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Speciality Restaurants Gets 2.54x Subscription

The Speciality Restaurants Limited IPO has ended, with a 2.54x subscription. Most of that came in from institutions who demanded more than 4.6x what they were allocated. Retail subscriptions were only 55% of theirs.

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Did I like the IPO? A quick glance through the docs told me the company wanted Rs. 146 to Rs. 155 per share, for a 11.74 million (1.174 crore) share issue. The post money valuation’s around 700 cr. (7 billion).

The company seems to have earned a net profit of Rs. 15 cr. (Rs. 150 million) in the first nine months of the year, on revenues of 150 cr. (1.5 bn) That puts the pre-money P/E at about 28-30, which can be fairly high in the restaurant business, where net margins are like 10% or so.

Since they have around 80 outlets, and will build about 40 more in the next 3 years, they are valuing each outlet at an average of 6-7 cr (60 to 70 million). That’s a little high, considering their per-restaurant profit is about Rs. 25 lakhs (2.5 million). A fine dining restaurant handles itself for about 3 years at the lower end and 8 years at the upper end – beyond that, it loses its charm. Even if you take a 10 year cash flow, and add a bit in for a liquor license and tables/chairs/equipment, you might only get about 4 cr. (40 million) per restaurant as a valuation. Paying an additional 75% for the brand is crazy.

And then they don’t own their restaurants – they even lease some (many?) from their promoters. The promoters get paid a good sum – over 7 cr. (70 million) as just rent, but overall, they seem to get paid lesser than others. The promoters own competing businesses, and have, in the recent past, got the company to acquire one of the promoters’ restaurant businesses. While the transaction isn’t a problem, the concept of having a promoter as competition isn’t palatable.

Competition comes from everywhere. The aspirational category though doesn’t have too many listings though. (Jubilant Foodworks, a pizza franchisee is one) So there may be a first mover advantage.

While the company shows something good – they did at least go public – the appetite for this kind of IPO in the market will determine future course. The wild success of the Jubilant IPO must have meant that no institution wanted to miss this one – but retail sat out. Would I have bought? No way; too high priced – I’d buy it at a price of Rs. 50 or so. Still, fundamentals are boring; I would still get in if there is a huge breakout with volume, and exit with a stop loss.

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