Speciality Restaurants is entering the primary market on 16^th May 2012, with a fresh issue of Rs. 1.17 crore equity shares of Rs. 10 each, in the price band of Rs. 146 to Rs. 155 per share, aggregating to Rs. 171 crore to Rs. 182 crore at the lower and upper end of the price band, respectively. Representing 25% of the post-issue share capital of the company, the issue will close on 18^th May.

Speciality Restaurants is a fine dining restaurant chain operating 82 restaurants(including 13 confectionaries) across 21 cities in India and 1 city in Bangladesh, under 10 different brands. Mainland China, with 37 outlets as of 29^th February 2012, is the company’s flagship brand, which accounted for 60% of F11 revenues. Its other key brands include Oh! Calcutta, Flame & Grill, Sigree, Sweet Bengal sweets. Of the total 82, 49 restaurants and 13 Sweet Bengal confectionaries are company owned and operated, while 20 restaurants are franchisee owned and company operated.

For 9 months ended 31st December 2011, company’s income from operations stood at Rs. 150 crore with net profit of Rs. 15.3 crore, resulting in net margin of 10.2% and EPS of Rs. 5.20, on equity of Rs. 35.22 crore. This indicates a 15% revenue growth and 31% net profit growth from FY11, when income was Rs. 173 crore, net profit was Rs. 15.6 crore and net margin was at 9.0%.

As of 31^st December 2011, company’s net worth stood at Rs. 113 crore, which will rise to Rs. 295 crore (at upper end of price band). The Chatterjee-couple currently hold 80.92% stake in the company, as promoters, which will reduce to 60.69%, post issue. PE investors Saif Partners (investor since Dec 2007) and Glix Securities (investor since Mar 2010) currently hold 14.2% and 4.9% stake, at an effective cost of Rs. 71 and Rs. 88 per share, respectively.

Objects of the issue include development of 45 new restaurants by FY15, for an investment of Rs. 132 crore, development of a food plaza in Kolkata for Rs. 15 crore in FY13-FY14 and debt repayment of Rs. 9 crore. Currently, company has total debt of Rs. 32 crore and cash balance of Rs. 8 crore.

Estimating Rs. 20 crore as net profit for FY12, at lower and upper end of the price band, shares are being issued to the public at a PE multiple of 25.2x and 26.7x respectively, which is quite stretched. Company has no listed peers as it cannot be benchmarked against Dominos-pizza maker Jubilant Foodworks, which operates on a much larger scale in an altogether different segment of the food services industry.

Although the company has shown an impressive 4 year revenue CAGR of 25% and 4 year PAT CAGR of 46%, seeking market cap on listing of Rs. 728 crore (at Rs. 155 per share) is on the aggressive side, given current fragile market conditions. On 127 expected restaurants by FY15, company is demanding a valuation of Rs. 5.7 crore per restaurant today, which is definitely on the higher side. It waits to be seen if the company can deliver 35% annual growth from here on in FY13, to justify the premium valuations.

Hence, listing gains must be ruled out by prospective investors. Only those with a one year time horizon can look to apply.

While company’s historic growth rates, expected margin expansion, strong execution capabilities and diversified brand portfolio are impressive, they fail to justify the aggressive pricing for its primary market offering. We would be happier, had the pricing been about 20% lower. For now, only hoping that the book gets discovered at the lower band at Rs. 146!