Speciality Restaurants: Sell

The Indian consumers’ predilection for dining out, whether at fine-dining restaurants, fast food joints or cafés, has dimmed in the last couple of years. With higher living costs squeezing disposable incomes, consumer discretionary spending has suffered.

Speciality Restaurants runs the Mainland China and Sigree restaurant chains in the fine-dining segment.

The company restrained from stiff hikes in menu prices in the face of weak consumer sentiment, even as raw material prices galloped. Margins have sunk as a result.

Spending hasn’t shown signs of revival yet. The company's moves to control costs and increase revenues will pay off only over the long term.

Investors can book profits in their holdings of Speciality Restaurants, trading currently at ₹139. We had rated the stock a buy last year at ₹101.

At current prices, the stock trades at a trailing 12-month valuation of 40 times, well over the average of 34 times it traded since it listed in 2012.

The company has a strong brand in Mainland China, accounting for 58 per cent of revenues, down slightly from the 60 per cent in earlier quarters.

Sigree, its other strong brand, stepped up contribution from 10 per cent last year to 14 per cent now. Oh! Calcutta has the next biggest revenue share at 10 per cent. The remaining is taken up by its other chains such as Flame & Grill, Machan, Haka, and Mezzuna. For Speciality Restaurants, food is the biggest cost head. Food inflation in the WPI has persisted above the 9 per cent mark for most of the past two years. Raw material costs as a percentage of sales, crept steadily higher from 27 per cent in the March 2012 quarter to 34 per cent in the latest June quarter.

Given the discretionary nature of the product offering, stiff hikes in menu prices could have impacted footfalls. The company therefore took a price increase (average of 5 per cent) only in December 2013, after a gap of over two years. But price revision could not compensate for the leap in input prices.

While sales growth has kept steady at 16-17 per cent, profit margins slid. From over 20 per cent in 2011-12, operating margin fell to 16 per cent by 2013-14.

The June 2014 quarter had margins coming in at 11 per cent on a sales growth of 21 per cent.

Speciality Restaurants has taken steps to sustain revenue growth. It has begun converting some Mainland China restaurants into a wider Asia concept and increased service time to all day.

It launched a new format Mezzuna (again an all-day multi-cuisine chain) and Hopippola (an all-day bar and restaurant) to increase revenues. The company is expanding overseas into Bangladesh, West Asia and Tanzania as well. On the cost front, it is looking to substitute pricey imports with locally-sourced foods. Another price hike could be on the cards in the next few months.

But these moves will bear fruit only over the long term and the near-term impact on profit margins will be minimal.

Restaurants planned in Doha and Dubai have seen delays; these and the one planned in Tanzania will get off the ground only after three-four months and will take time to break even. So, for the near term, Speciality will have to rely mostly on the domestic markets.

Restaurant footfalls have remained flat. Growth in outlets operational for a year or more was flat too, indicating that the company is reliant on new outlet openings to drive growth.

Speciality Restaurants plans to open 12-15 new restaurants in the current fiscal.

While this can push up revenues, it also involves higher initial costs. Until the new outlets break even, profit margins may remain subdued.