Aggressive Multibagger; Speciality Restaurants probably the cheapest branded play!

At the onset I would like to inform all readers that it is a great business that is going through the worst of phases. So, it would take a good amount of time to see best coming out of it. So, only real long term (3-5 years if not more) investors should look into it. It is no way a quick profit call. Also, it would take some guts to pick it up.

Speciality Restaurants Ltd.
The story of a hungry, foolish Bengali…

Incorporated in 1999,Speciality Restaurants Ltd is a fine dining operator in India the only listed company in the space. The first restaurant of the group came to existence in 1992 in Mumbai to cater to Bengali community who used to miss the home food and specially fish. The first restaurant was thus named ‘Only Fish’.  From the company website “It started as a tiny restaurant created by a bunch of foodies for some more foodie friends”

Because at the heart of the group lies the passion of Anjan Chatterjee, and his weakness for good food that turned into a great strength for Speciality Restaurants! He started Only Fish in 1992 with the nostalgic flavours of Calcutta, in the fast lane of Mumbai. The forty by forty square feet crowded dining place drew gourmets and food critics alike with the unique flavors of Calcutta. Anjan Chatterjee realized the dearth of speciality cuisines and hence the journey started.

By 1994, Speciality Restaurants Group had two flagship brands, Oh! Calcutta and Mainland China.

In May 2012 , Speciality Restaurants went public with a successful Initial Public Offer (IPO) in a very challenging economic environment and thus became the first and only public listed company in the stand-alone fine dining restaurant category in the country. The IPO was over subscribed by 2.54 times and got listed at around Rs. 150.

In the last 24 months, Speciality Restaurants has added a slew of casual all-day dining formats like Hoppipola, Mediterranean restaurant Café Mezzuna and a Chinese quick-service eatery Zoodles. Plans are also afoot to open more all-day dining formats where the beverage section (in particular alcohol) would take center stage. One such concept cooking in the oven is a micro-brewery.
Today SRL is the largest restaurant chain in India with 80 Company Owned and Operated Restaurants, 23 Franchisee and 19 Confectionery outlets spread across 23 cities in India, 1 city in Bangladesh and 1 city in Tanzania. Moreover, in this journey they have created a number of envious brands that caters to fine dining to fun dining, which they can leverage on, in future.

Strong brands, stronger spread!

SRL has created great brands across cities of India and a few abroad too that caters to variety of consumer profile ( From families to teen hangouts ) and a variety of taste and authenticity. I am sure all of you have come across few of these in your respective city and for me the experience had been very good in all of their restaurant brands. It ensured good food and good time. Following is a snapshot of brands that they have created till date.

Click here to know more about their brands and what kind of food and experience they  offer.

The following image will give you an fair idea about their geographic spread and the number of outlets for each brand

The man behind:

Though I haven’t covered yet, the financial performance of the company is dismal to say the least, and in this kind of situation understanding the management’s ability and grit becomes one of the most important parameter of judgement. So, here we deep dive into the management of SRL.

Anjan Chatterjee with his son Avik Chaterjee

Anjan Chaterjee background:

Born in 1959 into a family of scholars in Kolkata, Mr. Anjan Chatterjee went on to complete his graduation from Calcutta University and studied at the Institute of Hotel Management & Catering Technology, Kolkata, in 1982.

His first job was with the Taj Group of Hotels where he had first hands on exposure in the F&B industry.

Mr. Chatterjee’s passion for gourmet cuisine found its expression in the restaurant, Only Fish, which he launched in 1992.

A avid foodie, who takes part in a lot of food shows across the country. A avid lover of art and culture and is celebrated as an cultured intellectual in Calcutta and Mumbai.

The lesser known facts about Anjan Chatterjee:

Anjan is a brand builder per excellence. Not just his own brands he has build several power brands of India through Situations Advertising  a ad agency operating across different major cities of India that he founded in 1989. Only Fish was founded to cater to the Bengali ad people who used to miss their home food badly.

From Ujala ( Char Boondo wala) to Everest ( Taste mein best, mummy and Everest), to modern day Fair and Handsome ( Chupchup ke ladkiwala cream…) his brand building abilities has helped several home grown entrepreneurs to compete with their MNC counter parts. Click Here to know more about Situations advertising.

So, building and leveraging brand is something that he is mastering for last 30 years or more. It is that one crucial ability that sets him apart.

On November 7, 2015, the company’s board approved the appointment of Avik—who has been working in the company since 2013 without any formal designation—as the head of innovation and new formats.

What Avik is bringing into the business is quite clear from the excerpts of the Forbes Interview “I was always pushing for bars, but my dad was resistant at first. He used to tell me: ‘I’m a restaurateur and I’m going to make restaurants.’ I told him that the world is changing and people are also changing,” says Avik, who likes experimenting with global cuisines and has developed a flair for Japanese food. And thus the bar brand Hoppipola, catering to a young audience, was born in 2013 in the country’s pub capital of Bengaluru. The name Hoppipola, though, was Anjan’s choice and it means ‘jumping into puddles’ in Icelandic.

Read the full Forbes interview here.

So a experienced brand builder along with new blood makes a formidable management team for SRL.

Detailed Financial and fundamental analysis:

It is hard to find good points to mention in the fundamentals apart from a few

1. Debt free, asset light company sitting on big reserves ( Gives them flexibility for organic and inorganic expansion)
2. Growing top line despite at a slow pace
3. Days payable outstanding is significantly higher than days receivable outstanding, signifying low or negative working capital requirement ( A cash business)
4. Decent cash flow despite profits coming down
5. Company never skipped dividend after listing and actually the dividends are going up despite profits coming down ( Again a hint of ethical and confident management)

Key issues that the company facing financially:

1. Discretionary spends saw a sluggish trend for last few years, hence topline growth was modest.
2. Due to high input materiel cost ( Most of which is imported) operating margin is coming down starting 2011. So, though the company is making good sales it is not boiling down to profits.
3. As most of the ingredients are imported, it is badly hit by high dollar costs that was visible in last few years
4. As of last year company had the policy of opening 12 to 14 new restaurants per year, increasing on profits due to the break even burden of newly opened stores. Growth has not been profitable for last few years.
5. Today company is actually making a operating loss, the savior being the cash reserve that generates ‘other income’ to keep the company profitable.
6. Return ratios, naturally is moving downwards.

So, to sum up, the big issue of the company is to increase profits. Top line is not that much an issue.

Corrective measures taken by the company:

• The main money churner of the business is Mainland China brand. They have re branded it to Asia Kitchen which will have 40% foods from other South Eastern nations. It will reduce dependency on Chinese ingredients imports and help in improving margins.  In a analyst con call company has said that they have reduced Chinese ingredient imports from 20-25% levels to sub 10% levels.
• Closing down of unprofitable outfits. They have recently closed down a Sweet Bengal shop in Mumbai, Malad East. 3 more outfits are under close watch.
• Opening up more of Alcohol focused outfits that will add upto the bottom line.Moving from dinner lunch formats to fun dining formats ( Hoppipola) which caters to all they long customers. As India is getting younger, company plans to move towards Fun dining from fine dining. They foresee major revenue coming from Fun dining in near future which is significantly lower now.
• Going slow on the expansion plan. Reducing the target of 12-14 restaurants to only opening the ones they are really confident about
• Stressing on indigenous ingredients to reduce the cost and adverse effect of Dollar prices
• Promotions to increase weekday footfall.
• Launch of Mobifeast to cater to corporate catering and weddings. Where ticket size and margins are significantly higher.
• Launch of Zoodles outlets in places with captive audience. A strategic shift of opening up stores with captive audience ( Malls, airports) from standalone outfits.

My take on the issue:

As you all know i have been tracking it for long, i have written about it in my Facebook Posts before and after Vijay Kedia entered the stock i got even more interested and started to deep dive into the intricate details of the brand.

My main concern was operating margins and it took me sometime to understand the issue and by that time the stock went up from 80 to current 94.5 levels.

I feel following are 4 key the reasons for SRL not doing good financially.

1. Managements focus on brand building: Knowing Anajan Chaterjee he is taking his sweet time to build the brands. Building brands needs investments and higher breakeven time. They never compromised on the quality and never increased the prices in last few years.
2. Aggressive growth targets: They tried to do too many things at a very short span of time. So many brands, so many outlets opened up in last few years. As breakevens take around 8 months for them, all through they had some loss making outfits in their portfolio,  which pulled the OPM down.
3. External factors: In a analyst concall management mentioned, food inflation plays a havok in their business. So much so that he put 60% onus of gross margin erosion to food inflation and 40% to their wrong product mix. Also, as economy didnt pick up as expected their topline too hasn’t grown as per expectation reducing operating leverage to a great extent.
4. Lack of focus towards bottom line: With managements romanticism with serving good food and aggressive expansion plan somewhere i feel the focus on bottomline was missing. Which manifested in wrong product mix, high import costs and got magnified with economy not performing and discretionary spends going down.

To my mind, with the bad times management is getting conscious about their falsies and have identified the reasons for this downturn correctly. The measures taken on the direction of recovery is right and it is just a matter of time to get back to their hay days.

The following should bring them back to track

1. Better monsoon so lowered food inflation
2. Reduction of imports with Asia Kitchen from Mainland China
3. Closure of loss making units
4. Shift from fine dining to fun dining
5. Economic recovery with high GDP growth

Also, I feel that time has come that management takes a internal mindset shift from brand building to brand leveraging. If u have visited their stores you will see how lavish the spreads are…now here comes my Facebook anecdote of Northwest airlines saving $ 500000 a year just by cutting the lemon in 16 pieces in place of 10. That made me understand that in the large scale food business it is really easy to ramp up the margins by bringing in changes that too minute to be tangible. Now imagine their spread and what all can be reduced. As I said here a shift mindset needed from brand building to leveraging. 

Also with strong brands it is easy to dictate pricing. Any incremental pricing will straightaway add to the bottom line. Company still have significant head room of price increase as they say they provide 5 star food in 33% less price.

Valuations and buy strategy:

Valuations are damn cheap and that is for a reason.

A unique branded play in the stock market, leader in its area, almost negative working capital, great management, great brands, zero debt, 80 cr cash balance and most importantly in worst of time that should not last long, is available at price to book value less that 1.5. In my whole investing career i have never seen a established branded play available so cheap. At current price of 94.60 it is available at a mouthwatering valuations if you believe that things are going to improve from here and to me downside looks very limited.

I would suggest to buy 50% at current price. Q4 results will be muted and the stock might tumble after that. Our effort should be to nibble into it as price keeps going down. It would be great if you get a average price of around 85-90.

 

 

 

 

 

WE ARE  SEBI REGISTERED RESEARCH ANALYST.
1. AT THE TIME OF WRITING THIS ARTICLE, THE WE DO NOT HAVE A POSITION IN THE STOCK COVERED BY THIS REPORT.
2. WE HAVE NOT TRADED IN THE RECOMMENDED STOCK IN THE LAST 30 DAYS.
3. WE DOES NOT HAVE ANY MATERIAL CONFLICT OF INTEREST AT THE TIME OF PUBLICATION OF THE IDEA.
4. WE HAVE NOT RECEIVED ANY COMPENSATION FROM THE SUBJECT COMPANY IN THE PAST TWELVE MONTHS.
5. WE HAVE  NOT MANAGED OR CO-MANAGED PUBLIC OFFERING OF SECURITIES, HAS NOT RECEIVED ANY COMPENSATION FOR INVESTMENT BANKING OR MERCHANT BANKING OR BROKERAGE SERVICES NOR RECEIVED ANY THIRD PARTY COMPENSATION. 6. WE HAVE  NOT SERVED AS AN OFFICER, DIRECTOR OR EMPLOYEE OF THE SUBJECT COMPANY.
7. WE HAVE  NOT  BEEN ENGAGED IN MARKET MAKING ACTIVITY FOR THE SUBJECT COMPANY.
8. WE  DO NOT HAVE ACTUAL/BENEFICIAL OWNERSHIP OF ONE PER CENT OR MORE IN THE SECURITIES OF THE SUBJECT COMPANY, AT THE END OF THE MONTH IMMEDIATELY PRECEDING THE DATE OF PUBLICATION OF THE RESEARCH REPORT OR DATE OF THE PUBLIC APPEARANCE.
9. WET DO NOT OWN MORE THAN 1% EQUITY IN THE SAID COMPANY.