
|
Bid/Offer Closes |
May 18, 2012 |
|
Rated By |
CRISIL |
|
Rating |
4 out of 5 |
|
Listing |
BSE and NSE |
|
Lead Managers |
Kotak Mahindra Capital |
|
Registrars |
Link Intime |
Issue Details
The Kolkata-registered but Mumbai head-quartered Speciality Restaurants Ltd (SRL) is offering public 117.39 lakh shares at a price band of Rs 146 and Rs 155. The IPO constitutes 25% of the post-issue equity capital of the company. The offer is being made through the book-building route wherein up to 50% of the quantum would be allocated to qualified institutional buyers (QIBs) and 15% is earmarked for non-institutional bidders. Not less than 35% is reserved for retail investors. The shares are proposed to be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Issue Object
Of the issue proceeds, SRL proposes to spend an aggregate amount of Rs 132 cr on 45 New Restaurants in Fiscal Years 2013, 2014 and 2015. About Rs 15 cr is earmarked for developing a food plaza in Rajarhat, Kolkata. Of the proposed capital expenditure of Rs 147 cr, interiors and equipment account for around Rs 100 cr.
Issue Grade
CRISIL has assigned a grade of ‘4/5’ (pronounced “four on five”) to the IPO. While the rating indicates that the fundamentals of the IPO were above average relative to the other listed equity securities in the country, it explicitly puts out that the grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals.
Promoter
The founder-managing director of SRL, Anjan Chatterjee, has ample knowledge and experience in running fine dining restaurants. He is currently the vice president of the National Restaurants Association of India. Having obtained a diploma in hotel management in 1982 and trained as a management trainee at a leading five star hotel in India, the promoter has brought core values from his experiences to the operation of SRL’s restaurant network. Even though some of the stable mates of SRL have similar objectives, the promoter claims that none of his group companies will compete with the public company. While the closely-held group companies own and lease out hotel properties, SRL is said to be the only company operating the restaurants. The managing director and his spouse collectively hold about 81% of the pre-IPO equity. Even on the enlarged post-issue equity the promoters would hold a comfortable 61%.
Financial Track
The twelve-year old SRL has had a creditable growth in recent years. Its number of restaurants and confectionaries increased from 17 in March 2007 to 82 in February, 2012. The company opened 16 and 11 restaurants in fiscals 2010 and 2011 respectively. Its revenue registered a CAGR of 39%, from Rs 33 cr in FY06 to Rs 175 cr in FY11, primarily driven by addition of new restaurants (from 11 to 62) and better performance from the matured restaurants. EBITDA margin expanded from 18% in FY06 to 22% in FY11. Net profit clocked a five year CAGR of 38%. At the end of December 2011, the net worth of the company was Rs 113 cr against which its debts were less than Rs 32 cr.
Prospects
Post-IPO, SRL’s equity capital would increase 33.3% to Rs 46.95 cr. The existing bottom line of Rs 16 cr yields an EPS of 3.41 on the enlarged equity which does make the offer look costly. Nevertheless, if the company’s recent growth rate is any indication, its EPS could spurt significantly in next couple of years partly due to savings in interest costs in view of huge share premium collected through the IPO and largely on account of the additions (more than 50% increase) in number of restaurants.
Valuation
Hospitality industry mainly consisting star hotels currently commands a much higher discounting than the market average. This is largely due to the attractive real estates/properties owned by them. Compared to this, restaurants should have a lower P/E as they generally do not own the properties. Nonetheless this does not deter SRL’s investment banker Kotak Mahindra Capital (KMC) from advising a steep valuation for SRL. The offer band of Rs 146–155 values SRL nearly Rs 700 cr at an ultra high P/E of more 40 times (on fiscal 2011 earnings).
KMC’s advice on SRL seems to be largely influenced by the current discounting of Jubilant FoodWorks which IPO was incidentally lead-managed by KMC two years ago. Jubilant, which survives on the imported brand of Domino’s Pizza, currently commands a P/E of more than 68 times and its Price-Book Value is as high as 25 times. Interestingly, Jubilant’s current market capitalization is nearly double of Indian hospitality giants like Taj and Oberoi. Whereas the New York listed Domino’s Pizza Inc has a P/E of about 21 times at a market cap equivalent to Rs 10,500 cr, Jubilant is valued close to Rs 7,500 cr at an exorbitant P/E. How long such a steep valuation will sustain remains to be seen.
As regards the cost of holding of SRL’s existing shareholders, it is abysmally low at just 18 paise per share for the promoters. And, for the private equity and FII, it works out to Rs 71 and Rs 87 a piece respectively.
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HOW SPECIALITY COMPARES WITH HOTEL/RESTAURANT PEERS |
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HOTEL/RESTAURANT |
M-CAP |
P/E |
P/BV |
P/FV |
P/R |
OPM |
YLD |
PRICE |
|
IND/MKT COMPOSITE |
(Rs Cr) |
(x) |
(%) |
(Rs) |
||||
|
EIH |
4,484 |
28.7 |
1.9 |
39.2 |
4.0 |
24.3 |
1.2 |
78.45 |
|
Indian Hotels Comp |
4,451 |
25.9 |
1.4 |
58.6 |
2.5 |
24.3 |
1.7 |
58.60 |
|
Hotel Leela Venture |
1,194 |
– |
1.3 |
15.4 |
2.0 |
18.3 |
0.5 |
30.80 |
|
Oriental Hotels |
442 |
64.2 |
1.5 |
24.7 |
1.7 |
20.0 |
3.2 |
24.75 |
|
Asian Hotels (North) |
409 |
14.4 |
0.7 |
21.0 |
1.8 |
32.4 |
1.2 |
210.25 |
|
TAJGVK Hotels & Res |
360 |
17.5 |
1.1 |
28.7 |
1.4 |
31.3 |
3.5 |
57.40 |
|
EIH Associated Hotel |
302 |
29.6 |
2.7 |
15.4 |
1.6 |
30.4 |
1.6 |
154.00 |
|
Asian Hotels (East) |
290 |
9.6 |
0.4 |
25.3 |
3.6 |
30.2 |
1.8 |
253.35 |
|
Byke Hospitality |
269 |
120.2 |
6.3 |
14.1 |
7.0 |
10.9 |
0.7 |
141.30 |
|
Hotel-Composite (36) |
14,481 |
44.2 |
1.3 |
19.3 |
2.5 |
25.4 |
|
|
|
Mkt Compo (2802 cos) |
5,759,709 |
14.7 |
2.1 |
27.4 |
1.2 |
22.2 |
|
|
|
Jubilant Foodworks |
7,485 |
68.6 |
25.0 |
115.0 |
7.4 |
18.7 |
0 |
1,150 |
|
Speciality Res- Hi Band |
728 |
45.4 |
5.6 |
15.5 |
4.2 |
22.0 |
0 |
155 |
|
– Low Band |
686 |
42.8 |
5.2 |
14.6 |
3.9 |
22.0 |
0 |
146 |
Manager’s Track
The high profile investment banker of SRL had been associated with more than 50 IPOs between 2007 and 2012. Of these only 13 are quoting above the investment value today. As many as 20 scrips (40%) are currently traded more than 50% below the IPO value! In fact some of the high-priced IPOs are languishing 80% below the offer price.
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KOTAK MAHINDRA CAPITAL-ASSOCIATED IPOS |
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ISSUER |
ISSUE |
FV |
IPO |
LISTING DAY |
CURRENT |
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|
|
DATE |
|
PRICE |
PRICE |
GAIN |
PRICE |
GAIN |
|
Adani Port |
1-Nov-07 |
2 |
88.00 |
192.34 |
118.6 |
121.00 |
37.5 |
|
Bajaj Corp |
2-Aug-10 |
1 |
132.00 |
151.65 |
14.9 |
121.40 |
-8.0 |
|
BGR Energy |
5-Dec-07 |
10 |
480.00 |
901.30 |
87.8 |
294.90 |
-38.6 |
|
Central Bank |
24-Jul-07 |
10 |
102.00 |
115.40 |
13.1 |
77.75 |
-23.8 |
|
Coal India |
18-Oct-10 |
10 |
245.00 |
342.35 |
39.7 |
314.45 |
28.3 |
|
Consolid. Const |
18-Sep-07 |
2 |
102.00 |
158.29 |
55.2 |
14.00 |
-86.3 |
|
D.B.Corp |
11-Dec-09 |
10 |
212.00 |
265.90 |
25.4 |
195.00 |
-8.0 |
|
DLF |
11-Jun-07 |
2 |
525.00 |
570.05 |
8.6 |
187.30 |
-64.3 |
|
Edelweiss Fin |
15-Nov-07 |
1 |
82.50 |
151.00 |
83.0 |
27.25 |
-67.0 |
|
Eros Inter |
17-Sep-10 |
10 |
175.00 |
190.05 |
8.6 |
176.05 |
0.6 |
|
Fortis Health |
16-Apr-07 |
10 |
108.00 |
100.00 |
-7.4 |
99.60 |
-7.8 |
|
Future Capital |
11-Jan-08 |
10 |
765.00 |
908.20 |
18.7 |
135.65 |
-82.3 |
|
Future Vent |
25-Apr-11 |
10 |
10.00 |
8.30 |
-17.0 |
8.36 |
-16.4 |
|
Godrej Prop |
9-Dec-09 |
10 |
490.00 |
534.55 |
9.1 |
570.35 |
16.4 |
|
Gujarat Pipa |
23-Aug-10 |
10 |
46.00 |
54.05 |
17.5 |
53.60 |
16.5 |
|
Hathway Cable |
9-Feb-10 |
10 |
240.00 |
207.80 |
-13.4 |
165.95 |
-30.9 |
|
HDIL |
28-Jun-07 |
10 |
388.89 |
434.47 |
11.7 |
64.40 |
-83.4 |
|
Hindustan Media |
5-Jul-10 |
10 |
166.00 |
189.20 |
14.0 |
139.70 |
-15.8 |
|
Icra |
20-Mar-07 |
10 |
330.00 |
797.60 |
141.7 |
1,129.70 |
242.3 |
|
IL&FS Engg |
27-Sep-07 |
10 |
370.00 |
614.30 |
66.0 |
59.05 |
-84.0 |
|
Indian Bank |
5-Feb-07 |
10 |
91.00 |
98.30 |
8.0 |
179.65 |
97.4 |
|
IRB Infra |
31-Jan-08 |
10 |
185.00 |
189.05 |
2.2 |
105.20 |
-43.1 |
|
IVRCL Assets |
23-Jul-07 |
10 |
366.67 |
278.77 |
-24.0 |
39.75 |
-89.2 |
|
Jaypee Infra |
29-Apr-10 |
10 |
102.00 |
91.30 |
-10.5 |
43.75 |
-57.1 |
|
JSW Energy |
7-Dec-09 |
10 |
100.00 |
100.75 |
0.8 |
42.80 |
-57.2 |
|
Jubilant Food |
18-Jan-10 |
10 |
145.00 |
229.00 |
57.9 |
1,131.45 |
680.3 |
|
Jyothy Lab |
22-Nov-07 |
1 |
138.00 |
158.74 |
15.0 |
189.95 |
37.6 |
|
K.P.R.Mill |
2-Aug-07 |
10 |
225.00 |
173.50 |
-22.9 |
78.30 |
-65.2 |
|
KSK Energy |
23-Jun-08 |
10 |
240.00 |
190.50 |
-20.6 |
60.00 |
-75.0 |
|
Mahindra Holi |
23-Jun-09 |
10 |
300.00 |
317.10 |
5.7 |
271.75 |
-9.4 |
|
Mindtree |
9-Feb-07 |
10 |
425.00 |
620.30 |
46.0 |
581.10 |
36.7 |
|
Muthoot Fin |
18-Apr-11 |
10 |
175.00 |
176.25 |
0.7 |
129.40 |
-26.1 |
|
NHPC |
7-Aug-09 |
10 |
36.00 |
36.70 |
1.9 |
18.00 |
-50.0 |
|
Nitesh Estates |
23-Apr-10 |
10 |
54.00 |
50.95 |
-5.6 |
14.05 |
-74.0 |
|
NMDC |
10-Mar-10 |
1 |
300.00 |
298.30 |
-0.6 |
168.55 |
-43.8 |
|
NTPC |
3-Feb-10 |
10 |
201.00 |
201.75 |
0.4 |
148.35 |
-26.2 |
|
Oberoi Realty |
6-Oct-10 |
10 |
260.00 |
282.95 |
8.8 |
240.20 |
-7.6 |
|
Pipavav Defence |
16-Sep-09 |
10 |
58.00 |
56.80 |
-2.1 |
83.75 |
44.4 |
|
Power Finance |
31-Jan-07 |
10 |
85.00 |
111.55 |
31.2 |
145.40 |
71.1 |
|
Power Grid |
10-Sep-07 |
10 |
52.00 |
100.65 |
93.6 |
101.20 |
94.6 |
|
Prestige Estates |
12-Oct-10 |
10 |
183.00 |
192.55 |
5.2 |
108.35 |
-40.8 |
|
Puravankara |
31-Jul-07 |
5 |
400.00 |
361.75 |
-9.6 |
62.55 |
-84.4 |
|
Reliance Power |
15-Jan-08 |
10 |
281.25 |
232.81 |
-17.2 |
92.60 |
-67.1 |
|
Rural Electrificat |
19-Feb-10 |
10 |
203.00 |
241.85 |
19.1 |
181.90 |
-10.4 |
|
Shriram EPC |
29-Jan-08 |
10 |
330.00 |
293.60 |
-11.0 |
68.05 |
-79.4 |
|
SKS Microfinance |
28-Jul-10 |
10 |
985.00 |
1,088.58 |
10.5 |
98.15 |
-90.0 |
|
Tata Steel |
19-Jan-11 |
10 |
610.00 |
149.67 |
-75.5 |
411.75 |
-32.5 |
|
Tecpro Systems |
23-Sep-10 |
10 |
355.00 |
407.85 |
14.9 |
173.70 |
-51.1 |
|
Titagarh Wagons |
24-Mar-08 |
10 |
540.00 |
707.20 |
31.0 |
310.95 |
-42.4 |
|
TV18 Broadcast |
15-Jan-07 |
2 |
50.00 |
102.02 |
104.0 |
23.30 |
-53.4 |
|
Vascon Engine |
27-Jan-10 |
10 |
165.00 |
147.20 |
-10.8 |
40.10 |
-75.7 |
|
IPO & List Prices adjusted to bonus & stock splits |
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Concerns
- Survival on banner-value rather than property-appreciation.
- Restaurant business’ success largely depends on securing the best locations.
- Locations for new restaurants or for the relocation of existing restaurants may not be available at an acceptable cost or on acceptable terms.
- Loss of restaurant or confectionary locations is bound to have a material adverse effect on the business, financial condition, results of operations and prospects.
- Has to incur a significant amount of start-up costs including architecture and design fees and construction cost which may be unable to recoup. .
- SRL does not have registered trademarks for the brands “Oh! Calcutta”, “Sweet Bengal”, “Machaan”, “Shack” and “Kix” nor its corporate name and logo.
- Fine dining sector of the restaurant industry in India faces increasing competition in respect of price, service, location and food quality.
- A growing, under-served Indian market is attractive to new entrants, who may offer new cuisines that appeal to consumer tastes.
- Global restaurant chains entering India have the advantage of brand recognition, experience in operating in new markets, significant management, marketing and financial resources.