Mainland China owner launches IPO: Should you line up for a bite?

From opening a small eatery even without a restroom, called ‘Only Fish’ in Mumbai in 1992, Anjan Chatterjee and his company, Speciality Restaurants, have come a long way. Today, one of his flagship restaurant chains is ‘Mainland China’, which boasts of 32 outlets in India offering what Chatterjee calls “five-star food at non-five-star prices.”

After 20 years of being in the business, Speciality Restaurants finally decided to launch an initial public offering (IPO),which opens on 16 May. The IPO will offer 1.7 crore shares, which means there will be a dilution of 25 percent of the post-issue, paid-up capital. The price band has been fixed at Rs 146-155. Given those price levels, the company aims to raise around Rs 182 crore.

Speciality has a total of 69 restaurants under brands like ‘Mainland China’, ‘Oh! Calcutta’, ‘Sigree’, ‘Machaan’ and 13 confectionery stores called ‘Sweet Bengal’. The main objectives of the issue are building new restaurants, including expanding the number of Mainland China outlets to 100 by 2016 from the current 32; increasing the popularity of ‘Sigree’, which offers Indian cuisine, to the levels enjoyed by Mainland China; and servicing long-term debt.

More from Investing

MSMEs are breaking the traditional convention. Look who’s funding them Scale-up your startup without an investor! Here’s how

Indraneil Palit, chief operating officer of Speciality and friends with Chaterjee’s since college, told_Firstpost_: “We plan to build food plazas as well. We will begin with Kolkata and Pune, where all the offerings of Specialty will be available under one roof, but not necessarily with the same brand names,” he said. The company will use Rs 15 crore towards this goal.

In a new gamble, the company recently opened a new bar and restaurant in Pune called ‘Bizona’, targeted at young people who want to spend more on liquor than food. This outlet aims to generate 35-40 percent of its revenues from alcohol against the usual 15-17 percent generated in other outlets.

Valuations

The company earned a net profit of Rs 15 crore in the nine month to December 2011. On an annualised basis, that would imply a net profit of about Rs 20 crore for the financial year ending March 2012. With post-issue, paid-up capital of 4.7 crore shares, the earnings per share works out to be Rs 4.25.

[caption id=“attachment_309875” align=“alignleft” width=“380” caption=“Speciality has a total of 69 restaurants under brands like ‘Mainland China’, ‘Oh! Calcutta’, ‘Sigree’, ‘Machaan’ and 13 confectionery stores called ‘Sweet Bengal’. Photo:Charles Haynes/Flickr”]  [/caption]

At the lower end of the price band, the price/earnings (P/E) ratio is equivalent to 34 times 2011-2012 earnings. The P/E ratio is a measure of whether a share’s valuations are expensive or not. Across the price band, the P/E ratio works out to be 34-36.5 times earnings.Kotak Mahindra Capital, the book-running lead manager for the Speciality Restaurants’ issue, said the company is a play on the consumption theme of the country and that these valuations are “not very high” for such a high-growth sector.

The valuations of Jubilant Foodworks, the franchisee of Domino’s Pizza, are almost twice that of Speciality, at 70 times 2011-2012 past earnings. Of course, the question remains whether the fine dining business can offer growth levels as high as Jubilant.

Two private equity investors, SAIF and Glix Securities, which hold 14.19 percent and 4.89 percent, respectively, in Speciality, have been issued shares at average prices of Rs 70.78 and Rs 87.18, respectively, in the past, the company said in its IPO documents.

Crisil has assigned a grade of four out of a possible five to the company, indicating above average fundamentals. The grade reflects Speciality’s strong foothold in the fine dining restaurants segment in India and its success in creating brands like ‘Mainland China’ and ‘Oh! Calcutta’ in an industry characterised 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.

However, the grade is moderated by the stiff competition pervading the food industry. “Besides, Speciality’s business is dominated by the success of a singular brand, Mainland China, which contributes more than 50 percent to revenue,” it added.

It remains to be seen how investors will respond to the IPO. Seven public offers have hit the markets since November, but barring MT Educare, most of the other stock listings are trading well below their issue prices.Indeed, a recent IPO of ?Samvardhana Motherson Finance had to be withdrawn following a dull response, despite successful roadshows prior to the issue.

Given the poor performance of recent IPO listings, many investors might be inclined to buy stocks at cheaper prices in the secondary market than via an IPO. That could hurt response to Speciality’s launch offer.