Speciality Restaurants - An Expensive Order

At a time when the primary markets have turned out to be major wealth destroyers, stripping unwitting investors of their hard-earned money, Speciality Restaurants (SPL) decided to tap the markets with its IPO on May 16, 2012. After receiving a lukewarm response initially, the issue finally managed to attract some response from HNIs and institutional investors. It was over-subscribed by 2.54x, helping SPL raise around Rs 175 crore at an issue price of Rs 150 per share.

Despite the pessimistic mood prevailing in the markets, the shares of SPL got listed at a premium and ended their debut day at Rs 160.65 per share, a premium of 7.1 per cent from its issue price. However, we continue to maintain our bearish stance on the scrip.

Without arguing much over the favourable prospects of the food services industry in India, the strong foothold of SPL in the fine dining industry and the strong cash flows representing the strength of its brand value, we still feel that the counter is commanding slightly expensive valuations at the current levels. At an annualised post-issue EPS of Rs 4.26, its PE multiple stands at 37.71x of its current market price of Rs 160.65 per share.

Given the current fragile market conditions, the burgeoning inflationary scenario and the highly fragmented nature of the Indian food services industry, we believe that a fine dining restaurant player like SPL would feel some pressure in the near term as people’s disposable and discretionary spending power takes a beating.[PAGE BREAK]

We further believe that SPL’s dependence on the success of its flagship brand, Mainland China (MC), is a matter of concern, as any shift in consumer preferences (away from Chinese cuisine) may impact the sales of chain’s sales and thus, Speciality’s overall growth.

In conclusion, given the current market scenario and SPL’s expensive valuations, we recommend that investors use this listing day opportunity to book profits and consider re-entering the counter at lower levels of Rs 85 per share.