This post is not buy/sell/hold advice. Please see the disclaimer at the end before reading further
Speciality Restaurants Ltd, the owner of the popular Oh! Calcutta, Mainland China: Asia Kitchen and Hoppipolla brands is going through bad times.
2012 was its best year – when it went IPO. Things have tumbled downhill.
In 2012, as part of the usual IPO hard sell, the company announced aggressive plans
- Use the IPO proceeds to expand
- Leverage the equity scarcity premium to raise money from the markets
- Stay an asset-light business
Let the following image be a warning against IPO euphoria
It seems strange that the best investment professionals would bang their heads together and conceive that fine dining in a franchise format would take off, that too in a country like India. (Where even food delivery and fast food franchises are in trouble)
I snarked at the idea on twitter last year
Then I ended up buying a tracking position. Good old FOMO.
Authority Bias – Hey the big dogs are buying, what can go wrong?
Anchoring Bias – It has fallen substantially from the IPO price, how much further can it fall?
I also suffered the same Bias that convinced SAIF partners to not sell out pre-IPO shares at huge profits but instead to wait and average down their buying price during bad times.
“Mera Desh Badal Raha Hai” is what Indians said also in Rajiv Gandhi’s times.
Who cares about reality? It is a good story that sells.
The Indian consumer is still in the same place she was in 2012 when PEs rushed in to cash in on the eating-out Boom that never came like the many Booms before it (Biotech, Electronics etc.)
The power of Narrative Bias lies in the ability of a good story to trick the human mind, time after time.
With a young population, rising disposable incomes and more women in the workforce, it’s easy to see why the “eating out” culture looks set to continue growing in India.
– Mark Mobius, a believer in 2017.
The trouble here is as micro as it is macro.
The management of Speciality Restaurants Ltd needs to demonstrate that it has a coherent narrative for the growth and development of their brands.
Flush with PE money, Speciality Restaurants went shopping for acquisitions in London, UK
Later in 2014, it also bid for Celebrity Chef Sanjiv Kapur’s restaurants
Additionally, it bought a bakery in 2014
The owner Anjan Chatterjee is a fanatic for the food business. The role of the protoganist in a story about the rise of gourmet dining in India was tailored for him.
“Unless you are a foodie yourself you will never understand the pain points of a foodie and understand how to feed people. Otherwise you can’t be in the food business”
– Anjan Chatterjee in Forbes.
Story looks promising, thus far, although the balance sheet case for investing is already gone out the window with ROE < inflation.
We are entering speculation territory.
Speciality Restaurants sells the bakery it bought in 2014
Bad monsoon in 2015 causes food price inflation. The global economy gets a dark pallor.
The management realized it is bad times. The company expanded too fast – it was no longer “asset-lite”, so management begins “asset-sweating”.
Existing restaurants and formats began to be closed.
The tinkering wasn’t done with though. With the younger generation coming in the form of Avik Chaterjee, Speciality Restaurant Limited switched its focus from fine dining to fun dining.
Investments shifted from food to the food and beverages (i.e alcohol) segment and thus the Hoppipolla club and restaurant format was born.
Management tried to club Hoppipolla on the self-owned properties of Mainland China Asia Kitchen to save on rents and increase asset turnover.
You will notice this in several places in the cities of India – the signboards of Speciality Restaurant brands are on the same building, i.e they are “clubbed” together.
When I bought the tracking position, the story in my head would play out like Darden Restaurants (NYSE : DRI) which enjoys variable cost advantages in the US due to its size and spread.
The red flags for Speciality Restaurants should have been that there are too many formats and brands, that don’t necessarily enjoy the synergies to create cost and/or sourcing advantages. The sourcing of confectionaries for Sweet Bengal may not create synergies for the mediterranean food offered in Cafe Mezunna.
Customer focus is a good thing, but the constant tinkering with the formats and brands needs to give way to a longer term strategy.
Since this post is not buy or sell advice, I will add a few positives that could prove my cynicism wrong and explain why the brains behind SAIF Partners are still invested –
- Building brands is expensive. You are getting a handful of great brands very cheap
- The promoters love the business of food, even though their skill as businessmen is moot
- We might be at the bottom of a cycle – and with food inflation easing and consumption kicking in, things could change dramatically for Speciality Restaurants, i.e “Mera desh badal raha hai” could indeed be true this time
Disclaimer: I am not a SEBI Registered analyst or investment professional. Please take advice of a professional. My views are biased. I am writing to organize my thoughts and in good faith to share with the investor community. I do not offer Buy or Sell advice on this blog and none of my writing should be construed as a recommendation to Buy or Sell. I declare that the views are my own, and I have a tracking position in Speciality Restaurants. For more information please see the About section.