®ETPrime Wow anowst ~—_astions onieranwani=Q. Overcooked: why the stock of Anjan Chatterjee’s Speciality Restaurants went on the slide Pressure from PE investor forced the company into haphazard expansion, Now thatthe investor has exited, ‘an the company get back on tack? Qo + Smog Rea eae Oo & ire early. Get house, Roam the world, Open a restaurant. The stuff of dreams. R Forstarters,cobbling together a constant supply of cash, what with exorbitant rentals and only actualy running. restaurant were nearly that dreamy, employee costs is tall order. Breaking even? That's different kettle of ish ‘To compound problems, one of your key investors might want to exit. Add the pressures of delivering steady stock- market performance andthe demand for outsize growth even when your business may not be fully baked to handlet, and you get specialty Restaurants ‘The owner ofthe restaurant chains Mainland China and Oh! Caleuttaand the bar Hoppipok among others, Speciality Restaur fs one ofthe oldest and most prominent fine-ni players in india. t's also the only one (not counting quick-service restaurants, oF (SRS) tobe listed on the BSE and the NSE AAs of 2006, fine dining was. a INR309,000 crore market. Is projected tobe worth INR552,000 crore by 2022, as per the MRAI Technopak India Food Services Report 2016. Consumers typically spend over INR,000 per person at fine-dining joints, INR500-INRU, 000 in premium casual dining places, and 1887 50-INRx,500 in bars, the report says. Specialty has brands inal thee segments, making it attractive to investors,However, aftr listing marginally higher on the NSB in June 2012 at INRA52, the stock has been languishingin the INR75-INRi0@ range for the past several months. From conversations with the company’s investors — current and former — and owners of other restaurants t's clear thatthe challenges of running a fine-dining restaurant with public and private-equity (PE) money are too great to sustaln steady growth, ‘Acconing toa 2016 report titled study of Trends in Quick Service Restaurants in Ina, t's anall~ ‘to0-familiar problem in the food-service industry, of which 80% is unorganised, with fine~ dining and quick-service restaurants occupying just 10% each ofthe market. ‘Asinvestors looking for an exit forced it to open too many outlets, Speclallty Restaurants! ‘costs and losses mounted. Its brands also repeatedly suffered the vagaries of fuctuating, ‘consumer tases, Im short it did nat get the time and patient capital needed to nurture restaurants and create a poo! offoya customers. E-mails, texts, and phone calls to Anjan Chatterjee, founder and managing director, speciality Restaurants remained unanswered, We will update the story with his comments if they come fn, ‘Why Specialty Restaurants bit offmore than itcan chew Investors in Speciality Restaurants first noticed a problem inthe business in mid-20%7 when the balance sheet began showing signs of pressure even a te stock price was headed fora peak. Margins were suffering, and growth ed by more store openings had begun to taper, 1m Novernber 2016, brokerage firm Kotak Institutional Equities dropped coverage ofthe stock, ratingit “cautious” after recommending. sll ata target price of INR75 per share. At the time, the stock was trading at INRA, “We believe the business has potential for growth in the future, ut weakness in operational and, ence, financial performance over the past many quarters (in addition to low liquidity in the stock) has resulted in fading interest in the investor community,” analyst Rohit Chordia ‘wrote in anote dated November 10, 2016, “Hence, we have decided to drop coverage onthe stock."By tis time, the ig PE investor sitting onthe company’s boaed — SAIE Partners — had made partial ext, According to BSE filings, SAIF Partners was out ofthe business by the end ofthe second quarter of FV18, as were other prominent non-promoter shareholders including L&T “Mutual Fund and Reliance Equal Opportunity Fund, The IPO ad given PE firms a breather and hope for an attractive ext. But SAE had not sold shares in Spcialit's public issue. “SALE and other investors forced Specialty to expand very rapidly,” an investor in Speciality sal, requesting not tobe named in this story. “They made anjan open around 50 outlets under different brand names] in jst three ot four years because they were looking tthe topline, But one has to respect the balance sheet and ‘the bottom tine. o, [rapid] sales growth kind of stopped in 2013-15," the investor quoted above says. ‘Ahigher rate of restaurant openings automatically translates to higher deprecation costs and higher fixed costs (wages and rent), But breaking even takes longer, and so you are stuckina game of catch-up, ‘According toa Match 2017 report, SAIF Partners sold 2% of its stake in Speciality for INRS.2 ‘crore but took a 59% overall hiton the investment even after accounting for dividends. ‘Ane-mall to SAIE Partners! managing deectr Vishal Sood, who also was a director at Speciality Restaurants, did wot get a response. Speciallty's management had begun addressing the Issue in 2013 "The inrease in evenies thas been primaily with respect to the addition ofthe new stores,” speciaity’s chief financial officer Rajesh Mohta said in an investor conference callin August 2013. “The drop in EBITDA, particulary, has been (because of the front-end cost ofthe new restaurants, which gets ‘charged of to the profit and loss account, and because ofthe headwinds inthe economy. The {gestation perl, whl in the case ofa Malnland China used to be between three and six nontsearle, has inereased over a period of tne. This primarily the reason for lower EBITDA on an operations basis.” ‘Now the management is correcting some ofits mistakes, other Investors say. “Anjan is tuming around the loss-making restaurant by ether renegotiating rents or converting them tonewer formats like Asia Kitchen and Gong or shutting them down altogether to get focus backon profitable units,” says Deepak Bhagnani, investor and managing partner at TashaFor Chatterjee, who hasa degree from the Institute of Hotel Management Caleutta an previously ran an ad agency, Chinese food has proved tobe the biggest draw. Hs fest venture ‘was a Bengal food joint Only Fish, but is flagship brand continues tobe Mainland china, a chain of fine-dining Chinese restaurants, It till makes up 40%-45% of Speciality Restaurants business according to the company's investors. ““Thisis not an FMCG business, you have to build it assiduously.” ‘Tasha Invesco and its owner, the Bhagnani family, ovm 16% of Speciality Restaurants. They say they are not ina hurry and ean see Chatterjee turning the chain around. “Meanwhile, Chatterjee is opening new formats and new restaurants outside his flagship, That ‘means going beyond the fine-dining segment the company has stood for. ‘Among the new formats are Zoos, achain of Chinese QSR outlets, and Dariole, a baked {oods-and. coffee chain in Kolkata, Bu these, f00, ave thelr own share of problems. “Gor Zoos, the company wanted at least 50 outlets,” the frst investor quoted above says. “But for tat, you need your commissary” — acentalised kitchen from where pre-prepared food is shipped to QSR out crore-INR5 crore An that means you need to have guaranteed sales.” — “hich needs an upfront investment — atleast of INRA So, what comes first — the outlets or the kitchen? You need to take a risk. And Chatteree, according to this Investor, Is not the kind of person who likes to take iss like debt for new projects. Similarly, Dariole in Kolkatais goinghead to head not just with the plethora of coffee and cha chains, bt also the city’s established names inthis segment, such as Kookie Jar. t's a tough fight. “1think fine-dining is dying, tobe honest,” says the director ofa rival premium restaurant chain, requesting anonymity. “The action Isa in premium casual and affordable casual. thought about it for around three years before I ventured into QSR formats. 1s not easy (0 Juggle two otheee kinds of formats — the kin of thinking and strategie decisions you have to ‘make ally are extremely different. I someone asks forexta fries wit thelr burger in a premium restaurant, I would give it without hesitation, ut if someone does the same in aQSR. at the food court,’ automatically think about the costs. Because margins ae so thin.” How healthy is Speciality Restaurants vs. listed QSRs? 1 Specity_— ME Westie Crvlgment Mutant Footwats Renourerts Dona) ‘Bonin ad ain ort)For this restaurant director, the solution has been tohire individual heads for each ofthe brands. according to recent media reports, Chatterjee is aso hiring people in key positions as lhe prepares for his son aviko take ona bgge olen the business. Stil, mustering enough money and time for each new restaurant ia thorny tal, says the restaurant director quoted above “Thies not typical FMCG business. You have to build the business assiduously 1's not driven by standard operating procedures,” he says. "When PE money comes in and they look at exits, you need to sustain fast growth. You begin to lose touch with your outlet operations, and then margins begin to suffer. 1, say, you are asked to open fve restaurants in two cites in the next quarter, you will make mistakes, Such as taking up a plae with high ren, not even considering if the outlet can make a profit in that location or not.” “These mistakes have hurt restaurant chains like Pan India Food Solutions, owmers of outlets like Gelato italiano, Spaghetti Kitchen, and Bombay Bue, adds the director. Another victim of to0-fast expansion has been the caféchain Moshe's “mestaurants depend too much on hype” ‘The challenges to Speciality's turnaround story reflect in its valuations compared with ts listed (albeit SR) peers Domino's and MeDonald’s Some investors just don't think the business i for them. Among them isa former backer of Speciality Restaurants, who has sold his entire holding, “Restaurants don’t list in India, and they won’ list either,” he says. “They need too muchhhype to rum and theircosts are to high. Ifyou notice, most restaurants open with alot of hype, run fortwo or three years, an then customers lose interest and find a new place. The hype is gone. You constantly need to change your format and your menu to keep them coming.” “Eine dining," he says, “is all about experience. But QSR is just about taking care of your hunger.” ‘and then there are leakages, “Ifyou ae gong to run a bar, [and have to} get aliquot licence, too much money needs to change hands under the table,” he says. “Ifyou need to pay people off to get alicence, orto get ‘ut of alquor raid, how are you going to show those expenses tothe shareholder?” ‘Tobe sue, this investor isn’t too keen on QSRs either. “Lookat their valuations!” he says. But then again, dreams don't have PE ratios. ditional inputs by Pravin Palande and research support by Rochelle Britto) (Graphics by Ankica Mehrotra) ‘The atest rom ET Prime now on Telegram. To subscribe to our Telegram newsletter clicker 6 coumenrs BB ponutan wink neaoens