INDIA Retail

Speciality Restaurants
Q3FY13 Result Update 7 February 2013
Key Data
Target Price CMP Upside Stock to Sector Sector to Market Rs232 Rs174* 33% Outperform Neutral Bloomberg Code Reuters Code Current Shares O/S (mn) Diluted Shares O/S(mn) Mkt Cap (Rsbn/USDmn) 52 Wk H / L (Rs) 1Yr Daily Vol. (3M NSE Avg.) - Face Value (Rs) 11.1 USD = Rs53.2

Buy

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.

SRL IN SPRE.BO 47.0 47.0 8.2/153.5 227/150

Price Performance (%)*

SRL NIFTY 1M (8.9) (0.9) 6M (3.3) 12.8

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 Caf Mizona by carving out areas from Mainland China which will help the company reduce cost.
Q2FY13 Q2FY12 YoY (%) Q1FY13 QoQ (%) Q2FY13E 612 535 14.2 547 11.7 624 136 108 26.6 132 3.1 139 171 147 16.7 150 13.9 170 201 175 14.8 190 5.7 207 103 106 (2.7) 75 38.3 108 16.8 19.8 -294 bps 13.6 323 bps 17.3 38 37 1.1 36 5.3 40 8 23 10 27 27 26.5 35.0 89 70 66 95 22 22 15 23 39.0 30.5 67 48 51 72 Var (%) (2.1) (2.1) 0.5 (2.8) (4.8) -48 bps (6.0)

10

Source: Bloomberg, Centrum Research *as on 06 February 2013

Revenue trend
(Rs mn) 700 600 500 400 300 200 468 116 495 87 535 106 464 67 526 105 547 75 100 0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Revenue Operating Profit Operating Margins 612 103 17.5 14.4 13.6 19.8 24.7 20.0 16.8 (%) 26.0 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0

Net Sales Employee cost RM cost Admin & Other Exp EBITDA EBITDA margin (%) Depreciation Interest Other Income PBT Tax PAT

Source: Company, Centrum Research

New restaurants opening on track (6.8)

Brand Name FY11 All 30 8 4 4 7 6 4 63 11 74 Fran. 11 1 0 0 2 4 0 18 0 18 Mainland China Oh! Calcutta Haka Sigree Flame & Grill Machaan Others Subtotal Sweet Bengal Total FY12 All 38 8 3 5 7 6 4 71 12 83 Fran. 13 1 0 0 2 4 0 20 0 20 Current All 48 9 3 6 7 6 3 82 14 96 Fran. 16 1 0 0 2 4 0 23 0 23

(7.8)

Source: Company, Centrum Research 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.
Rev 1,731 1,962 2,252 3,207 4,148 YoY (%) 34.4 13.4 14.8 42.4 29.3 EBIDTA 379 375 375 648 845 EBIDTA (%) 21.9 19.1 16.6 20.2 20.4 Adj PAT 160 172 227 411 545 YoY (%) 66.0 7.6 31.5 81.4 32.5

Source: Company, Centrum Research

Earnings revision
FY13E Particulars Revenue EBITDA EBITDA margin (%) Adj PAT PAT margin (%) Current Earlier 2,252 2,289 375 407 16.6 17.8 227 242 10.1 10.6 FY14E Chg (%) Current Earlier (1.6) 3,207 3,212 (7.9) 648 650 -113 bps 20.2 20.2 (6.4) 411 412 -52 bps 12.8 12.8 Chg (%) (0.2) (0.3) -3 bps (0.0) 2 bps

Source: Company, Centrum Research

Ankit Kedia ankit.kedia@centrum.co.in +91 22 4215 9634 Fully DEPS 3.4 3.7 4.8 8.8 11.6 RoE(%) 19.0 16.2 11.2 13.2 15.2 RoCE (%) 15.0 13.9 7.9 10.7 12.6 P/E (x) EV/EBIDTA (x) 51.0 21.3 47.4 21.9 36.0 18.1 19.9 10.4 15.0 7.7

Y/E Mar ( Rsmn) FY11 FY12 FY13E FY14E FY15E

Source: Company, Centrum Research Estimates

Please refer to important disclosures/disclaimers inside

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Financials
Exhibit 1: Income Statement
Y/E March (Rsmn) Net Sales Growth (%) Employee Cost %of Sales Rent %of Sales Material cost %of Sales Admin & other expenses % of sales EBIDTA EBIDTA Margins (%) Depreciation Interest expenses PBT for operations Other income PBT Provision for tax Effective tax rate (%) Net Profit Adj Net Profit FY11 1,731 34.4 330 19.1 238 13.8 445 25.7 339 19.6 379 21.9 143 13 222 18 241 81 33.4 160 160 FY12 1,962 13.4 423 21.6 287 14.6 510 26.0 367 18.7 375 19.1 129 27 220 27 247 74 30.1 172 172 FY13E 2,252 14.8 520 23.1 336 14.9 600 26.6 421 18.7 375 16.6 145 5 225 90 315 88 28.0 227 227 FY14E 3,207 42.4 677 21.1 463 14.4 833 26.0 586 18.3 648 20.2 183 2 463 117 580 168 29.0 411 411 FY15E 4,148 29.3 866 20.9 590 14.2 1084 26.1 763 18.4 845 20.4 215 2 628 140 768 223 29.0 545 545

Exhibit 3: Cash flow

Y/E March (Rsmn) CF from operations Profit before tax Depreciation & amortisation Others CF before WC changes Working capital changes Cash inflow from operations Income tax paid Cash from Operations Cash from investing Capex Investments Others Cash from investing Cash from financing Borrowings/ repayments Interest paid Equity/ Share Capital Cash from financing Net change in cash FY11 235 127 4 366 2 368 (90) 277 (141) (195) 16 (320) (39) (19) 110 52 10 FY12 247 129 2 377 (161) 216 (95) 122 (312) 101 21 (190) 95 (27) (0) 68 (1) FY13E 315 145 5 465 (9) 456 (88) 368 (470) 0 0 (470) (223) (5) 1,536 1,308 1,206 FY14E 580 183 2 765 (140) 625 (168) 457 (449) 0 0 (449) 0 (2) 0 (2) 6 FY15E 768 215 2 985 (124) 861 (223) 638 (369) 0 0 (369) 0 (2) 0 (2) 267

Source: Company, Centrum Research Estimates

Source: Company, Centrum Research Estimates

FY13E 470 2,443 2,912 0 (43) 2,869 FY14E 470 2,854 3,324 0 (43) 3,280 FY15E 470 3,399 3,869 0 (43) 3,826

Exhibit 2: Balance Sheet

Y/E March (Rsmn) Share Capital Reserves & Surplus Total Shareholders Funds Loan Funds Deferred Tax Liabilities Total Capital Employed Fixed Asset Gross Block Less:- Accumulated Depreciation Net Block Capital WIP Total fixed assets Investments Inventory Debtors Loans & advances Cash & bank balances Other current assets Total current assets Current liabilities & provisions Net current assets Total FY11 349 628 977 198 (24) 1,151 FY12 352 797 1,149 223 (43) 1,329

Exhibit 4: Key Ratios

Y/E March Margin ratios (%) EBIDTA Margins PBIT Margins PBT Margins PAT Margins Growth ratios (%) Revenues EBIDTA Adj Net Profit Return Ratios (%) ROCE RoNW RoIC Turnover Ratios Inventory period (days) Collection period(days) Payment period (days) Working Capital Cycle (days) Per Share (Rs) EPS CEPS Book Value Dividend Valuations (x) PER P/BV EV/EBIDTA EV/Sales M-cap/Sales FY11 21.9 13.6 13.9 9.3 34.4 43.2 66.0 15.0 19.0 27.6 16 12 60 (32) 3.4 6.5 20.8 0.0 51.0 8.4 21.3 4.7 4.7 FY12 19.1 12.6 12.6 8.8 13.4 (1.0) 7.6 13.9 16.2 21.8 14 14 63 (35) 3.7 6.4 24.5 0.0 47.4 7.1 21.9 4.2 4.2 FY13E 16.6 10.2 14.0 10.1 14.8 (0.1) 31.5 7.9 11.2 15.7 15 12 63 (36) 4.8 7.9 62.0 0.0 36.0 2.8 18.1 3.0 3.6 FY14E 20.2 14.5 18.1 12.8 42.4 72.9 81.4 10.7 13.2 24.8 15 12 60 (33) 8.8 12.7 70.8 0.0 19.9 2.5 10.4 2.1 2.5 FY15E 20.4 15.2 18.5 13.1 29.3 30.4 32.5 12.6 15.2 29.3 15 12 60 (33) 11.6 16.2 82.4 0.0 15.0 2.1 7.7 1.6 2.0

1,035 410 625 102 727 251 20 56 352 48 475 303 173 1,151

1,238 510 728 151 879 150 20 74 511 47 652 353 299 1,329

1,708 655 1,053 151 1,204 150 25 74 563 1,253 1,915 401 1,514 2,869

2,157 838 1,319 151 1,470 150 34 105 802 1,259 2,201 541 1,660 3,280

2,526 1,053 1,473 151 1,625 150 45 136 1,037 1,527 2,744 694 2,051 3,826

Source: Company, Centrum Research Estimates

Source: Company, Centrum Research Estimates

Speciality Restaurants

Appendix A
Disclaimer
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No representation is made that this report is accurate or complete. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection.

Speciality Restaurants

This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction. As per the declarations given by them, Mr. Ankit Kedia, research analyst and and/or any of his family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the above companies in the preceding twelve months. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance. While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances Key to Centrum Investment Rankings: Stock to Sector Sector to Market Outperform Outperform Neutral Underperform Outperform Neutral Neutral Underperform Outperform Underperform Neutral Underperform Accumulate: Add on decline; Reduce: Sell on rise Stock to Market Buy Buy Accumulate Neutral Neutral Neutral Reduce Sell Sell

Stock to Sector This is the relative rating of the stock to the sector and reflects its relative attractiveness vis--vis other coverage stocks in the sector. Sector to Market This is the relative rating of the sector vis--vis the other sectors in the coverage space. This is derived based on the conviction of the analyst on a sector and macro view outlined in market strategy. Stock to Market The final rating on the stock is obtained as a combination of the stock to sector and sector to market view as outlined in the table above.

Speciality Restaurants

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Speciality Restaurants