Own a piece of Mainland China - Speciality Restaurants IPO

Speciality Restaurants, the owners of the brand "Mainland China", is currently doing an IPO (Initial Public Offering) on the Indian Stock exchanges. This is the second "Restaurant Business" IPO in India, after Jubilant Foodworks (Dominos Pizza India). Jubilant was a super hit IPO (the initial offer price was Rs.145 per share - Feb 2010 and the current price of the share is Rs.1149 per share).

If Speciality is able to replicate the success of Jubilant, then investors can expect reasonable returns on their investment. Clearly the investment climate is a little different now, plus the company operates in the fine-dining segment.

Where are they currently?
They currently have 69 restaurants - 40 Mainland China units, 8 Oh!Calcutta units, 5 Sigree units, 6 Machaan units, 7 Flame & Grill units and 3 Haka units. They also operate 13 Sweet Bengal units (all in Mumbai) - a Bengali sweet shop as the name suggests.

Their forays into the QSR area have not been successful - Just Biryani, Mostly Kababs.

Their reported revenues as on Mar 31, 2011 were Rs.173 Crores (assuming they had 65 restaurants and 13 Sweet Bengals at that time), their restaurants are generating about 2.5-2.7 Crores annually with a 22% Operating Margin (EBITDA). Mainland China accounts for a little over 60% of their revenues.

What is the company valued at?
The valuation of the company is 4 times their revenues (i.e. around 720 Crores).

My Assessment:
They have clearly cracked the fine-dining business model with Mainland China. I am not too sure if they have really been able to replicate the model with other brands in the same manner - maybe to some extent with Oh!Calcutta, but the rest are simply experiments still.

With the funds raised from the IPO (expected to be about 170-180 Crores) about 145 Crores will used for opening 48 new restaurants (average investment per restaurant will be 3 Crores), a bulk of which (around 35) will be Mainland Chinas. So they will use some of the money for experimenting with their other brands. They will be using 15 Crores to invest in a food plaza in Kolkota (they have already invested about 2 Crores in this project). The remaining 10-20 Crores will be used for repayment of debt and for general corporate purposes.

They are proposing to use around 33% of the funds raised to experiment (with their other brands, the food plaza etc.) and 67% for doing what they are doing really well (Mainland China). As an investor, you need to hope and pray that they are able to create yet another successful brand like Mainland China. I am a little concerned that they are getting distracted with the Food Plaza, Haka (Chinese fast food - Casual Dining segment) and Sweet Bengal, rather than simply focus on what they do really well - fine dining.

Final Thoughts:
I am really hoping the IPO does well and the company delivers stellar returns to the investors. This will pump in some more confidence amongst venture capitalists to seedfund new ventures in the restaurant business in India. Speciality has taken 21 years to do an IPO. Imagine if an investor had pumped in 20 lakhs in 1991 to own probably 30-40% of the company. The value today would be over 200 Crores. The returns are astronomical.