Crisil assigns IPO Grade 4/5 to Speciality Restaurants Limited

8 Nov 2011 , 11:11 AM

CRISIL has assigned a CRISIL IPO grade of ‘4/5’ (pronounced “four on five”) to the proposed IPO of Speciality Restaurants Limited (Speciality). This grade indicates that the fundamentals of the IPO are above average relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. 

The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor. The assigned grade factors in favourable industry prospects of the food services industry given the demographic profile (68% of the 1.1 bn population in 2006 are below the age of 35 years) and the rising base of working class in India which are expected to provide impetus to the restaurant business. Also, increasing urbanisation, a growing middle class population and rising disposable income in India are leading to an increase in dining out as a lifestyle choice. 

The grade reflects Speciality’s strong foothold in the fine dining restaurants segment in India with 73 restaurants and confectionaries under 11 brands spread across 17 cities in India and one in Dhaka, Bangladesh. The company has been successful in creating brands like Mainland China (also the flagship brand) and Oh! Calcutta in an industry which is characterized by high brand mortality and strong competition. The grade also factors in the company’s strong focus on quality food, attentive services, and ability to identify locations with high consumer traffic. Further, its strategy to introduce new brand concepts has enabled it to attract more guests per day for all of its restaurants thereby improving the overall profitability. 

The grade also takes into account the company’s prudent expansion strategy through internal accruals which has enabled it to manage the overall risk in this business. Further, the grade is influenced by the strong and professional management team, the strong internal control system implemented by the company and good corporate governance practices being followed therein. However, the grade is moderated by the fact that the food service industry is highly fragmented and there is stiff competition from the organised (domestic and international) as well as unorganised players. 

Besides, Speciality’s business is dominated by the success of a singular brand, Mainland China, which contributes more than 50% to overall revenue. Speciality’s revenues for FY10 were Rs 1,298 mn and Rs 807 mn for 6MFY11. EBITDA margins were 20.4% in FY10 and 21.5% during 6MFY11 and PAT margins were 6.9% and 9.4%, respectively. As of September 30, 2010, the net worth of the company was Rs 906 mn against a debt of Rs 210 mn.

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